IDB Development Corporation. Annual Report

Transcription

1 IDB Development Corporation 2016 Annual Report 2016

2 IDB Development Corporation Ltd. Financial Statements December 31, 2016 (Audited) * The English version of this information as at December 31, 2016 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

3 IDB Development Corporation Ltd. - Periodic Report for 2016 Part A - Description of the Corporation s Business Table of Contents 1. Definitions Introduction Activities of IDB Development and description of the development of its business affairs Investments in IDB Development within the framework of the amendment to the debt settlement in IDB Holdings; additional investments in the capital of IDB Development and transactions with its shares Dividend distribution Financial information with respect to IDB Development s operating segments General environment, impact of external factors and restrictions and supervision over the activities of IDB Development Discount Investment Corporation Ltd Cellcom Israel Ltd Property & Building Ltd. and Projects in Las Vegas Shufersal Ltd Clal Holdings Insurance Enterprises Ltd Adama Agricultural Solutions Ltd. (discontinued operation) Oil and gas assets Human capital Financing Taxation Environmental risks and methods for the management thereof Legal proceedings Goals and business strategy Information regarding exceptional changes to the business affairs of IDB Development Discussion regarding risk factors /1251/ v1

4 1 1. Definitions In this part (i.e., part A of the description of the corporation s business in this periodic report), the following abbreviations will have the meanings specified alongside them: IDB Holdings - IDB Development - IDB Tourism - DIC - Koor - Clal Insurance Enterprises Holdings - Modiin - Adama - Property & Building - Cellcom - IDB Group - Shufersal - IDBG - IDB Holdings Corporation Ltd. IDB Development Corporation Ltd. and/or its wholly owned headquarter companies (excluding IDB Tourism (2009) Ltd.) IDB Tourism (2009) Ltd. Discount Investment Corporation Ltd. and/or its wholly owned headquarter companies, as applicable. Koor Industries Ltd. Clal Insurance Enterprises Holdings Ltd. Modiin Energy Limited Partnership. Adama Agricultural Solutions Ltd. Property & Building Corporation Ltd., including its subsidiaries and associate companies ( Property & Building Corporation without the aforementioned companies). Cellcom Israel Ltd. IDB Development and companies under its direct and indirect control. Shufersal Ltd. IDB Group USA Investments Inc. Additionally, the following terms will have the meanings specified alongside them: New York Stock Exchange - Tel Aviv Stock Exchange - Board Of Directors Report - USD - Financial Statements - Commissioner of Capital Markets - Authority - The New York Stock Exchange in the United States. The Tel Aviv Stock Exchange Ltd. The board of directors report of IDB Development as of December 31, 2016, which is included in Part B of this periodic report. United States Dollar. The financial statements of IDB Development as of December 31, 2016, which are included in Part C of this periodic report. The Commissioner of Capital Markets, Insurance and Savings at the Ministry of Finance. The Israel Securities Authority. Companies Law - The Companies Law, Restrictive Trade Practices Law - The Restrictive Trade Practices Law, Food Law - The Law to Promote Competition in the Food Sector, Encouragement of Capital Investments Law - The Encouragement of Capital Investments Law, Securities Law - The Securities Law, Concentration Law - The Law to Promote Competition and Reduce Concentration, Index - Reporting Date - December 31, Proximate to the Publication of the Report - March 15, Midroog - Maalot - The Consumer Price Index, as published by the Central Bureau of Statistics. Midroog Ltd. Standard & Poor s Maalot Ltd. Income Tax Ordinance - The Income Tax Ordinance (New Version), /1251/ v1

5 2 2. Introduction IDB Development is a holding company. Some of the investee companies 1 which are held by IDB Development (directly or indirectly), which meet the conditions set forth in International Financial Reporting Standard 8, Operating Segments ( IFRS 8 ), constitute reportable operating segments. Each investee company which constitutes a reportable operating segment of IDB Development, in accordance with the tests set forth in IFRS 8, is described in this part as a separate operating segment of IDB Development. Investee companies of IDB Development whose results are included in the financial statements under other segments (a segment which includes IDB Tourism and holdings in oil and gas assets) are not described in this report under separate operating segments. For details regarding oil and gas assets, see section 14 of this part ( Others ). For additional details, see Note 32 to the financial statements. Any use in this part of the term contribution to profit (loss) means, unless noted otherwise, IDB Development s share (attributable to the owners of IDB Development) in the business results of the investee company and in the taxes which are attributed to that investment (in consideration of the effect of the amortization of excess cost attributed to the investment in that company, if it exists in the books of IDB Development) with respect to the reporting period. The share of IDB Development in the results of the investee company, as stated above, include profits of IDB Development from the sale of holdings in the investee company, and amortization operate cancellation of the amortization of the investment in the investee company, insofar as such profits are applied to the statement of income. With respect to holdings in the shares of the companies mentioned in this part, unless noted otherwise, the data regarding the holdings of the holding company in the investee company also include all of the holdings in the investee company which are held through wholly owned subsidiaries of the holding company. Additionally, data regarding holdings in an investee company do not include other indirect holdings, and do not include holdings of institutional investors which are held by IDB Development, including within the framework of profit sharing life insurance accounts and/or provident funds and/or joint investment trust accounts and nostro accounts, as relevant. The holding rates in shares of investee companies are presented, in general, as figures rounded to the nearest tenth of percent (one digit after the decimal point), unless presented otherwise. The holding rates in the shares of the investee company are calculated out of the total actual issued capital of the investee company, without taking into account possible dilution due to the exercise of options and other convertible securities which were issued by it, unless expressly stated otherwise. Reference to the market value of an investee company whose shares are listed for trading on the stock exchange is in accordance with the closing price of the shares of that investee company on December 31, In case the shares of an investee company are traded on the Tel Aviv Stock Exchange and on another stock exchange, the reference to the market value is in accordance with the closing price on the on the Tel Aviv Stock Exchange, unless noted otherwise. Transactions involving shares of IDB Development or of an investee company of IDB Development, which were performed by an interested party (including allocations of share options, as stated above, to an interested party, and exercise thereof in accordance with their terms), are presented if the relevant transaction was performed over the counter, and represented 0.5% or more of the issued share capital of the relevant company. The debt ratings mentioned in this part are in accordance with the local rating scale in Israel (for example, a Maalot rating of A- means a rating of ila-). The descriptions of the investee companies which are held by IDB Development sometimes include data which are based on surveys, publications and various studies. IDB Development is not be responsible for the content of the aforementioned surveys, publications and studies. This part should be read together with the other parts of the periodic report, including the board of directors report and the notes to the financial statements. 1 Investee Companies - consolidated subsidiaries, associate companies and joint ventures, as these terms are defined in Note 1.D to the financial statements, as well as Clal Insurance Enterprises Holdings, which is presented in the financial statements of IDB Development as a financial asset measured at fair value through profit and loss. 8371/1251/ v1

6 3 Chapter A - Description of the General Development of IDB Development s Business Affairs 3. Activities of IDB Development and description of the development of its business affairs 3.1 IDB Development was incorporated in 1981, in accordance with the laws of the State of Israel, and in that same year, performed its initial public offering of securities on the Tel Aviv Stock Exchange. On April 3, 2016, within the framework of the amendment to the debt settlement in IDB Holdings which was approved by the Court, IDB Development ceased being a public company, and became a debenture company (as this term is defined in the Companies Law), whose debentures are listed for trading on the Tel Aviv Stock Exchange. On this matter, see section 4 of this part and Note 14G to the financial statements. 8371/1251/ v1 IDB Development is a holding company which invests, independently and through investee companies, in companies which are engaged in various branches of the Israeli economy and abroad, and primarily in the insurance, communication, real estate, trade and services segments. IDB Development strives to promote and maximize the value of its current investments until their sale, in the appropriate circumstances, and continuously evaluates opportunities for investment and realization of its investee companies and other companies in Israel and around the world. In recent years, IDB Development has placed a special emphasis on the realization of investments, as stated above, both in consideration of its financing requirements, and in consideration of regulatory developments. In the last four years, a total of NIS 2,272 million has been injected into IDB Development, as an investment in capital and as subordinated loans to IDB Development, where out of the aforementioned amount, a total of NIS 1,629 million has been injected by companies under the control of Mr. Eduardo Elsztain (Dolphin Fund Limited ( Dolphin Fund ), Dolphin Netherlands BV ( Dolphin Netherlands ) and Inversiones Financieras Del Sur S.A. ( IFISA ); in consolidated terms: the Control Group ). Additionally, in 2016 and thereafter, IDB Development performed several actions which resulted in the reinforcement of its financial stability, as specified below: In November 2016, the transaction for the sale of Koor s entire stake in Adama was completed, in which Koor received a total of USD 230 million, and additionally, the debts, liabilities and rights of Koor, in accordance with a non-recourse loan agreement which it received from a Chinese bank, were assigned (see also Note 3.H.4.B to the financial statements) Within the framework of the amendment to the debt settlement in IDB Holdings between the trustees for the debt settlement in IDB Holdings, Dolphin Netherlands and IDB Development, which was approved by the District Court of Tel Aviv and completed on April 3, 2016, IDB Development allocated, inter alia, debentures (Series I) in consideration of a total of NIS 167 million (without a discount) (see also Note 14.G.(3) to the financial statements) In August 2016, IDB Development issued to the public debentures (Series K) secured by a pledge on some of the shares of Clal Holdings Insurance Enterprises, for a total gross consideration of NIS 325 million. Due to regulatory restrictions, IDB Development performed an early repayment of approximately NIS 240 million, and in March 2017, received the issuance consideration balance in the amount of approximately NIS 85 million (see also Note 14.C.(4) to the financial statements) In November 2016, IDB Development issued to the public debentures (Series L) secured by a pledge on some of the shares of DIC, for a total gross consideration of NIS 383 million (see also Note 14.C.(5) to the financial statements) In February 2017, subsequent to the reporting date, IDB Development issued to the public debentures (Series M) secured by a pledge on the future consideration from the sale of sale of shares of Clal Holdings Insurance Enterprises, for a total gross consideration of NIS 1,060 million (see also Note 14.C.(6) to the financial statements) Subsequent to the financial staements date, IDB Development reached understandings with its financing entities, after the performance of a partial early repayment of its liabilities to those financing entities, in the first quarter of 2017, regarding the cancellation of the majority of the restrictions and financial covenants, and the cancellation of other liabilities, including, inter alia, restrictions on activities involving the sale of primary holdings, restrictions on permitted investments in investee companies, restrictions on pledges of holdings in investee companies, which required the receipt of consent from those entities (see also Note 14.E. to the financial statements). For additional details, see the introduction to the board of directors report. The financial statements and auditors report to the shareholders of IDB Development as of December 31, 2016, as opposed to previous reporting periods, were prepared based on the assumption that IDB Development will continue operating as a going concern. Within the framework of the auditors report, and without qualifying their opinion, attention was called to the financial position of IDB Development and to the plans of management with reference to material liabilities of IDB Development towards the debenture holders, which are expected to be repaid at the end of The materialization of management s plans will be affected by factors which are not entirely under the control of IDB Development, inter alia, with reference to its ability to execute its plans to realize holdings in Clal Insurance Enterprises Holdings, in consideration of, inter alia, the outline which was determined by the

7 4 Commissioner of Capital Markets for the sale of the control of Clal Holdings Insurance Enterprises, the requirements of the Concentration Law, and the ability of IDB Development to deal with the implications of the Concentration Law. However, the management of IDB Development estimates that it will be able to service its liabilities when they come due, and continue its activities. For additional details, see Note 1.B. to the financial statements. 3.2 Control of IDB Development; Implementation and implications of the debt settlement in IDB Holdings on IDB Development Before the approval of the debt settlement in IDB Holdings by the Court in January 2014 (the Debt Settlement in IDB Holdings ), and the completion thereof, IDB Development was wholly owned by IDB Holdings. Within the framework of the completion of the Debt Settlement in IDB Holdings, the control of IDB Development was transferred, in May 2014, to Messrs. Mordechai Ben-Moshe and Eduardo Elsztain (through corporations under their control), in equal parts, the shares of IDB Development were listed for trading on the Tel Aviv Stock Exchange, and it became a public company. In October 2015, the separation process between the two controlling shareholders was completed, in which corporations under the control of Mr. Mordechai Ben Moshe which held IDB Development transferred all of their aforementioned holdings to corporations from the control group, corporations under the control of Mr. Eduardo Elsztain which held IDB Development at the time, and thereby, the aggregate total holding rate of the control group in the shares of IDB Development increased to approximately 80.72%, and Mr. Mordechai Ben Moshe ceased being a Controlling shareholder of IDB Development, and ceased holding its shares. Additionally, the shareholders agreement which existed between the parties in connection with their holdings in shares of IDB Development expired in accordance with its terms. For additional details, see Note 14.G.(1) to the financial statements. Following the completion of the amendment to the Debt Settlement in IDB Holdings, which was approved by the Court, beginning on April 3, 2016, IDB Development became a private company wholly owned by the control group, whose debentures are listed for trading on the Tel Aviv Stock Exchange. For additional details, see section 4.2 of this part and Note 14.G.(1) to the financial statements. For details regarding the possible main effects on the position of IDB Development, and the control thereof, as stated above, on the investee companies of IDB Development, see Note 14.F.1.A to the financial statements and sections , 9.10, , 9.21, 10.7 and 12.2, and the footnote to section 14.1 in this part. For details regarding legislation to promote competition and reduce concentration, and its implications on IDB Development and its investee companies, see section 7.2 of this part. 3.3 For additional details regarding the control and holding of shares of IDB Development as of December 31, 2016, and as of the publication date of the report, see regulation 21A of Part D of the report ( Additional Details ). 3.4 Holding structure and operating segments Presented below is a general description of the investee companies which are held IDB Development and whose details are provided in this part. Some of these investee companies constitute operating segments (in accordance with the tests for definition of reportable operating segments which are included in IFRS 8, as specified in section 2 of this part), as noted below alongside their names: DIC DIC is a public company which was incorporated in Israel, and whose shares and debentures are listed for trading on the Tel Aviv Stock Exchange. DIC is a holding company which invests, independently and through investee companies, in companies which are primarily engaged in the communication, real estate, trade and services sectors. In November 2016, upon the completion of the sale of DIC s entire holdings in Adama, Adama ceased holdings companies engaged in the agrochemistry segment. For additional details regarding DIC, see section 8 of this part. Operating segment - Cellcom Cellcom is a public company which was incorporated in Israel, whose shares are listed for trading on the Tel Aviv Stock Exchange and on the New York Stock Exchange, and whose debentures are registered for trading on the Tel Aviv Stock Exchange. Cellcom is a provider of communication services, which offers to its customers primarily mobile communication services, landline telephone services, international telephone services, internet connectivity services and associated services, and beginning in December 2014, also television over internet services. For additional details regarding Cellcom, see section 9 of this part. Operating segment - Property & Building and projects in Las Vegas Property & Building Corporation is a public company which was incorporated in Israel and whose shares and debentures are listed for trading on the Tel Aviv Stock Exchange. The main operating segments of Property & Building include the revenue-generating properties segment and the residential construction segment, in Israel and 8371/1251/ v1

8 5 abroad. Property & Building also holds, together with IDB Development, IDBG 2, which is engaged, through real estate corporations, in the construction and operation of a commercial and office project in Las Vegas, Nevada (USA). For additional details regarding the Property & Building operating segments and projects in Las Vegas, see section 10 of this part. Operating segment - Shufersal Shufersal is a public company which was incorporated in Israel, whose shares and debentures are listed for trading on the Tel Aviv Stock Exchange. It is primarily engaged in the ownership and management of a supermarket chain - the largest and leading chain in Israel, in terms of sales volume. Shufersal is also active in the real estate segment and in the customer club credit card segment. For additional details regarding Shufersal, see section 11 of this part. Operating segment - Adama (discontinued operation) Until November 22, 2016, IDB Development operated through Adama in the segment involving the development, production and marketing of crop protection products. In light of the completion of the sale of the holdings of Koor, a wholly owned subsidiary of DIC, in Adama on November 22, 2016, the operating segment Adama is presented in the financial statements of IDB Development as of December 31, 2016 as a discontinued operation. For additional details regarding the aforementioned transaction, see section 13 of this part. Operating segment - Clal Insurance Enterprises Holdings (discontinued operation) - Clal Insurance Enterprises Holdings is a public company which was incorporated in Israel and whose shares and debentures are listed for trading on the Tel Aviv Stock Exchange. Clal Insurance Enterprises Holdings is a holding company which is primarily engaged in the insurance, pension and provident funds segments, and in the holding of assets and real and other businesses (such as insurance agencies), and which constitutes one of the largest insurance groups in Israel. Clal Insurance Enterprises Holdings has three operating segments: long term savings, non-life insurance and health insurance. For details regarding the appointment of a trustee for most of IDB Development s holdings in Clal Insurance Enterprises Holdings by the Commissioner of Capital Markets, and regarding the outline which was determined by the Commissioner of Capital Markets for the sale of IDB Development s holdings in Clal Insurance Enterprises Holdings, see Notes 3.H.5.A, B. and C. to the financial statements. For additional details regarding Clal Insurance Enterprises Holdings, see section 12 of this part. Others As of the publication date of the report, the others segment also includes IDB Development s holdings in oil and gas assets. For details regarding the holdings in oil and gas assets see section 14 of this part. 3.5 Diagram of primary holdings as of March 15, 2017 Presented below is a diagram specifying the primary corporations which are held by IDB Development. The corporations presented in bold in the diagram are the corporations which constitute operating segments, as stated above. The holding rates presented in the diagram are holding rates in issued share capital, directly and/or indirectly, as of March 15, IDBG is an American corporation whose entire issued share capital is held by IDB Development and Property & Building Corporation (through wholly owned subsidiaries) in equal parts. 8371/1251/ v1

9 6 Presented below is an index of the abbreviations of company names presented in the diagram, and which do not appear in the index in section 1 of this part (by alphabetical order), as well as the remarks referred to in the diagram: (I) (II) Elron - Elron Electronic Industries Ltd. Gav-Yam: Gav-Yam Bayside Land Corporation Ltd. Ispro - Ispro The Israeli Properties Rental Corporation Ltd. Clal Insurance: Clal Insurance Company Ltd. Mehadrin: Mehadrin Ltd. Neveh-Gad: Neveh-Gad Construction and Development Ltd. Hadarim Properties: Hadarim Properties Ltd. PBC International Investments: Property & Building International Investments (2005) Ltd. GW: Great Wash Park LLC 452 Owners: 452 Fifth Owners LLC For details regarding the appointment of a trustee by the Commissioner of Capital Markets with respect to approximately 50% of the issued share capital and voting rights of Clal Insurance Enterprises Holdings which are held by IDB Development, see Note 3.H.5.A to the financial statements. For details regarding the outline which was determined by the Commissioner of Capital Markets for the sale of IDB Development s holdings in Clal Insurance Enterprises Holdings, see Notes 3.H.5.B. and C. to the financial statements. For additional details regarding the pledge of approximately 5% of shares of Clal Holdings Insurance Enterprises in favor of the debenture holders (Series K) of IDB Development, see section of this part and Note 3.H.5.D to the financial statements. For details regarding a pledge of approximately 38.7% of DIC shares which are held by IDB Development to the trustee for the debenture holders (Series L), see Note 14.C.(5) to the financial statements. (III) The holding rate is in the issued share capital of Cellcom. The holdings in the voting rights of Cellcom are at a rate of approximately 45.7% (of which approximately 3.4% is by virtue of an agreement with two other Cellcom shareholders). (IV) The holding rate presented in the diagram constitutes IDB Development s holding rate in Noia Oil and Gas Exploration Ltd. ( Noia ), which is the controlling shareholder of Modiin Energy Management (1992) Ltd., which is the general partner in Modiin ( Modiin Management ), and which Noia holds at a rate of 75%.For details regarding the holdings in oil and gas assets, see section 14 of this part. 8371/1251/ v1

10 7 IDB Development-Diagram Amendmeded 67.8% (II) 54.9% (I) Oil and gas assets 47.5% (IV) Modiin Management Modiin 4.9% 100% Shufersal IDB Tourism 60.7% Elron Mehadrin Technology 50.3% 100% Neveh-Gad 43.4% 45.4% Real estate Property & Building Hadarim Properties Gav-Yam Ispro PBC International Investments DIC Comminication 64.4% b 100% 55.1% 56.6% 100% 100% 42.3% (III) Cellcom 013 Netvision Insurance and Financial Services Clal Holdings Insurance Enterprises Clal Insurance 100% 100% 452 Owners 50% IDBG 50% 100% HSBC Building GW (V) 100%

11 8 3.6 Weight of primary holdings and market segments See section 1.5 of the board of directors report for details regarding the relative weight of IDB Development s primary holdings which constitute reportable segments, in consideration of the rates of holding therein, directly and indirectly. 3.7 Characteristics and results of any material structural change, merger or acquisition; Acquisition, sale or transfer of assets in a material scope, structural changes and expectation regarding developments For details regarding the amendment to the Debt Settlement in IDB Holdings which was approved by the Court in March 2016, which included the injection of funds to IDB Development instead of the undertaking to perform tender offers for shares of IDB Development within the framework of the Debt Settlement in IDB Holdings, the issuance of debentures by IDB Development and the conversion of IDB Development into a private company (whose debentures are still listed for trading on the Tel Aviv Stock Exchange) owned by the control group, and for details regarding additional developments in connection with the debt settlement in IDB Holdings, see Note 14.G to the financial statements Holdings of IDB Development in Clal Insurance Enterprises Holdings For details regarding the outline which was determined by the Commissioner of Capital Markets for the sale of IDB Development s control and holdings in Clal Insurance Enterprises Holdings (the Outline ), including details regarding the appointment of a trustee in August 2013 by the Commissioner of Capital Markets, for the purpose of exercising the authorities which are conferred by virtue of the means of control in Clal Holdings Insurance Enterprises (the Trustee ), see Note 3.H.5.A to the financial statements. For details regarding the proceedings which are being conducted in connection with the Outline before the District Court of Tel Aviv-Yafo, regarding the Trustee s motion for the issuance of orders on this matter, see Notes 3.H.5.B. and C. to the financial statements. See Note 21.C.1.B.(8) to the financial statements. For details regarding the decision of the Supreme Court, in a ruling regarding a petition which was filed by IDB Development, in which the petition was dismissed, and in which it was determined that in addition to 3.92% of the shares of Clal Holdings Insurance Enterprises which are not subject to the provisions of the Outline, and which, as of the date of the ruling, are pledged in favor of a secured creditor, IDB Development is entitled to pledge an additional 1.08% of shares of Clal Holdings Insurance Enterprises which are held by the Trustee, subject to the provisions of the Outline, and regarding a pledge of approximately 5% of shares of Clal Holdings Insurance Enterprises in favor of the debenture holders (Series K) of IDB Development, see section of this part and Note 3.H.5.D to the financial statements. Additionally, it is noted that on May 26, 2016, the Board of Directors of IDB Development reached a decision to engage with a reputable investment bank to accompany the process of selling IDB Development s holdings in Clal Insurance Enterprises Holdings (the Sale Process ), and advised IDB Development on all matters associated with the structure and terms of the Sale Process. Following the aforementioned resolution of the Board of Directors, on July 3, 2016, IDB Development engaged with an international investment bank, which will accompany it throughout the Sale Process. As part of the above, IDB Development received inquiries from potential buyers with whom it is in contact, for additional details, see Note 3.H.5.F to the financial statements Details regarding the acquisition and sale of assets in a material scope, or structural changes which were performed to the operating segments of IDB Development, are presented in the description of the actual operating segments in Chapter C of this part For details regarding the Concentration Law, its implications on IDB Development and its investee companies, and structural changes which are being evaluated with respect to it, see section 7.2 of this part. 3.8 For details regarding the cash flow forecast of IDB Development for the years 2017 and 2018, and regarding its debt service plans, see section of the board of directors report. 3.9 In December 2016, IDB Development exercised all of the DIC options (Series 4) which were held by it, in consideration of a total of approximately NIS 92.3 million (according to an exercise price of NIS per share) and increased its holdings in the share capital of DIC to approximately 69.56% of the issued and paid-up capital of DIC. it is noted that, proximate to the publication of the report, IDB Development announced that it intends to exercise the options (Series 5) and the options (Series 6) of DIC which it holds before the effective date for the exercise of the first tranche of options, i.e., April 6, Investments in IDB Development within the framework of the amendment to the debt settlement in IDB Holdings; additional investments in the capital of IDB Development and transactions with its shares 4.1 In February 2016, IDB Development received from Dolphin Netherlands a subordinated loan in the amount of NIS 15 million. for additional details regarding the subordinated loan, see Note 13.C.(4) to the financial statements. 4.2 In March 2016, after the receipt of approval from the shareholders meeting and the warrant holders of IDB Development, and approval of the Court, the Debt Settlement in IDB Holdings was amended with respect to the undertaking to perform tender offers for shares of IDB Development (the Amendment To The Settlement ). The Amendment To The Settlement included provisions according to which Dolphin Netherlands acquired from the 8371/1251/ v1

12 9 minority shareholders all of the shares of IDB Development, in a manner whereby the control group began holding 100% of the shares of IDB Development, which became a debenture company (as defined in the Companies Law). The consideration to the minority shareholders for the acquired shares, and the cancellation of the undertaking to perform the aforementioned tender offers, included: (a) payment, on March 31, 2016, in cash, of NIS 1.25 per share; (b) payment, on March 31, 2016, of NIS 1.20 per share, which was paid through debentures (Series I), in an amount which was determined based on their adjusted par value, and which were issued by IDB Development against the transfer by Dolphin Netherlands to IDB Development of an amount equal to the adjusted par value of each debenture which was issued, as stated above; and (c) an undertaking to pay a total of NIS 1.05 per share, contingent upon the sale of shares of Clal Holdings Insurance Enterprises or upon the receipt of a permit for control of Clal Holdings Insurance Enterprises, in accordance with the conditions which were determined in the Amendment To The Settlement. Within the framework of the Amendment To The Settlement, Dolphin Netherlands injected into IDB Development a total of NIS 515 million (including, inter alia a subordinated loan in the amount of NIS 15, as stated above, and including the injection of funds against the allocation of debentures (Series I) by IDB Development, and any amount which was injected into the Company within the framework of the exercise of the options). On March 15, 2016 and March 31, 2016, a total if NIS 85 million and NIS 248 million, respectively, was injected into IDB Development, by Dolphin Netherlands, as part of the implementation of the Amendment To The Settlement, as a subordinated loan convertible into shares of IDB Development. For additional details regarding the convertible subordinated loans and regarding the financing expenses which IDB Development may record in the first quarter of 2017, with respect to the aforementioned subordinated loan, see Note 13.C.(5) to the financial statements. Additionally, within the framework of the Amendment To The Settlement, all of the options for shares of IDB Development which were held by the public expired, and the warrant holders of IDB Development received payments or rights to payments in accordance with the alternatives which were determined in the Amendment To The Settlement. For additional details regarding the Amendment To The Settlement, see Notes 14.C.(3) and 14.G. to the financial statements. 4.3 Additional transactions with the share capital of IDB Development Presented below are material transactions which were performed with the shares and securities convertible into shares of IDB Development by interested parties in IDB Development (over the counter) during the years 2015, 2016 and 2017 (until the publication date of the report) (in addition to those specified in sections 4.1 and 4.2 of this part): On February 11, 2015, IFISA acquired from Dolphin Netherlands, in an over the counter transaction, 71,388,470 ordinary shares of IDB Development, which constituted approximately 12.48% of its issued share capital (approximately 7.11% at full dilution) (see line (2) in the table presented in section 4.4 of this part, and the immediate reports of IDB Development dated February 14, 2015 (reference numbers: and )). As of the publication date of the report, the balance of the consideration with respect to the acquisition of the aforementioned shares, in the amount of approximately USD 21.7 million (with the addition of interest according to the rate specified in the agreement), has not yet been transferred to Dolphin Netherlands, and the aforementioned shares are pledged to secure the remaining payment. On May 31, 2015, IFISA acquired from Dolphin Netherlands, in an over the counter transaction, 46,002,000 options (Series 4) of IDB Development in accordance with an agreement between them, which was signed on that same day, in consideration of a total of NIS 460,020 (NIS 0.01 per warrant (Series 4)). According to the agreement, IFISA undertook towards Dolphin Netherlands to exercise all of the options (Series 4) which were acquired by it, and Dolphin Netherlands undertook towards IFISA to exercise 44,198,000 options (Series 4) of IDB Development which were owned by it. On June 4, 2015, Dolphin Netherlands and IFISA exercised options (Series 4) into shares of IDB Development (see lines (4) and (5) in the table in section 4.4 of this part, and the immediate report of IDB Development from June 1, 2015 (reference number )). See line (8) of the table presented in section 4.4 of this part, regarding the right to acquire shares of IDB Development which IFISA provided to Dolphin Netherlands. See lines (9) and (10) in the table presented in section 4.4 of this part regarding the acquisition of ordinary shares, options (Series 4), options (Series 5) and options (Series 6) by Dolphin Netherlands and Dolphin Fund, within the framework of the Amendment To The Settlement. 4.4 Presented below are summary details in table form regarding material transactions and investments which were performed with the shares and securities convertible into shares of IDB Development by interested parties in IDB Development (over the counter) over the counter 2015, 2016 and 2017 (proximate to the publication of the report): 8371/1251/ v1

13 10 Date Name of interested party Type of security Number of securities involved in the action (% of issued capital / % of total securities of the same type) (*) 258,970,184 (45.28%) 115,097,859 (93.95%) 109,342,966 (93.95%) 97,833,180 (93.95%) Holding rate in securities of the same type before the action Holding rate in securities of the same type after the action Consideration in millions of NIS Price per share / security in NIS as derived from the investment (in NIS) Ordinary shares 31.27% 61.48% (1) Dolphin Options (Series Fund and 4) 0% 93.95% Dolphin Options (Series Netherlands 5) 0% 93.95% (**) Options (Series 6) 0% 93.95% (2) Dolphin Ordinary 71,388, % 48.98% Netherlands shares (12.48%) IFISA 0% 12.48% (3) Dolphin Options (Series 46,002, % 56.37% Netherlands 4) (37.55%) IFISA 0% 37.55% Dolphin 44,198,000 (4) 48.98% 48.98% 73.5 Netherlands Ordinary (6.68%) shares 46,002,000 (5) IFISA 12.48% 17.73% 76.5 (6.95%) (6) (7) (8) February 2016 C.A.A % 0% Ordinary 92,665,926 IFISA shares (13.99%) 17.73% 31.72% Dolphin Netherlands Dolphin Netherlands Subordinated loan convertible into shares One-time right to acquire 92,665,925 (13.99%) NIS 1.64 per share 3 Description of the transaction Acquisition of securities within the framework of a rights issue along with the shelf offering report dated January 19, 2015 Over the counter sale from Dolphin Netherlands to IFISA Over the counter sale from Dolphin Netherlands to IFISA Conversion of options (Series 4) into ordinary shares of IDB Development Completion of the buy me buy you process in which C.A.A. sold all of the shares of IDB Development which were held by it to IFISA (see Note 31 to the financial statements) Injection of the subordinated loans, in the amount of NIS 210 million, from Dolphin Netherlands to IDB Development (see Note 13.C.(3) to the financial statements) Agreement between Dolphin Netherlands and 3 Subject to adjustments, with the addition of annual interest as specified in the agreement between Dolphin Netherlands and IFISA.

14 11 Date (9) (10) Name of interested party and IFISA Dolphin Netherlands Dolphin Fund Type of security ordinary shares from IFISA Ordinary shares Nonmarketable options (Series 4) Nonmarketable options (Series 5) Nonmarketable options (Series 6) Nonmarketable options (Series 4) Nonmarketable options (Series 5) Nonmarketable options (Series 6) Number of securities involved in the action (% of issued capital / % of total securities of the same type) (*) 127,656,643 (19.28%) 24,860,259 (99.85%) 109,307,246 (99.97%) 97,801,220 (99.97%) 37,600 (0.15%) 35,720 (0.03%) 31,960 (0.03%) Holding rate in securities of the same type before the action Holding rate in securities of the same type after the action 48.98% 68.26% % % % % % % Consideration in millions of NIS Price per share / security in NIS as derived from the investment (in NIS) Description of the transaction IFISA 4 See the consideration specified in section 2 (regarding the shares) and in sections 1.34,1.33 (regarding the options) of the Amendment To The Settlement between the trustees for the debt settlement in IDB Holdings and Dolphin Netherlands, which was published by IDB Development on March 1, 2016 (reference number ). (*) % of the issued capital / % of the total securities of the same type was calculated as the ratio between the number of securities involved in the transaction and the number of securities of the same type after the relevant action (i.e., after the performance of the issuance / exercise of options, as performed on that date, etc.). (**) The options (Series 4, 5 and 6) were allocated without consideration. For additional changes in the holdings of shares of IDB Development by interested parties in IDB Development, over the years 2015, 2016 and 2017 (until proximate to the publication of the report), see the immediate reports of IDB Development. 4 In accordance with the aforementioned agreement, Dolphin Netherlands was given a one-time right to acquire from IFISA ordinary shares of IDB Development, exercisable, all or part, for a period of two years, as well as right of first refusal in the event that IFISA decides to sell the aforementioned shares to any third party whatsoever during the aforementioned period (see the immediate report of IDB Development dated March 25, 2016 (reference number: )).

15 12 5. Dividend distribution 5.1 IDB Development did not distribute dividends over the years 2015, 2016 and 2017 until the publication date of the report. 5.2 As of December 31, 2016, IDB Development s balance of profits, as defined in section 302 of the Companies Law, was negative, and amounted to approximately NIS 98 million The cash flow forecast of IDB Development (see section of the board of directors report) does not assume a dividend distribution by IDB Development in the years 2017 and For details regarding the financial restrictions and covenants which were determined in credit agreements, and with respect to debentures which were issued by IDB Development, which restrict dividend distributions by IDB Development, see Note 14.E to the financial statements. In case of deviation by IDB Development from its undertakings to fulfill certain financial ratios or from restrictions on a distribution, which were determined in agreements between IDB Development and banks and financial institutions which have provided it with credit, and in the deeds of trust of debentures which were issued by IDB Development, due to which the lenders will be entitled to require the early repayment of the credit. In general, the liabilities of IDB Development, as stated above, may delay or reduce a dividend distribution on its part. As of the publication date of the report, IDB Development has no policy with respect to dividend distributions. 5.4 To the best of IDB Development s knowledge, the Ministry of Justice is promoting proposed legislation which includes many significant proposed improvements to the profit test set forth in the Companies Law with respect to dividend distributions, and the adjustment of that test to IFRS, where in accordance with the offer, inter alia, the method used to calculate the balance of distributable earnings will be performed based on realized earnings, unrealized profits will be neutralized (such as changes in the fair value of investment property, but not unrealized losses), excluding those which are easily exercisable, and amounts which are applied to other comprehensive income and which reduce equity will be deducted. In general, legislative amendments and changes in accounting standards have affected, and may affect in the future, the possibilities for dividend distributions by IDB Development, the scope of distributable profits, and the profitability of dividend distributions by IDB Development, as well as the possibilities for distribution, the scope of distributable profits and the profitability of dividend distributions by investee companies of IDB Development. 5 The aforementioned amount of profits was calculated based on the net profit or net loss for the owners of IDB Development, which accrued in the years 2015 and 2016, according to the financial statements of IDB Development as of December 31, The cumulative balance of profits of IDB Development as of December 31, 2016 was negative, and amounted to a total of approximately NIS 3,615 million.

16 13 Chapter B - Other information regarding IDB Development 6. Financial information with respect to IDB Development s operating segments For financial information with respect to IDB Development s operating segments, see Note 32 to the financial statements. In light of the completion of the sale of Koor s holdings (which is held 100% by DIC) of 40% of the share capital of Adama in November 2016, IDB Development is presenting in the financial statements the operating segment Adama as a discontinued operation. For details regarding the aforementioned transaction, see Note 3.H.4 to the financial statements. For details regarding fixed costs and variable costs which are attributed to the operating segments, and regarding profit from operating activities (operating profit) from the operating segment attributable to the owners of IDB Development and attributable to non-controlling interests, see some of the descriptions of the IDB Development s operating segments in Chapter C of this part. For details and an analysis of the result of IDB Development s business activities, see section 1 of the board of directors report. 7. General environment, impact of external factors and restrictions and supervision over the activities of IDB Development 7.1 General - IDB Development is a holding company which holds a large number of companies which are engaged in various market segments. The activities of IDB Development and of its investee companies are affected, inter alia, by the state of the capital market, the state of the market, and the state of the economy in Israel and around the world (including interest rates, inflation rates, exchange rates, and prices of raw materials) as well as the security-political situation in Israel and the Middle East. The state of the economy in Israel and the security situation may also affect the willingness of foreign entities to engage in business relationships with Israeli investee companies of IDB Development. Changes to trends in capital markets in Israel and around the world may affect the values of assets and the prices of marketable securities which are held by IDB Development and its investee companies, and may cause, in certain cases, the recording or amortization of losses with respect to impairment of such holdings, and may affect the ability of IDB Development and its investee companies to generate from the realization of holdings adequate proceeds and profits, whether those which are applied to the statement of income, or those which are applied directly to capital attributed to the shareholders of IDB Development. Additionally, such changes to trends may affect the raising of funds through the performance of private or public issuances of securities by IDB Development and its investee companies, or the identification of financing sources or financing terms, when these are required by IDB Development and its investee companies to finance their operating activities. For additional details regarding factors which affect the business results of IDB Development as a holding company, see section 1 of the board of directors report. IDB Development and some of its investee companies are subject to restrictions in accordance with the law on the performance of new investments or on increases to existing investments in the investee companies, in certain cases, including the requirement to receive approvals or permits from various regulatory authorities in connection with passing the holdings limit beyond the rates prescribed in law. IDB Development and some of its investee companies are also subject to restrictions in accordance with the law or in accordance with directives issued by various regulatory authorities with respect to their business activities, including directives which regulate the oversight of insurance business operations (for details regarding the appointment of a trustee by the Commissioner of Capital Markets for IDB Development, with respect to most of its holdings in Clal Insurance Enterprises Holdings, and regarding the outline which was determined by the Commissioner of Capital Markets for the sale of holdings in Clal Insurance Enterprises Holdings, see Notes 3.H.5.A, B. and C. to the financial statements and section 12.2 of this part), directives from the communications segment (for details regarding the receipt of approval from the Ministry of Communication for a change to the control structure (indirectly) of Cellcom, including in connection with directives which pertain to holdings of Israeli entities which are included in the communication licenses of Cellcom, amendment to the licenses and receipt of an extension regarding compliance with the requirements, see sections and of this part), various provisions of the law and terms of some of the licenses in the communications segment which were given to several investee companies of IDB Development, including restrictions on cross ownerships (which mean, in general, holdings in means of control of competing corporations) (see also section of this part), directives pertaining to antitrust restrictions (see also sections 7.5 and 11.6 of this part), directives regulating the oil and gas segment, directives pertaining to the oversight of prices of products and services, directives pertaining to consumerism and restrictions due to benefits or approvals from tax authorities. Additionally, some of the investee companies of IDB Development have foreign operations, market products or services outside of Israel or have the securities traded outside of Israel. These companies are also affected by legislative arrangements and foreign regulatory arrangements, and are exposed to changes in various currency rates. Various restrictions by virtue of the law or in accordance with the directives of various regulatory authorities, as stated above, as well as various contractual restrictions, may restrict the opportunity for IDB Development and its investee companies to take advantage of business opportunities for new investments, or to increase or realize

17 14 existing investments, or to pledge investments in investee companies as collateral for the repayment of their liabilities. 7.2 The Concentration Law - In December 2013, the Concentration Law was published, which includes three main chapters that pertain to the restriction of control in companies with a pyramid structure; Regarding the separation between significant real corporations and significant financial entities, and taking into account considerations involving industry-wide concentration and considerations of branch-specific considerations regarding the allocation of rights According to the provisions of the Concentration Law, a pyramid structure for the control of reporting corporations (in general, corporations whose securities were offered to and are held by the public) is restricted to 2 tiers of reporting corporations (where a first tier company may not include a reporting corporation which does not have a controlling shareholder). In accordance with transitional provisions which were prescribed in the Concentration Law, a third tier company or higher tier company is no longer entitled to control reporting corporations, except for corporations as stated above which are under its control as of the date of publication of the Concentration Law in the Official Gazette (the Publication Date ), regarding which it will be required to discontinue control by no later than December 2017 (the 2017 Requirement ). It is noted that so long as a reporting corporation is considered a second tier company in accordance with the Concentration Law, it is not entitled to control reporting corporations, and insofar as, on the Publication Date, it holds control of reporting corporations, it must discontinue its control of such corporations by no later than December 2019 (the 2019 Requirement ) On the Publication Date, IDB Development was considered a second tier company, DIC was considered a third tier company, and reporting corporations controlled by DIC were considered fourth and fifth tier companies. In May 2014, the control of IDB Development changed, within the framework of the completion of the Debt Settlement in IDB Holdings, and following the above, IDB Development and DIC are no longer considered second and third tier companies, respectively Proximate to the publication date of the report, IDB Development and DIC are considered first and second tier companies, respectively, for the purpose of the Concentration Law. Therefore, so long as DIC is considered a second tier company, it must discontinue, by no later than December 2019, its control of the reporting corporations which are under its control, and so long as Property & Building, which is under the control of DIC, is considered a third tier company, it must discontinue, by no later than December 2017, its control of the reporting corporations which are under its control In August 2014, the Boards of Directors of the Company and DIC each resolved to appoint (separate) advisory committees, to evaluate various alternatives for dealing with the implications of the Concentration Law, and of its fulfillment of the restrictions specified therein, with respect to the control of companies through a pyramid structure, with the intention to allow the continued control by IDB Development and/or DIC of other tier companies (which are currently directly held by DIC) also after December It is noted that the alternatives which were evaluated by the advisory committee of the Board of Directors of IDB Development include, inter alia, possible structural changes on all tiers (i.e., both on the level of the tier of IDB Development and on the level of the tier of DIC, Property & Building and its investee companies), including a preliminary evaluation of several alternatives with respect to the 2017 requirement Further to the above, due to the fact that some of the possible actions and/or structural changes may include transactions in which the controlling shareholders in IDB Development may have a personal interest, and in accordance with the recommendation of the advisory committee, the Board of Directors of IDB Development resolved, on March 22, 2017, to appoint an independent committee (which is comprised of the two outside directors and the independent director of IDB Development) to evaluate various alternatives for IDB Development s dealing with the requirements of the Concentration Law, with respect to the 2017 requirement. These alternatives may include scenarios involving possible structural changes pertaining to the first tier (IDB Development) and the second tier (DIC), as well as possible structural changes pertaining to the third tier (Property & Building) and the fourth tier (Gav-Yam, Ispro and Mehadrin). With respect to the aforementioned structural changes to which IDB Development is not directly party, the committee will evaluate, subject to the restrictions of the law, also the preparations of the other member companies in the group for dealing with the requirements of the Concentration Law, and will be in contact, as required, with the relevant entities in those companies. An evaluation of the various alternatives, as stated above, will also be conducted in consideration of the 2019 requirement. In this regard, IDB Development was informed by DIC that it is also continuing its evaluation of various alternatives for dealing with the requirements of the Concentration Law, as stated above, including with respect to the 2017 requirement, and that in these circumstances, it has agreed for its audit committee to evaluate such alternatives As of proximate to the publication date of the report, the foregoing constitutes an evaluation only of these alternatives, and there is no certainty in connection with their adoption and the implementation of any alternatives by IDB Development and/or DIC and/or its investee companies. The implementation of the adopted alternative (insofar as it will be adopted) may take a significant period of time to implement or may not materialize, or may materialize in other ways. Based on an analysis which was conducted by IDB Development, and based on the assessments of IDB Development and DIC (as reported to IDB Development), IDB Development believes that it is more likely than not that the completion of one or more of the aforementioned alternatives will be successful, and will allow IDB Development and DIC to continue holding control of Cellcom also after December 2019.

18 15 Accordingly, the recoverable amount of the Cellcom activity as of June 30, 2016 was calculated based on value in use, as specified in Note 8.D. to the financial statements Additionally, IDB Development was informed that Property & Building, which as of the approval date of this report is a third tier company, and is the controlling shareholder of reporting corporations (Gav-Yam, Ispro and Mehadrin), is also evaluating the implications of the Concentration Law on the aforementioned holdings, with the aim of retaining its control thereof. Property & Building stated in its reports as of December 31, 2016 that insofar as any of the alternatives which are being evaluated by IDB Development and/or by DIC in connection with the 2017 requirement are implemented, Property & Building may become a second tier company, which will allow it to postpone the solution regarding the Concentration Law, with respect to reporting corporations which are under its control, for an additional two years, until December To the best of IDB Development s knowledge, further to the decision of the Board of Directors of Property & Building, the audit committee of Property & Building is evaluating various alternatives which are available to Property & Building to solve the issue involving the Concentration Law by December 2017, in order to present its recommendations to the Board of Directors of Property & Building within a period of time which will allow it to achieve this goal. As IDB Development was informed, according to the assessment of Property & Building, it will be able to retain control of the reporting corporations which are under its control, and therefore, the Concentration Law had no impact on its financial statements as of December 31, However, Property & Building is unable to assess with certainty the dates and scopes of various actions which it may be required to perform in connection with the implementation of the Concentration Law. Accordingly, and as reported to IDB Development, Property & Building did not create a deferred tax liability in case it is forced to realize such holdings, and according to its assessment, it will not be required to pay taxes with respect to the profits from the aforementioned realization With respect to the structure of the boards of directors of the Group s member companies, it is noted that IDB Development, as a first tier company, and DIC, as a second tier company, are not subject to the obligation set forth in the Concentration Law to include on its Board of Directors a majority of independent directors, and a minimum number of outside directors, as specified in the Concentration Law with respect to third or greater tier companies. However, in accordance with the Concentration Law, and as of the publication date of the report, the Boards of Directors of Cellcom, Shufersal, Property & Building, Elron, Gav-Yam, Ispro and Mehadrin (which are third and fourth tier companies, respectively) include a majority of independent directors, and the number of outside directors on their Boards is at least one half of the total number of Board members, less one, rounded upwards. It is noted that in June 2014, the Promotion of Competition and Reduction of Concentration Regulations (Classification of Company as Tier Company), , entered into effect, in which easements were provided to certain corporations which are considered third tier companies, regarding an update to the composition of their Boards of Directors, in order to adjust the composition of their Board of Directors for compliance with the requirements of the Concentration Law The fourth chapter of the Concentration Law also prescribes provisions regarding the separation between significant real corporations and significant financial entities. Regarding these provisions, it is noted that so long as IDB Development is a significant real corporation after December 11, 2019, it will not be able to control Clal Insurance Enterprises Holdings or to hold over 10% of a certain type of the means of control of Clal Holdings Insurance Enterprises (or over 5% of a certain type of the means of control of Clal Holdings Insurance Enterprises, in the event that Clal Insurance is considered to be an insurer without a controlling shareholder). For details regarding the main provisions of these chapters, see section 7.2 in Part A of the Periodic Report for 2013, which was published on April 1, 2014 (reference number ) (the Periodic Report For 2013 ). For details regarding the possible accounting implications of the Concentration Law on the financial statements of IDB Development, see Notes 3.G.3. and 8.D. to the financial statements. In connection with the provisions of the Concentration Law with respect to the separation between significant real corporations and significant financial entities (section 7.2(b) of Part A of the Periodic Report For 2013), and with respect to the taking into account of industry-wide concentration considerations and branch-specific concentration considerations with respect to the allocation of rights (section 7.2(C) of Part A of the Periodic Report For 2013), it is noted that in May 2015, a list of the concentration entities was published in the Official Gazette, and in January 2017, an update was made to the list of concentration entities, the list of significant real corporations, and the list of the significant financial entities. The aforementioned list is updated from time to time. Pursuant to the provisions of the Concentration Law, the following, inter alia, are regarded as a concentrated entity: a significant financial institution, a significant real corporation, and any entity which belongs to a business group (a corporation, the controlling owner of the corporation and a corporation controlled by either of the aforesaid) that includes a significant financial institution or a significant real corporation. IDB Development, its controlling shareholders (Eduardo Elsztain and corporations through which he holds IDB Development) and the Group s member companies (including DIC, Cellcom, Property & Building, Shufersal, Clal Holdings Insurance Enterprises IDB Tourism, Noia Oil and Gas Exploration Ltd., and companies under the control of those companies) were included in the list of concentration entities, both by virtue of section 4(a)(1)(a)(1) of the Concentration Law (significant financial entity) and by virtue of section 4(a)(1)(a)(2) of the Concentration Law (significant real corporation) and the aforementioned companies were also included in the list of significant real corporations. Clal Insurance Company (a company owned by Clal Insurance Enterprises Holdings), additional companies under the control of Clal Insurance Enterprises Holdings, and Epsilon Investment House Ltd. and Epsilon Provident Fund Management Ltd. (which are held by

19 16 DIC) were also included in the list of significant financial entities. In accordance with transitional provisions which were determined in the Concentration Law, so long as IDB Development is a significant real corporation, after December 11, 2019, Clal Insurance Company will not be able to control Clal Insurance Company and additional financial entities in Clal Holdings Insurance Enterprises Group, or to hold more than 10% of a certain type of means of control in such entities (or more than 5% of a certain type of means of control of such an entity if it is considered an insurer without a controller). As specified in this section, the Board of Directors of IDB Development intends to work in order to allow the continued control by IDB Development of significant real corporations which are directly held by DIC, also after December For details regarding the non-success of the negotiations for the sale of IDB Development s holdings in Clal Insurance Enterprises Holdings, and regarding the outline which was determined by the Commissioner of Capital Markets for the sale of the holdings in Clal Insurance Enterprises Holdings, see Notes 3.H.5.B. and C. to the financial statements. The provisions of the Concentration Law require regulators who have the authority to allocate rights to certain public assets (inter alia, in the communication, energy, transportation, natural resources and other branches) to take into account considerations regarding the encouragement of competition in the branch and regarding the reduction of cross-economy concentration, when allocating rights to such assets to private entities (including before extending the validity or renewing a right which was allocated, as stated above). These requirements may prevent IDB Development and its investee companies from expanding their activities in such areas and/or may prevent them from entering into activities in such areas. For details regarding possible effects of the provisions of the Concentration Law on Cellcom with respect to the allocation of frequencies and the renewal of licenses for communication services, see section of this part. For additional details regarding the implications of the provisions of the Concentration Law on investee companies of IDB Development, see sections , , 11.6 and 12.2 of this part. The implementation of the provisions of the Concentration Law (in the transition periods specified therein), and particularly, those which pertain to companies incorporated according to a pyramid structure, and those which pertain to the separation between significant real corporations and significant financial entities, affect, and may have a significantly adverse affect on IDB Development (and on its investee companies, which hold reporting corporations whose securities are held by the public), inter alia, in consideration of the restrictions on its holding structure, on the control of reporting corporations, on its ability to acquire or to realize holdings in public companies and in reporting corporations (with respect to the realization of holdings, including the holding of Clal Holdings Insurance Enterprises) and on the value of its holdings in such companies, on the market branches in which it operates, etc. 7.3 Proper Banking Management Directives; Group of borrowers - IDB Development and some of its investee companies are affected by the Proper Banking Management Directives issued by the Commissioner of Banks in Israel, including, inter alia, restrictions on the scope of loans which a banking corporation in Israel can provide to a single borrower, to a single group of borrowers, and to the largest borrowers and groups of borrowers in the banking corporation (as these terms are defined in the aforementioned directives). IDB Development, its controlling shareholders and some of its investee companies are considered a single group of borrowers for this purpose. These restrictions may impair the ability of IDB Development and some of its investee companies to borrow additional amounts from banks in Israel, their ability to refinance debt through bank credit, their ability to make investments for which bank credit is required, their ability to invest in companies which was taken out significant credit from certain banks in Israel, and their ability to perform certain business transactions in collaboration with entities which have taken out credit, as stated above. However, in recent years, a decrease has occurred in the scope of credit used from the banking system in Israel for the group of borrowers which includes IDB Development. Within the framework of the Concentration Law (in the chapter regarding the restriction of control of companies in a pyramid structure, as specified in section 7.2 of this part), it was determined that the Minister of Finance and the Governor of the Bank of Israel (or any entity authorized by them for this purpose) will issue directives regarding restrictions on credit which will be given to a corporation or business group (i.e., the controlling shareholder and companies under his control) by financial entities (as defined in the provisions of the Concentration Law), cumulatively, in consideration of, inter alia the liability of each corporation, or the total liability of the business group. The Minister of Finance and the Governor of the Bank of Israel are entitled to determine the provisions which will be determined regarding the aforementioned credit restrictions will also apply to groups of borrowers and to related companies to which the determined conditions apply. IDB Development, its controlling shareholders and companies under its control constitute a business group for this purpose, and insofar as these restrictions will be applied, they may affect IDB Development and companies which are under its control. It is noted that, to the best of IDB Development s knowledge, proximate to the publication of the report, no such directives were established by the Minister of Finance and the Governor of the Bank of Israel, and that the Proposed Insolvency and economic Recovery Law, , includes a proposal to cancel, in the Concentration Law, the sections which determine that the aforementioned directives will be determined by the Minister of Finance and the Governor of the Bank of Israel, and to impose the restriction regarding credit on a real corporation which constitutes a part of a business group (as defined in the provisions of the Concentration Law) and not on the lenders. 7.4 Consumer and labor laws - The results of operations of investee companies which are held by IDB Development which operate in Israel in the commercial and services branches, including communication and retail services, such as Cellcom and Shufersal, are also affected by the provisions of the law, and apply to consumer affairs, including the oversight of prices of products and services, product quality and product returns (see, for example, sections 9.17, 11.6 and of this part). For details regarding the Food Law and the Bags Law, see sections 11.6 and of this part. Additionally, a significant increase in the minimum wage in Israel, other material changes in labor laws

20 17 in Israel, including developments in ruling issued by the labor courts and social developments which increase the practical possibility of employee unions (where such unionization may impose difficulties on structural changes and may harm managerial flexibility), or strikes, industrial unrest and work disruptions in investee companies which are held by IDB Development, and disruptions in the activities of ports in Israel, may adversely affect the business results of those companies, primarily those which operate in the fields of commerce and services, and therefore also on the business results of IDB Development (see, for example, sections 9.13, 10.16, and 11.8 of this part). For details regarding the legislation with respect to the increase of the minimum wage in Israel, and its expected impact on Shufersal, see section 11.6 of this part. For details regarding a collective agreement between member companies of Clal Holdings Insurance Enterprises Group and the Histadrut New General Federation of Labor in Israel (the Histadrut ) and the employee committees in Clal Holdings Insurance Enterprises Group, see section of this part. For details regarding Cellcom s engagement in a collective labor agreement with the employees representation and with the Histadrut in February 2015, and regarding the declaration from January 2016 regarding a labor dispute in Cellcom, see section 9.13 of this part. 7.5 Anti-trust - As a holding company which is engaged in the acquisition or sale of holdings and means of control of corporations, IDB Development is subject, inter alia, to the provisions of the Restrictive Trade Practices Law, primarily with respect to transactions which constitute mergers and/or which includes restrictive arrangements, as these terms are defined in the aforementioned law. Accordingly, certain transactions in which IDB Development as part of its investee companies engage may be subject to the approval of the Antitrust Commissioner, which may prevent their implementation, or may impose restrictive conditions on them. Terms included in approvals for mergers or decisions with respect to restrictive arrangements, which are given (or which will be given) by the Antitrust Commissioner, in connection with an arrangement, transaction or acquisition of holdings in various companies by IDB Development and/or by companies under its control, may restrict the activities of IDB Development and of its investee companies, and may affect their results. 7.6 For details regarding the general environment and external factors which affect specific operating segments of IDB Development, see the description of each of the operating segments in Chapter C of this part. For details regarding risk factors which affect the activities of IDB Development and its investee companies, see section 22 of this part.

21 18 Chapter C - Description of IDB Development s Business Operations by Operating Segments Presented below is a description and details regarding DIC, through which IDB Development holds most of the companies which constitute operating segments. DIC does not constitute an operating segment of IDB Development in accordance with the operating segment tests prescribed in IFRS 8, as specified in section 2 of this part. 8. Discount Investment Corporation Ltd. 8.1 As of December 31, 2016, IDB Development holds approximately 67.92% of the issued share capital and voting rights in DIC. 6 Presented below are data regarding the investment of IDB Development in DIC As of December 31, 2016: Investment amount in DIC, as recorded in the books of IDB Development (NIS millions) Rate which constitutes the investment amount in DIC out of the total capital attributed to the owners of IDB Development Market value of the investment of IDB Development (in millions of NIS) 1, % 910 * Additionally, as of the reporting date, IDB Development held options (Series 5) and options (Series 6), whose market value amounted to NIS 96 million. 8.2 Investments which were performed in the capital of DIC and transactions with its shares In August 2015, DIC published a shelf offering report in accordance with a shelf prospectus of DIC from June 2013 (as amended), according to which, in September 2015, by way of a rights offering to DIC shareholders, 85,216 units of DIC securities were issued (without consideration), each of which includes four series of options (Series 3 to 6), which were listed for trading on the Tel Aviv Stock Exchange. In December 2015, IDB Development exercised all of the DIC options (Series 3) which were held by it, in consideration of a total of approximately NIS 92 million (according to an exercise price of NIS 6.53 per share) and increased its holdings in the share capital of DIC. additionally, until their expiration date in December 2015, additional options (Series 3) of DIC were exercised in consideration of a total of NIS 10 million. For additional details, see Note 3.H.6.D to the financial statements. In September 2016, IDB Development sold 8,888,888 DIC shares to a private company wholly owned by IRSA, at a price of NIS per share, for a total consideration which amounted to approximately NIS 100 million, in a manner whereby the holding rate of IDB Development in the issued capital of DIC decreased from 76.07% to 67.3%. In December 2016, IDB Development exercised all of the DIC options (Series 4) which were held by it, in consideration of a total of approximately NIS 92.3 million (according to an exercise price of NIS per share) and increased its holdings in the share capital of DIC to approximately 69.56% of the issued and paid-up capital of DIC. additionally, until their expiration date in December 2016, additional options (Series 4) of DIC were exercised in consideration of a total of approximately NIS 33 million. For additional details, see Note 3.H.6.D to the financial statements. It is noted that the exercise addition with respect to the balance of the options (Series 5) and the options (Series 6) of DIC which are held by IDB Development amounts to approximately NIS 210 million. additionally, proximate to the publication of the report, warrants (Series 5) and options (Series 6) of DIC were exercised in consideration of a total of approximately NIS 7 million and NIS 3 million, respectively. For the sake of completeness, it should be noted that in the months January and February 2015, companies under the control of Mr. Eduardo Elsztain, the controlling shareholder of IDB Development, acquired DIC shares within the framework of transactions on the Tel Aviv Stock Exchange. Additionally, companies under the control of Mr. Eduardo Elsztain exercised, in December 2015, options (Series 3) of DIC in consideration of a total of approximately NIS 0.6 million, and in December 2016, options (Series 4), options (Series 5) and options (Series 6) of DIC, in consideration of a total of approximately NIS 17.9 million, in a manner whereby, proximate to the publication of the report, companies under the control of Mr. Elsztain directly hold (in addition to the holdings through IDB Development) approximately 8.06% of the issued share capital of DIC (Dolphin Fund - approximately 0.07%, Dolphin Netherlands - approximately 0.56%, and IRSA - approximately 7.43%). It is noted that proximate to the publication of the report, IDB Development announced that it intends to exercise the options (Series 5) and the options (Series 6) of DIC which it holds before the effective date for the exercise of the first tranche of warrants, i.e., April 6, For additional details, see Note 33.J. 6 Approximately 38.7% of DIC shares which are held by IDB Development were pledged to the trustee for the debenture holders (Series L) of IDB Development.

22 Dividend distribution During the years 2015 and 2016, DIC did not distribute any dividends. As of December 31, 2016, DIC s balance of profits, as defined in section 302 of the Companies Law, amounted to approximately NIS 995 million. During the years 2015 and 2016, DIC did not distribute any dividends. On March 22, 2017, the Board of Directors of DIC resolved to implement a dividend payment in the amount of NIS 4.5 per share, which reflects, in accordance with the Company s issued share capital on the date of the resolution, a total dividend amount of approximately NIS 539 million, which will be paid in two tranches, on April 20, 2017 (NIS 3.3 per share) and September 19, 2017 (NIS 1.2 per share) (it is hereby clarified that the payment of the second tranche is on the condition that, until the payment date of the second tranche, no material change for the worse will occur in DIC, which could change the conclusion regarding DIC s fulfillment of the solvency test with respect to the second tranche). It is noted that the total distribution amount may change as a result of the exercise of securities convertible into DIC shares (options (Series 5 and 6) and options which were allocated to corporate officers in accordance with an options plan), insofar as any will be performed as of the date of the effective date for the distribution of any of the dividend tranches, and amount to a maximum total of approximately NIS 694 million, which reflects the issued share capital of DIC, assuming full exercise of DIC s securities convertible into shares. see also section of the board of directors report and Note 33.J to the financial statements. As of the publication date of the report, DIC has no dividend distribution policy. 8.4 Presented below are data from the financial statements of DIC as of December 31, 2016 (the amounts are in millions of NIS): Income in 2016 Profit attributable to the owners of DIC in 2016 Capital attributable to the owners of DIC As of December 31, 2016 Total assets As of December 31, 2016 Accounting reference in the books of IDB Development 17, ,306 34,496 Consolidated company 8.5 General environment and impact of external factors on DIC; Restrictions and supervision of DIC s activities; DIC s operating segments DIC is a holding company which is primarily engaged in the holding of shares of investee companies, which are active in several segments. In light of the above, DIC s general operating environment, the restrictions and supervision which apply to DIC s activities as a holding company, and the external factors which affect it, are similar in nature to the general environment, the restrictions, the supervision and the factors which affect the activities of IDB Development, as described in section 7 of this part. See also the reference to the restrictions and supervision which apply to the various operating segments of DIC, under the description of the operating segments in Chapter C of this part. Each of the following companies constitutes a separate operating segment of DIC (according to the tests for reportable operating segment in accordance with IFRS 8, as specified in section 2 of this part): Cellcom (see section 9 of this part); Property & Building (see section 10 of this part); Shufersal (see section 11 of this part). In light of the completion of the sale of the entire holdings of Koor (which is held 100% by DIC) in the share capital of Adama (40%) in November 2016, DIC presents in the financial statements the operating segment Adama as a discontinued operation. DIC also has holdings in additional companies which are engaged in various segments, whose results are included in the financial statements of the others segment Characteristics and results of any material structural change, merger or acquisition; Acquisition, sale or transfer of assets in material scope and not in the ordinary course of business For details regarding the completion of a transaction for the sale of Koor s holdings in Adama (40%) to China National Agrochemical Corporation ( ChemChina ), in which Koor received a cash amount of USD 230 million, see Note 3.H.4.B to the financial statements For details regarding transactions which took place in 2016, in which DIC acquired Shufersal shares which constitute approximately 7.73% of Shufersal s capital, from Isralom Properties Ltd. of the Bronfman-Fischer Group, for a total net consideration of NIS 235 million, in a manner whereby DIC s total holdings in the issued capital of Shufersal increased from approximately 52.95% to approximately 60.67%, see section 11.3 of this part and Note 3.H.3 to the financial statements For details regarding transactions in which DIC sold, in June 2016, shares of Property & Building Corporation, for a net consideration of NIS 217 million, in a manner whereby its holdings in the issued capital of Property & Building Corporation decreased from approximately 76.45% to approximately 64.44%, see Note 3.H.2.A to the financial statements. 7 Including Elron Electronic Industries Ltd., which is engaged in the holding of technology companies.

23 For details regarding transactions in which Property & Building Corporation sold, in December 2016, shares of Gav-Yam, for a gross consideration of approximately NIS 391 million, such that its holdings in the issued capital of Gav-Yam decreased from approximately 69.06% to approximately 55.06%, see section 10.4 of this part and Note 3.H.2.B to the financial statements. For details regarding the Concentration Law, its implications on DIC and its investee companies, and structural changes which are being evaluated with respect to it, see section 7.2 of this part and Note 3.G.3 to the financial statements. For details regarding additional major changes in DIC and in DIC s investments in its investee companies in 2016, in H.1 to 3.H.4, and 3.H.6.A. to the financial statements. 8.7 Human capital As of December 31 of the years 2015 and 2016, and as of the reporting date, DIC independently employed 28, 33 and 31 employees, respectively (including the employees which DIC provides to Elron, in accordance with the agreement under which DIC provides to Elron management and administration services, and which is expected to expire on April 1, 2017), and proximate to the publication of the report, 18 employees, not including Elron employees, all in the headquarters and administration segments. In 2016, the managerial backbone of DIC headquarters was replaced, and as part of the above, a new Acting General Manager and CFO were appointed. Mr. Sholem Lapidot was appointed, in January 2016, to serve as the Acting General Manager of DIC, and in August 2016, as the General Manager of DIC. On August 6, 2016, the general meeting of DIC approved (after receiving approval from the compensation committee and the board of directors of DIC) the terms of tenure and employment of Mr. Sholem Lapidot as the Acting General Manager of DIC. Mr. Gil Kotler was appointed, in January 2016, as the CFO of DIC. Further to that stated in the periodic report for 2015, which was published on March 23, 2016, according to which DIC, together with IDB Development, are evaluating the possibilities for the consolidation of functions in the two companies, and the appointment joint corporate officers to serve in both companies, IDB Development and DIC performed a consolidation of functions, as stated above, in order to achieve savings in costs and in the appointment of joint corporate officers, including, as of the publication date of the report, the joint General Manager, CFO, VP Legal Advisor, VP Accounting, and Company Secretary. For additional details regarding understandings which were reached with respect to the services agreement between IDB Development and DIC, see section 15 of this part and Note 31.B.(2) to the financial statements.

24 Financing Presented below are the balances of the credit amounts in the books of DIC as of December 31, 2016: Short term liabilities Long term liabilities Bank credit Credit from other sources (institutional and public) (**) NIS millions - - 3,599 CPI-linked balances % Average interest (% Effective interest rate) (*) % (5.707%) NIS millions Unlinked balances % Average interest (% Effective interest rate) (*) % (3.589%) 6.695% (6.530%) (*) % Average interest rate - the weighted average of the stated interest rate with respect to the relevant credit amounts; % Effective interest rate - the weighted average of the effective interest rate, in accordance with the relevant credit amounts according to their values in the financial statements of DIC. (**) After deducting debentures in the amount of NIS 105 million which were acquired by a wholly owned subsidiary of DIC. It is noted that on April 18, 2016, the balance of DIC s debentures (Series D) was repaid in its entirety, and that on January 1, 2017, the balance of the debentures (Series G) of DIC was repaid in its entirety. Additionally, on March 21, 2017, a full and final redemption of DIC Debentures (Series T) was performed, following the sale of Koor s holdings in Adama, which constitutes a redemption event in accordance with the deed of trust for the aforementioned debentures For details regarding DIC s liabilities within the framework of loans which it accepted from two banking corporations, to refrain from the provision of pledges in favor of others (negative pledge), subject to certain exceptions, see Note 20.D to the financial statements In March 2016, the two banking corporations which extended loans to DIC, in connection with the decrease in the holding rate of Mr. Mordechai Ben Moshe in the share capital of IDB Development, below a rate of 26.65%, which may constitute grounds for demanding the immediate repayment of the aforementioned loans, agreed that so long as IDB independently holds control the Company, directly and/or indirectly (at full dilution), and Mr. Eduardo Elsztain and/or corporations under his control hold, directly and/or indirectly, at least 51% of the issued and paidup share capital of IDB Development (at full dilution), the change in control of DIC, as mentioned above, will not constitute grounds for demanding the immediate repayment of their loans to DIC. For additional details, see Note 14.F.1.A to the financial statements For details regarding a group of borrowers and the restrictions which apply in connection therewith, see section 7.3 of this part DIC has a shelf prospectus dated May 31, 2016, under which DIC may issue to the public debentures, nonconvertible debentures, convertible debentures, options exercisable into shares, into non-convertible debentures and into convertible debentures and marketable securities.

25 Credit rating - Details regarding debenture ratings Series Name of rating company Rating As of Rating As of Rating determined on the series date of issuance Date of rating issuance F S&P Maalot BBB- (1) BBB (2) AA 2/2017 G S&P Maalot BBB- (1) BBB (2) AA 2/2017 H S&P Maalot BBB- (1) BBB (2) AA 2/2017 I S&P Maalot BBB- (1) BBB (2) - 2/2017 Additional ratings during the period between the date of the original issuance and the current rating as of March 22, 2017 Date Rating 4/2007, 6/2007, 11/2008, 7/2009, 1/2011, 10/2011, 11/2011, 1/2012, 5/2012, 9/2012, 7/2013, 8/2013, 12/2013, 3/2014, 12/2014, 2/2015, 3/2016, 7/2016 4/2007, 6/2007, 11/2008, 7/2009, 1/2011, 10/2011, 11/2011, 1/2012, 5/2012, 9/2012, 8/2013, 3/2014, 12/2014, 2/2015, 3/2016, 7/ /2008, 7/2009, 1/2011, 10/2011, 11/2011, 1/2012, 5/2012, 9/2012, 8/2013, 3/2014, 12/2014, 2/2015, 3/2016, 7/2016 1/2012, 5/2012, 9/2012, 8/2013, 3/2014, 12/2014, 2/2015, 3/2016, 7/2016 AA, A+, A-, BBB+, BBB, BBB- AA, A+, A-, BBB+, BBB, BBB- AA, A+, A-, BBB+, BBB, BBB- A-, BBB+, BBB, BBB- (1) This rating includes a positive rating outlook for the Company. (2) This rating includes a stable rating outlook for the Company As of December 31, 2016, DIC has a balance of liquid resources in the amount of NIS 1,822 million, where the total repayments of principal and interest with respect to DIC s debt in 2017 and in 2018 amounted to NIS 1,276 million and NIS 911 million, respectively. For details regarding DIC s policy with respect to liquid resources, and regarding its available sources, see Note 19.A.2.A to the financial statements For additional details, see Note 14.A.(1) and (2) and 14.F.1.A. to the financial statements. 8.9 Taxation See details in Note 30 to the financial statements Legal proceedings For details regarding material pending legal proceedings on behalf of and against DIC and against its investee companies (including companies which do not constitute reportable operating segments), and regarding material legal proceedings, as stated above, which concluded during the reporting period, see Notes 21.C.(2), 21.C.(1).A.4, C.1.(A).7 and 31.B(5)(B) to the financial statements. For additional details regarding the main claims on behalf of and against DIC in 2016 and until the reporting date, see the reports of IDB Development: Summary description of the claim A new motion (after a previous claim on the same matter was struck out) to approve a derivative claim on behalf of DIC, against directors and corporate officers who held office in DIC, certain shareholders of DIC (excluding IDB Development, which was removed from the proceedings), and its auditors, with respect to a tender offer which DIC performed for Shufersal shares, which increased DIC s holding in Shufersal shares, and regarding dividend distributions which it subsequently announced, since they constituted prohibited distributions which did not fulfill the profit test. A motion to approve a derivative claim on behalf of DIC, against, inter alia, Koor, Adama and CNAC, alleging that the Claim amount NIS billion Declaratory relief was Reference to the immediate report

26 23 Summary description of the claim full tender offer which was published by ChemChina will prevent Adama from have the possibility to conduct commercial competition, in breach, allegedly, of the agreement between Koor and CNAC. A motion to approve a class action against, inter alia, DIC, Koor, Adama and CNAC, alleging that DIC, Koor and CNAC had breached their duty of good faith and loyalty towards Adama, and that the engagement in the sale transaction for the sale of Koor s entire stake (40%) in Adama will constitute a breach by Koor, DIC and CNAC of their duty to act in good faith and loyalty towards Adama. The petitioner requested Koor and DIC not to complete the sale transaction. The Court ordered that the two motions be struck out, and accordingly, also the dismissal of the personal claim which was filed. A derivative claim on behalf of DIC, against its directors, the filing of which was approved by the Court, in connection with investments which DIC performed in Ma ariv holdings Ltd. during the years Claim amount requested in the class action Declaratory relief was requested in the derivative claim NIS 370 million Reference to the immediate report Goals, business strategy and expected developments in the coming year DIC is a holding company which invests in companies that operate in various segments, primarily in the branches of communication, real estate, trade and services. DIC generally invests in investee companies in a manner which provides it influence over their guidance and management. DIC strives to promote and maximize the value of its current investments, until they are sold, in the appropriate circumstances. DIC strives to promote and maximize the value of its current investments, and to effect their optimization, up to and including selling them in the appropriate cases, through influence and involvement in most of its investee companies. This effect is realized, whether through the appointment of directors on its behalf and the provision of candidates on its behalf for corporate officer positions, or through involvement in the business strategic processes of the investee companies. In parallel with the substantiation of the control group s control of IDB Development and DIC, as specified in section 3.2 of this part, in early 2016, the managerial backbone of DIC was replaced, and as part of the above, a new General Manager and CFO were appointed, and an emphasis was placed on effective management of the group. Within the framework of DIC s involvement in the investee companies, DIC appoints therein directors on its behalf, and in some of the investee companies, DIC appoints candidates on its behalf for tenure as corporate officers therein. DIC is involved in, and leads, the formulating of the strategy in its investee companies. Most of DIC s investee companies are public companies and leaders in their fields, with solid access to the capital markets and the banking system. Additionally, in appropriate cases, DIC may provide financial sources to the investee companies (through capital or through the provision of loans) in order to facilitate their business development. DIC s ability to refinance debt and to raise debt is affected, inter alia, by its net asset value and its leveraging ratio (the ratio of debt to total assets). DIC strives to maintain its leveraging ratio at a level which will allow it to refinance its debts, and as part of the above, DIC works to adopt business actions on the level of DIC headquarters itself, and on the level of its investee companies, which have the possibility of unlocking value in the investee companies on the one hand, and creating cash flows to assist DIC in the debt service on the other hand. As specified in section 7.2 above, in December 2013, the Concentration Law was published, which determined, inter alia, various restrictions with respect to pyramid holding structures; Provisions regarding the separation between significant real corporations and significant financial entities, and regarding taking into account industrywide concentration considerations and branch-specific competition considerations in the allocation of rights. As of the approval date of this report, DIC was considered a second tier company for the purpose of the Concentration Law. Therefore, so long as DIC is considered a second tier company, it must discontinue, by no later than December 2019, its control of the reporting corporations which are under its control, and so long as Property & Building, which is under the control of DIC, is considered a third tier company, it must discontinue, by no later than December 2017, its control of the reporting corporations which are under its control. DIC informed IDB Development that the Board of Directors of DIC appointed an advisory committee for the evaluation of various alternatives for DIC s dealing with the implications of the Concentration Law and the fulfillment of the restrictions specified therein with respect to the control of pyramid structure through a pyramid structure, with the intention of allowing DIC s continued control of other tier companies (which are currently directly held by DIC) also after December In the coming year, DIC will be required to take steps in connection with the implications of the provisions of the

27 24 Concentration Law which apply to it, as stated above Information regarding an exceptional change in DIC s business operations For details regarding events subsequent to the date of the statement of financial position, see Notes 21.C(2)C and 33.J-L to the financial statements Discussion regarding risk factors As a rule, the general risk factors which apply to DIC as a holding company are similar in nature to those which apply to the activities of IDB Development, mutatis mutandis. See section 21 of this part. Presented below are details regarding the risk factors which apply to the activities of DIC: Risk factor - Controlling shareholder status The intention of banking corporations to reduce their credit exposure to corporations in the IDB Group, may have an adverse impact on the ratings given for DIC s debentures and/or may impose difficulties on DIC s ability to raise capital and/or to refinance its debts, if it is interested in doing so (and/or may worsen the refinancing terms with respect to such debt). As of the publication date of the report, DIC is unable to estimate the full impact of the results of the aforementioned proceedings and events on DIC Risk factor - Cash requirements, reliance on cash flows of investee companies and liquidity The cash flows of DIC are used to repay debt (principal and interest payments), to finance general and administrative expenses, to make investments, and, if relevant, to distribute dividends as well. One of the main sources for DIC s current cash flows includes dividends distributed by its investee companies (if and insofar as any are distributed). An additional source for DIC s cash flows is the realization of assets, including the realization of holdings in investee companies. Changes in the scope of dividends and/or in the scope of asset realizations accordingly affects DIC s cash flows. The state of capital markets in Israel and around the world (which affects, inter alia, the value of DIC s investments), the financial ratios of DIC, the decline in the value of its main holdings, and the returns at which DIC s debentures are traded, may have an adverse effect on the rating of DIC s debentures and/or may impair DIC s ability to raise capital and/or to refinance its debts, if it wishes to do so (and/or may worsen the refinancing terms with respect to such debt). For details regarding material restrictions on the transfer of resources by material investee companies of DIC, see Note 3.J to the financial statements Risk factor: Financial institutions which hold cash deposits and financial assets Cash deposits and material financial assets of DIC or of its investee companies (including traded shares of their investee companies) are held on their behalf by financial institutions and brokers. DIC and its investee companies, as stated above, are exposed to the risk of losses in connection with these assets, in certain cases involving a deterioration in the financial stability of those financial institutions and brokers Presented below is DIC s assessment with respect to the classification and extent of the impact of the aforementioned risk factors (excluding environmental risks, insofar as they pertain to radiation risks) on DIC:

28 25 Risk factors Macro factors Branchspecific factors Major impact State of the global economy and changes in capital markets in Israel and around the world, including the impact on the ability to raise capital and debt Financial risks Legislation, standardization and regulation Implications of the application of provisions of the Concentration Law on DIC and its investee companies Extent of impact Medium impact Permits and licenses Environmental risks Work salary and working relationships Anti-trust Class actions regarding consumer and environmental issues Minor impact Government grants and benefits; Budgetary policy Special factors Cash needs, reliance on the cash flows of investee companies and liquidity Regulatory restrictions on bank credit and on credit from institutional entities Restrictions on the realization of holdings and on pledges Restrictions on the performance of investments Financial institutions which hold cash deposits and financial assets Status of the controlling shareholder Conduct vis-à-vis debenture holders

29 26 9. Cellcom Israel Ltd. Presented below is a description and details regarding Cellcom, which constitutes an operating segment of IDB Development (according to the operating segment tests specified in IFRS 8, as specified in section 2 of this part): 9.1 Presented below are data regarding IDB Development s investment in Cellcom as of December 31, 2016: Name of holding company DIC Holding rate (In percent) Approxi mately Investment amount (concatenated) in Cellcom as recorded in the books of IDB Development (NIS millions) Rate which constitutes the investment amount in Cellcom out of the total capital attributed to the owners of IDB Developme nt Market value of the investmen t in Cellcom (concatena ted) (NIS millions) Contribution to results attributable to the owners of IDB Development in 2016 (NIS millions) 1, % Descriptio n of activity Provision of communic ation services An economic paper in connection with an impairment test of the goodwill attributed to Cellcom as of June 30, 2016 is attached (by way of reference to DIC s reports as of June 30, 2016) to the financial statements. Presented below are data from the consolidated financial statements of Cellcom as of December 31, 2016 (amounts are presented in NIS millions): Revenues 2016 net profit attributable to the owners of Cellcom 2016 capital attributed to the owners of Cellcom as of December 31, 2016 Total assets As of December 31, 2016 Accounting reference in the books of IDB Development 4, ,322 6,662 Consolidated company 9.2 Cellcom is a public company which was incorporated in Israel, whose shares are listed for trading on the Tel Aviv Stock Exchange and on the New York Stock Exchange, and whose debentures are listed for trading on the Tel Aviv Stock Exchange. Cellcom operates and sells to its customers various communication services. Cellcom s activity is divided into two segments - the mobile segment and the landline segment. Cellcom s activity in the mobile segment includes the provision of mobile communication services in Israel, in accordance with licenses which are extended from time to time, the sale of mobile equipment to end users, and supplementary services. Cellcom holds a general license from the Ministry of Communication which is valid until the end of January 2022 (the Mobile License ). As of December 31, 2016, Cellcom provided mobile services to approximately million subscribers 9, over several networks, most of which feature a national distribution, which include calls, sending and receipt of messages, and internet browsing. Cellcom also provides its customers with accompanying services, such as content and data services, and also offers end user equipment, and repair services for end user equipment. Cellcom s activity in the landline segment includes internet infrastructure services (based on the wholesale landline market), beginning in May 2015, internet connectivity services ( internet provider services), television over internet services, beginning in December 2014 ( Cellcom TV ), including television channel broadcasts, including channels which are provided by Idan+ broadcasts, video on demand (VOD) broadcasts, and additional advanced features, landline telephone services ( Landline Services ) to the business and private sectors, data communication services to business customers and communication operators, international telephone services ( International 8 In accordance with the agreements with Cellcom s minority shareholders, who hold, in total, approximately 3.4% of Cellcom s issued share capital, DIC holds all of the voting rights with respect to Cellcom shares which are owned by each of the aforementioned minority shareholders. Additionally, the transfer of Cellcom shares which are owned by the aforementioned minority shareholders requires the consent of DIC, and additionally, it has the right of first refusal in connection with the sale of the aforementioned shares. Accordingly, as of December 31, 2016, DIC held approximately 45.7% of the voting rights in Cellcom. 9 For details regarding the definition of active subscribers, see the remarks to section 9.5 of this part.

30 27 Telephone Services ) and additional services such as conference call services, cloud computing services and information security. Cellcom has licenses for the provision of the services (except with respect to the television over internet services, which do not require a license). 9.3 Material mergers and acquisitions; investments which were performed in Cellcom s capital and transactions with its shares in the last two years In June 2016, DIC acquired Cellcom shares at a total scope of approximately NIS 13 million. In January 2017, Cellcom terminated the agreement for the acquisition of the share capital of Golan Telecom Ltd. ( Golan and the Golan Acquisition Agreement, respectively). Following the refusal of the regulators to approve this transaction, and ongoing legal litigation vis-à-vis Golan due to repeated breaches by Golan of the agreements with Cellcom. including an attempt to breach a payment undertaking in the amount of NIS 600 million, plus VAT, with respect to a breach in the settling of past accounts with respect to intra-national roaming services which were provided until December 2015, and breach of an undertaking to pay the agreed-upon consideration with respect to intra-national roaming services. 9.4 Dividend distribution In the years 2015 and 2016, Cellcom did not declare any dividend distribution. The distributable earnings of Cellcom as of December 31, 2016 amount to a total of approximately NIS 1,322 million. Cellcom adopted a dividend distribution policy according to which it will distribute to its shareholders, in each calendar quarter, at least 75% of the quarterly retained earnings of Cellcom, after tax, provided that the dividend distribution will not adversely affect the cash requirements of Cellcom and the plans which were approved by Cellcom s Board of Directors, and subject to the restrictions in accordance with the law and contractual restrictions which Cellcom accepted and/or will accept (inter alia, the aforementioned distribution is subject to the aforementioned restrictions which are included in Cellcom s debentures series (Series F-K), and the terms of financing agreements - see section 9.15 of this part). However, the Board of Directors of Cellcom is entitled, in its discretion, not to distribute dividends, or to distribute dividends in a different from scope from the foregoing. with respect to 2016, the Board of Directors of Cellcom resolved not to announce a dividend distribution, due to the intense competition in the mobile market and its adverse effect on Cellcom s results of operations, and in order to strengthen Cellcom s balance sheet. According to Cellcom s assessment, it has sufficient means and financial resources in order to finance its activities (including to service its debt), for the next 12 months, including dividend distributions, insofar as Cellcom s Board of Directors will decide to again announce a dividend distribution. It is noted that the Minister of Communications is entitled to revoke the general license which Cellcom holds for the provision of mobile radio services, according to the cellular method, before it expires, if one or more of the grounds specified in the license has occurred, including if the joint equity of Cellcom and of Cellcom shareholders, who hold 10% or more therein, has fallen below USD 200 million. 10 For details regarding the restrictions which Cellcom accepted upon itself in connection with dividend distributions within the framework of engagements in deeds of trust and in financing agreements by which it is bound, see Note 14.F.2 to the financial statements. 9.5 Presented below are financial and operational data regarding Cellcom s activities: Income (in millions of NIS) 4,027 4,180 4,570 Cost of sales and services (NIS millions) 2,702 2,763 2,727 Operating profit (NIS millions) EBITDA 11 (NIS millions) ,282 Rate of EBITDA from total revenues 21.3% 20.9% 28.0% Total assets as of December 31 (NIS millions) 6,662 6,278 7,240 Total liabilities as of December 31 (in millions of 5,322 5,093 6,148 NIS) Number of mobile subscribers at end of period (in thousands) 12 2,801 2,835 2, See section 14.1 (f)(5) of the license: The joint equity, including retained earnings, of all shareholder in the company which is the license holder, together with the equity of the license holder, has fallen below USD 200 million; for this purpose, any shareholder who holds less than 10% of the rights to Company s profits will not be taken into account EBITDA - earnings before financing income (expenses), net, other income (expenses) (excluding expenses in connection with a voluntary retirement plan for employees) net, taxes on income, depreciation and amortization and share-based payments. 12 The data regarding subscribers pertains to active subscribers. In accordance with the policy regarding the counting of Cellcom s mobile subscribers, a subscriber who is no longer an active subscriber is considered a post paid subscriber which does not generate income and activity in the Cellcom network, a pre paid subscriber who does not generate income through calls, SMS s, and a mobile data subscriber who does not make use of mobile data or who generates cumulative income of less than NIS 1 for six consecutive months. to the best of Cellcom s knowledge, the six month policy is consistent with the policy which has been adopted by other mobile operators in Israel.

31 28 Churn rate in the mobile segment % 42% 44% Average monthly revenues per mobile subscriber (NIS) (ARPU) Number of subscribers in the internet services field (in thousands) 15 - Number of subscribers in the television services segment (in thousands) 15 - Presented below are data regarding the share of IDB Development in profit from operating activities (operating profit) from the Cellcom operating segment (NIS millions) (these data were calculated according to the holding rates at the end of each of the aforementioned years): Attributable to the owners of IDB Development Attributed to non-controlling interests For an analysis of Cellcom s results of operations, see section of the board of directors report. 9.6 General environment; impact of external factors on Cellcom s operations; general information regarding operating segments Regulation - The communication market in Israel is characterized by significant regulatory intervention in the business operations of the companies which are active in the segment. Cellcom s activity is subject to oversight by several regulatory authorities, primarily the Ministry of Communication. in recent years, this regulatory intervention has increased and has adversely affected Cellcom s position and its business results. For additional details regarding the restrictions and oversight of Cellcom s operations, see section 9.17 of this part Dependence on licenses - Cellcom operates in accordance with licenses which were given to it in accordance with the relevant law in Israel. These licenses stipulate, inter alia, conditions and restrictions which Cellcom is required to fulfill in its business activities. The licenses may be amended in accordance with the terms set forth therein, including against the position of Cellcom. A fundamental breach of the provisions of the licenses may result in their revocation. Additionally, a breach of the licenses may result in the imposition of significant financial sanctions on Cellcom. For additional details, see section of this part Oversight of products and services - certain tariffs and certain pricing mechanisms, provision of products and services and other activities in Cellcom s area of activity are subject to oversight by the Ministry of Communication and/or are subject to provisions of the law and/or to the provisions of the licenses by virtue of which Cellcom operates. For additional details, see section 9.17 of this part Competition - for details regarding the competition in the communications segment, see section 9.10 of this part Technological changes - The mobile communications segment is a dynamic segment, due to the rapid pace of technological change and the significant competition, which require appropriate preparation. For additional details, see sections 9.10 (with respect to the competition in the markets in which Cellcom operates) and 9.21 (under the risk factor technological changes and dependence on technology ) of this part. Cellcom operates a mobile communication network which is based on LTE technology 16, a 4G technology. As of the reporting date, Cellcom s LTE network covers most of the population of Israel. Cellcom also operates a mobile communication network which are based on GSM/GPRS/EDGE technology (2G and 2.5G) and UMTS/HSPA and a UMTS/HSPA network 17 (3G/3.5G), which cover the vast majority of populated areas in Israel. Cellcom also operates a transmission network. The Cellcom TV service is provided over the internet, together with the digital television landline broadcast network in Israel (Idan+) Main barriers to entry and exit in the operating segment 13 Churn rate is the number of subscribers who have stopped, whether voluntarily (who initiated the discontinuation of their use of Cellcom services) or involuntarily (who defaulted on their mandatory payments to Cellcom for a continuous period of six months) from Cellcom s list of appointments during a certain period, as a percent of the total number of subscribers at the start of that period. 14 ARPU (Average Revenue Per User) - average monthly revenue per subscriber, including current revenues from the provision of mobile communication services (including roaming services and hosting services) and the provision of repair services to Cellcom customers in a certain month. calculated by dividing the total income, as stated above, in a certain period, by the average number of Cellcom subscribers in the same period (not including the number of roaming services of incoming roaming services and hosting services, who are not Cellcom subscribers) and dividing the result by the number of months in the same period. 15 The number of subscribers in the television services segment and the internet services segment refers to active subscribers only. 16 LTE - mobile technology standard - a mobile standard which allows the transfer of data at a high rate. 17 GSM is a numerical mobile network technology which is used in most countries around the world; GPRS is a data communication standard over the GSM network,which allows the transfer of content and access to the internet; EDGE is a data communication standard over the GSM network, which constitutes an upgrade of the GPRS network; HSPA technology on the UMTS network constitutes one of the prominent 3G standards. HSPA+ technology is an upgrade of HSPA technology.

32 29 Mobile segment - The main barriers to entry with respect to the operation of mobile communication services include: (1) the need to obtain a general license for the provision of mobile communication services from the Ministry of Communication, while complying with the conditions which were determined in the Communications Law (Communications and Broadcasting) (the Communications Law ), and receipt of permission to use appropriate frequencies from the state, which involves significant financial cost; (2) The need for significant financial resources and significant knowledge for the purpose of implementing the significant investments which are required in technological infrastructures, the creation of a network and national distributions of sites, as well as an extensive operations, service, advertising and marketing network; (3) The structure of the mobile market in Israel, which is a market with high penetration rates 18 ; (4) The need to create base sites (which are also called mobile antennas) in national distribution, which involves many difficulties due to the difficulty in renting areas for location of the base sites and in licensing the sites, which has encountered resistance from the local authorities (for details, see section of this part). The barriers to entry which are attributed to the creation of infrastructures do not constitute a barrier to entry for virtual operators 19, and provide a lower barrier to entry for Hot Mobile Ltd. ( Hot Mobile ), Golan, and new operators (such as Marathon 018 Xfone Ltd. ( Xfone )) 20, which are entitled to provide communication services through the use of intra-national roaming services over the networks of existing operators, and are also entitled to create networks in collaboration with existing operators. For additional details, see sections and 9.18 of this part. The main barrier to exit in the mobile communications segment is the approval of the Minister of Communications to discontinue the provision of service, which may be contingent on maintaining the continuous provision of service to the customers of the service operator that desires to exit the segment. The mobile license includes restrictions, inter alia, on the transfer of shares in a license holder, and on the transfer and pledge of the license assets. For additional details, see section of this part. Landline segment - The barriers to entry with respect to the operation of landline communication services are low, and include the need to obtain a standard license. 21 With respect to the operation of television over internet services, there is no requirement for a license. It is noted that on all matters associated with the market for television over internet services, there is the need for significant financial resources, including the need for engagement in agreements for the acquisition of content and technological infrastructure. The barrier to exit from the landline communications segment is the requirement to obtain regulatory approvals for the discontinuation of the provision of landline communication services, excluding television over internet services Restrictions on the scope of credit - Cellcom is an indirect subsidiary of IDB Development, and in light of the above, it is included in the group of borrowers and in the business group together with additional companies which are directly and indirectly held by IDB Development. For details regarding the restrictions on the scopes of credit which apply to a group of borrowers and business groups, see section 7.3 of this part Public concern regarding non-ionizing radiation - For details regarding the level of concern among the public with respect to non-ionizing radiation, see section 9.16 of this part. For details regarding additional factors in the general event which may also affect Cellcom s activities, see section 7 of this part. 9.7 Products and services Mobile segment - Cellcom is the largest provider of mobile communication services in Israel, based on the number of subscribers and estimated market share as of December 31, As of December 31, 2016, Cellcom provided mobile services to approximately million subscribers, with an estimated market share of approximately 27.5%. Cellcom offers a wide variety of services in the mobile segment, including, inter alia, basic mobile telephone services, text messages and multimedia, content services and advanced mobile data and other value added services, as well as international roaming services, a wide variety of end user equipment and end user equipment repair services. Cellcom routinely evaluates services which are relevant to customers, such as Internet of Things (IOT) services which it has recently begun offering. Cellcom has created an extensive, stable and advanced system of mobile networks, which allows it to offer highquality services in general to all populated areas in the State of Israel, while using effective planning through the 18 The penetration rate is the ratio between the total number of subscribers and the total population of Israel (for the purpose of this calculation, the population of Israel does not include foreign and Palestinian workers, although they are included in the list of total subscribers). As of December 31, 2016, the penetration rate of mobile services in Israel, according to the publications of the companies, is estimated at approximately 119%, representing approximately 10.2 mobile subscribers. 19 Virtual operators (MVNO s) are operators which do not have infrastructure and frequencies, and acquire hosting services from an operator which owns infrastructure. 20 Xfone won the frequencies for the 4G tender in January 2015, but has not yet commenced operations. 21 A Standard General License is a general license which is one of the following, or a license which combines several of them: a designated general license; General mobile virtual network operator license through another network; a general license for the provision of international communication services. (From the website of the Ministry of Communication, he/moc.aspx).

33 30 leverage of shared components for networks, where possible. Cellcom s main goal is to continue expanding its 4G network, and to support the increasing demand for data transmission over its 4G network, which supports high speeds, and in parallel, to continue optimizing its networks in order to provide its customers with maximum support for video and other content requiring broadband. Landline segment - The landline services provided by Cellcom include Cellcom s internet infrastructure services (based on the wholesale landline market), which are provided, as of the reporting date, to approximately 163,000 consumers, internet provider services, which are provided, as of the reporting date, to approximately 638,000 households, which constitute approximately 25% of the market share, television over internet services, which are provided, as of the reporting date, to approximately 111,000 households, landline telephone services for the business and private sectors, international telephone services, data communication services for business customers and for communication operators, as well as additional services such as switchboard services, cloud computing services and information security. Cellcom s transmission network, which is distributed strategically in order to cover most of the business centers in Israel, allows Cellcom to provide its customers with telephone and data transfer services with significant speed and quality, while reducing Cellcom s need to lease capacity from Bezeq The Israeli Communication Corporation Ltd. ( Bezeq ). In order to complete the coverage of the transmission network for the entire country, in general, Cellcom makes use of the microwave network as a supplementary solution in areas which are not covered by Cellcom s fiber optic network. Cellcom leases from Bezeq and from Hot Communication Systems Ltd. ( Hot ) additional capacity as required for the landline services which are provided to Cellcom s business customers. 9.8 Segmentation of revenues Presented below are data regarding the segmentation of Cellcom s revenues for the years 2016, 2015, and 2014: Income in millions of NIS Income in Income in % of % of millions of millions of revenues revenues NIS NIS % of revenues End user % 1, % 1, % equipment Income and services Mobile 2, % 2, % 2,487 services 54.4% Landline % % % services * Other % % % services** total services 3, % 3, % 3, % Total 4, % 4, % 4, % * Primarily comprised of international call services, landline telephone services, transmission services, international call routing services among operators around the world (hubbing), infrastructure and internet provider services, and television services. ** Including repair service fees.

34 Income in Income in Income in %of % of millions of millions of millions of revenues revenues NIS NIS NIS % of revenues Private 2, % 3, % 3, % Business % 1, % 1, % Other* % % % Total 4, % 4, % 4, % * Including income from incoming roaming services, hosting services and other services. 9.9 Marketing and distribution Cellcom markets its products through dozens of service and sale centers and dozens of licensed marketers throughout the country, a telephone sales channel and an internet sales channel. business customers receive routine services through designated portfolio managers. Cellcom provides services to its customers through telephone hotlines, service centers, and several self-service channels (including its website) Competition In 2016, Cellcom s advertising and PR expenses amounted to approximately NIS 44 million. In order to deal with the increased competition in the communication market, Cellcom implemented several strategic steps, including, inter alia, the following: identification of new opportunities in order to maximize its advantages over its competitors, including, for example, Cellcom s television over internet services, which are based on the wholesale landline market; network sharing and hosting agreements with Golan (which will enter into effect after the acquisition of its share capital by Electra Consumer Products (1970) Ltd. ( Electra ), as described in section 9.18 below) and Xfone; investment in Cellcom s networks, in order to ensure the provision of high-quality and advanced mobile and landline services, and others. Positive factors affecting Cellcom s competitive position - Offering a wide variety of mobile and landline communication services; investment in Cellcom s network in order to allow the provision of high-quality and advanced services by mobile communication and landline communication, including investments in Cellcom s 4G network, and the provision of advanced services to Cellcom customers; identification of new opportunities to maximize Cellcom s advantages as a communications group, such as the successful launch of Cellcom s television over internet services, internet infrastructure services based on the wholesale market and the IOT services which Cellcom began offering; engagement in network sharing and hosting agreements with Golan (which will enter into effect after its acquisition by Electra) and Xfone, which will facilitate a more efficient cost structure relative to Cellcom s networks, and the operation thereof and investment therein, as well as optimization of Cellcom s expense structure. Negative factors affecting Cellcom s competitive position - (A) The fact that Cellcom is a part of the IDB Group, which is a large Israeli business group that is subject to significant oversight, may limit Cellcom s ability to expand its business operations in the future, to engage in strategic partnerships in the communications market, and to raise debt. Additionally, Cellcom is unable to estimate the impact of the financial position of the IDB Group and DIC on Cellcom; (B) The dividend distribution policy which was determined by Cellcom, which will significantly reduce its future cash balance, and may restrict Cellcom s ability to implement unexpected capital investments (insofar as the Board of Directors of Cellcom will announce dividend distributions in the future, as described above); (C) Cellcom s high rate of debt, which reduces the free capital available to finance its business operations, and the development thereof, and reduces the flexibility of its response to changes in the market and the economy (for additional details, see section 9.21 (under the risk factor significant debt ) of this part); and (D) the provisions of the Concentration Law with respect to the allocation of rights to public assets, which may adversely affect Cellcom s ability to renew its mobile licenses and to receive new frequencies (for details, see section of this part) Communication groups and structural separation As of the reporting date, four communication groups are operating in Israel: Cellcom, Bezeq, Partner Communications Ltd. ( Partner ) Smile Telecom Ltd. ( 012 Smile ), and Hot. Bezeq and Hot are subject to various restrictions which originate from the obligation regarding structural separation which applies to them, in connection with the sale of communication packages by them and by their subsidiaries, In light of the fact that they are monopolies, each in its own core business operations - Bezeq in the landline telephone market, and Hot in the multi-channel television market. The restrictions include the requirement that some of the services which are included in Bezeq s basket must be offerd separately by Bezeq, under the same conditions as the basket, as well as the requirement that Bezeq allow its competitors to offer their services within the framework of baskets, as stated above, under the same conditions, and market them as it markets its own packages (the second requirement does not apply to the sale of the package by a subsidiary of Bezeq). The same requirements also apply to Hot in case of packages which include internet provider services, with respect to the internet provider services component. Bezeq received, in 2010, easements with respect to the structural separation, which allow Bezeq to offer packages together with its subsidiaries. Additionally, in 2015, a merger was implemented between Bezeq and D.B.S. Satellite Services (1998) Ltd. ( Yes ), which provides multi-channel television services for payment (this merger

35 32 is subject to certain restrictions, as specified below). Despite the fact that Hot is also subject to requirements regarding the structural separation between multi-channel television services for payment, internet provider services, mobile services and landline telephone services, Hot was allowed to offer landline telephone packages, multi-channel television and internet infrastructure services, and, under certain conditions, internet provider services, and beginning in 2011, the Ministry of Communication allowed Hot and Hot Mobile each to offer the other s services, and to exchange information. In January 2016, the Ministry of Communication announced its intention to cancel the structural separation of Bezeq and Hot, as part of the plan to ensure massive investment in optic fiber infrastructure in Israel, and in December 2016, the Ministry of Communication notified Bezeq that it intends to conduct a public hearing regarding the possible cancellation of the corporate separation, and later the structural separation in the Bezeq Group, and Bezeq had already announced a full merger with Yes, including full integration of Yes into Bezeq. Cellcom believes that the cancellation of the corporate and structural separation in the Bezeq and Hot groups may adversely affect Cellcom s competitive position, particularly if the foregoing is implemented before the existence of a full and effective wholesale landline market. Any change to the structural separation restrictions in Bezeq and Hot, and under the supervision of Bezeq tariffs, or anti-competitive conduct which has not been prevented by the regulator, may adversely affect Cellcom s ability to compete with Bezeq and Hot, and may have a significantly adverse affect on Cellcom s results of operations. Cellcom s estimates, as stated above, constitute forward looking information as defined in the Securities Law. Cellcom is unable to estimate the impact of the expected changes due to the activities of the aforementioned communication groups on Cellcom s business activities Mobile segment Cellcom operates in a highly competitive environment, which intensified after the entry into the market of additional mobile communication providers and regulatory changes which reduced barriers to entry and barriers to transition. As of the reporting date, it competes against eight other mobile communication operators: four mobile communication operators which are license holders for the construction of mobile networks (MNO): Partner, Pelephone Communications Ltd. ( Pelephone ), Hot Mobile and Golan (additionally, Xfone frequencies in a frequencies tender for the 4G network, and has not yet entered the market), along with four virtual operators - Rami Levy Hashikma Marketing Communications Ltd. ( Rami Levy ), Home Mobile Ltd. (whose operations were purchased by Cellcom, subject to the required approvals), Azi Communications Ltd. and Select Communications Ltd. For details regarding Cellcom s network sharing and hosting agreements with Xfone and Golan (following its acquisition by Electra), see section 9.18 below. According to Cellcom s estimate, the subscriber market shares of the various mobile operators (based on active subscribers ) as of December 31, 2016 are as follows: Cellcom - approximately 27.5%,; Partner approximately 26%,; Pelephone - approximately 23%,; Hot Mobile - approximately 13.8%,; Golan - approximately 7.8%; the other virtual operators together - approximately 1.9%. Cellcom s assessment regarding the market share is based on the reports which were published to the public by other operators, and on Cellcom s assessments with respect to operators which do not issue public reports. However, there is no standard method for counting subscribers. The average annual churn rate of mobile subscribers in the Israeli market in 2015 and in 2016 is estimated at approximately 38% and 36%, respectively, which is high relative to the churn rate in other developed countries. The churn rate from Cellcom in 2015 and 2016 was 42% and 42.4%, respectively. End user equipment - Creating a connection between transactions for the provision of mobile services and transactions for the acquisition of end user equipment (including by way of the provision of airtime refunds for the acquisition of end user equipment) is prohibited. This prohibition has resulted in increased competition on the market. The increasing competition in the mobile device sales segment has resulted in a decrease in the scope of mobile devices sold by Cellcom Landline segment The Hot and Bezeq groups are the only ones that own full landline infrastructures in Israel. In June 2016, Partner announced that it intends to create a national landline infrastructure. Cellcom is evaluating the possibility of investment in IBC group (a company owned by the Electric Corporation and an international group led by Via Europa) ( IBC ), or the creation of the broad landline infrastructure which it owns. Internet services - access and infrastructure - The two main internet infrastructure providers for the private sector and the only groups that own infrastructure which offer internet infrastructure services both for to the internet access providers and to end user customers are Bezeq and Hot. Bezeq also provides internet infrastructure services to operators which do not own infrastructure, within the framework of the wholesale landline market. in 2014, IBC also began distributing its infrastructure and providing broadband services in select areas. IBC s license allows it to provide broadband infrastructure services on the fiber optic infrastructure of the Electric Corporation to other license holders, and to large business customers. in 2016, IBC s shareholders announced their intention to raise capital by introducing additional investors. As of the reporting date, Cellcom is evaluating the possibility of investing in IBC. As of September 30, 2016, Bezeq provides internet infrastructure services to approximately 1.19 million households, and Hot provides services to approximately 700 thousand households.

36 33 Internet provider services are provided, as of the reporting date, by the three major internet providers: Cellcom, Bezeq International, Smile Telecom (a subsidiary of Partner) and additional small providers, including Xfone Communication Ltd. as of December 31, 2016, Cellcom provides internet provider services to approximately 638,000 households, and Cellcom estimates its market share as 25% of the market share, as compared with 40% of the market share for Bezeq International, and 23% of the market share for Smile Telecom. The internet provider market is highly competitive, saturated and characterized by relatively low barriers to entry. The competition primarily focuses on the ability to offer high internet connectivity speeds relative to price. insofar as IBC s infrastructure is available to possibility, this will boost Cellcom s opportunity to compete in the infrastructure and internet provider market, since this would decrease Cellcom s dependence on Bezeq and Hot as infrastructure providers. Multi-channel television services - The market for multi-channel television for payment is controlled by Hot and Yes (which provide this service, as of September 30, 2016, to approximately 816 thousand and 618 thousand households, respectively). Cellcom began operating in this segment at the end of December 2014, through a hybrid television service which includes DTT broadcasts (television channels provided by the digital cable television broadcast network which operates in Israel and is distributed for free by the Second Authority for Television and Radio (Idan+) ( DTT Broadcasts ) and OTT TV services (television over internet), and as of December 31, 2016, it provides this service to approximately 111 thousand households. Other market players can also use the DTT broadcasts in combination with their own OTT services, similarly to Cellcom s method of operation in the segment. According to Partner s announcement, it will enter the television market in the first half of in 2016, Netflix and Amazon Prime, began operating in Israel, which provide internet-based VOD services, and Cellcom estimates that these services are expected to constitute a supplementary service to the television services which are offered by the existing competitors. in March and September 2014, the Antitrust Commissioner published the following requirements as a condition for the merger in the Bezeq group, in order to facilitate opening up the multi-channel television market to competition by reducing barriers to entry in the television segment: (1) in general, Bezeq will not charge a fee to internet providers with respect to the consumption of internet provider services which are due to multi-channel television broadcasts, and all of the existing exclusivity arrangements to which Bezeq and Yes are party will be canceled, with respect to non-original production television content, and the engagement of exclusivity arrangements of this kind will be prohibited in the future; and (2) The Bezeq / Yes group will allow new television service providers to acquire certain original productions of Bezeq for two years. The legal merger between Bezeq and Yes was completed in International call services - Cellcom is a large provider of international call services. Cellcom s main competitors are Bezeq (through its subsidiary - Bezeq International) and Partner (through its subsidiary - Smile Telecom), and additionally, there are other competitors, such as Xfone Communication Ltd., Rami Levy, Golan and Hot, through their wholly owned subsidiaries or related companies. As of September 30, 2016, Cellcom s market share is estimated at approximately 20%, Bezeq International at approximately 35%, Smile Telecom at approximately 24%, and Hot-Net at approximately 12%. The international call service market is highly competitive, with the competition primarily based on the operator s ability to offer attractive pricing. Regulatory changes in this market have resulted in increased competition. in recent years, the use of alternative communication technologies, such as voice over IP, have resulted in reduction of the telephone market, and particularly, international telephone services. This trend is expected to continue in the future at a moderate rate. This trend, together with the inclusion of international telephone services in mobile service and landline service communication packages at no additional charge, have resulted in a decrease in income from these services. The adoption of the proposed changes in regulation of the international telephone services market, which includes the possibility for offering international telephone services by landline operators and the mobile operator themselves, and not through separate companies, may increase competition and adversely affect Cellcom s results of operations. Local landline services - The landline telephone market has been controlled for many years by Bezeq, a monopoly in the landline telephone market, which held approximately 2/3 of the landline telephone market share (and a larger market share among business customers) 22 and Hot. Additional providers in the landline telephone services market include Cellcom, Netvision (wholly owned by Cellcom), Partner-012 Smile and Bezeq International. Cellcom s penetration into the landline telephone market is an important component in Cellcom s ability to offer a comprehensive package of services to its subscribers. As of the reporting date, Cellcom offers landline telephone services to business customers, and through VOB technology, to its private customers. Cellcom estimates that its market share in the landline telephone services market is immaterial. insofar as the wholesale landline market will include landline telephone, Cellcom will be able to offer home landline telephone services to its private customers through the wholesale market. For additional details regarding the wholesale market, see section of this report. Other landline services - transmission services and data communication services are provided by Bezeq, Hot, Partner and Cellcom, and are intended for business customers and communication operators. In 2016, the competition in this segment increased, primarily due to the plans offered by Hot and Partner. 22 The data are as of March 31, 2016, according to the publications of the Ministry of Communication.

37 Fixed assets and facilities Most of Cellcom s fixed assets include the mobile network equipment, which includes base sites which are distributed throughout the country, which provide broad communication coverage for the vast majority of populated areas in the country, as well as a transmission network (which includes optic fibers in a total length of approximately 1,800 km., and microwave infrastructure), which provides connectivity for Cellcom between most of its base sites, and through which Cellcom also provides, to select business customers, transmission services, data transfer and advanced landline communication services. In 2017, Cellcom intends to continue the distribution of its LTE network, and to continue optimizing its networks in order to provide to its customers maximum support for video and other content requiring broadband. Cellcom s estimates, as stated above, constitute forward looking information as defined in the Securities Law. Cellcom is unable to estimate the impact of the distribution of its LTE network and the optimization process on Cellcom s business activities. Cellcom has a backup network for disaster recovery with respect to its engineering systems, which was intended to increase network resiliency in case of damage to one of its components, and has adopted a business continuity plan and a disaster recovery plan in accordance with the requirements of its license. As of December 31, 2016, the amortized cost of Cellcom s fixed assets and intangible assets amounted to approximately NIS 2,866 million. in 2016, Cellcom s investments in fixed assets and intangible assets, including communication networks, network equipment and transmission infrastructure, amounted to approximately NIS 382 million. For details regarding the restrictions on pledges of the property and equipment which are used in the provision of services within the framework of Cellcom s licenses, and regarding additional restrictions applicable to Cellcom regarding the creation of pledges on its assets, see sections and of this part. Cellcom rents 78 service centers and points of sale. Additionally, Cellcom rents from various entities sites for the purpose of the construction, maintenance and operation of communication facilities which are used in Cellcom s communication network. based on past experience, Cellcom encounters difficulties in extending the leases of approximately 5% of the sites used for communication facilities. In June 2013, Cellcom renewed the permission agreement with the Israel Land Administration, which manages the lands of the Development Authority and the Jewish National Fund, for the use of land for the construction and operation of small broadcast facilities, as defined in national outline plan for communication 36 ( National Outline Plan 36 ), which is in effect until 2019 (the Permission Agreement ). The permission agreement determined that, subject to the receipt of advance approval from the land managers, which will be given at the request of Cellcom with respect to each site, Cellcom is entitled to build and operate transmission facilities on land, during the permission period, and specific permissions and contracts which will be signed following the permission agreement are cancelable by the land managers, by providing advance notice, in case of certain events. Additionally, the permission agreement includes a prohibition on the transfer of control of Cellcom without providing a definition of the term control for this purpose. Cellcom has two main rental properties in Israel: (1) A long term agreement for its technological center in Netanya, with an area of approximately 11 thousand square meters. The rental is for a period of ten years, from August 2011, and Cellcom has the option to extend the agreement for an additional period of 5 years, while in the event that Cellcom does not exercise the option, it will be required to pay compensation of approximately NIS 11 million. in January 2015, Cellcom rented approximately 1,100 square meters through a sublease for a period of five years, and in 2016, Cellcom rented, through a sublease, an additional area of approximately 5,000 square meters, for a period of 6 years. The sublessees have the option to extend the sublease for an additional period, under certain conditions; and (2) A long term agreement for Cellcom headquarters in Netanya, with an area of approximately 58 thousand square meters (of which, approximately 26 thousand square meters are used for underground parking) until December 2022, which can be extended by two additional periods of 5 years each. beginning in 2015, Cellcom has leased, through subleases, approximately one quarter of the leased area for periods of up to five years. The lessees have the option to extend the sublease for additional periods. Cellcom also has two additional properties which it leases: one in Haifa, with an area of approximately 8,900 square meters, and the other in Rosh Ha ayin, with an area of approximately 3,300 square meters Intangible assets Cellcom has the right to use frequencies for the provision of communication services in its communication networks. In August 2015, Cellcom was allocated 3 megahertz ( MHz ) in the 1800 MHz range for 4G networks (in light of Cellcom s existing 1800 MHz frequencies). As opposed to the frequencies which were provided in the past to Cellcom, which are valid during Cellcom s license period, the frequencies won by Cellcom, as part of the tender, were provided for a period of 10 years. Additionally, in order to provide optimal performance on the 4G network, Cellcom will require additional frequencies beyond those which were allocated to it in accordance with the 4G frequencies tender, and due to the fact that the Ministry of Communication believes that, for this purpose, Cellcom will clear 12 MHz in the 1800 MHz frequencies which were allocated to it for the purpose of the 2G network, Cellcom cleared such frequencies in locations where the low use of the 2G network, in combination with advanced

38 35 and modern software programs which allow it, with minimum adverse impact on the performance of the 2G network. Additionally, insofar as the network sharing agreements with Electra and Xfone, as described in section 9.18 of this report, are realized, Cellcom will be able to enjoy 10 MHz in the 1800 MHz frequencies of Golan and Xfone. If the aforementioned frequencies are not provided to Cellcom, Cellcom will hold a lower number of frequencies than its competitors, which may result in harm to Cellcom s competitive position. For details regarding the aforementioned frequencies tender, see section in this report. The Ministry of Communication is evaluating the possibility of replacing 850 MHz frequencies with 900 MHz frequencies. This process will require Cellcom to perform significant investments in its networks. Cellcom is a member of the GSM association, which includes various operators from all over the world which use GSM technology, and which meet the standards of the association. As a member of the association, Cellcom is entitled to make use of the association s intellectual property rights, including use of the GSM logo and trademark. Cellcom has rights to a large number of trademarks and trade names which are registered under the names of Cellcom and Netvision, as applicable. Additionally, several patents are registered under Cellcom s name Human capital As of December 31, 2015 and 2016, Cellcom employs employees in a number which reflects approximately 3,645 and approximately 3,563 full time positions, respectively. Over the years 2014, 2015 and 2016, Cellcom launched, together with the representative employees organization, voluntary retirement programs for employees. In February 2015, a collective labor agreement was signed with the employees representation and the Histadrut for a period of three years (from 2015 to 2017), which applies to all employees of Cellcom and Netvision, excluding senior management positions and additional positions. as a result, Cellcom s operating activities, including the possibility for Cellcom to implement organizational and staff changes, is more limited, complex, lengthy and expensive than as reflected in the voluntary retirement plans which were implemented in the years 2014, 2015 and 2016, and may also require greater managerial attention, since if not, it would be available for routine management. In January 2016, Cellcom received a declaration regarding a labor dispute from the Histadrut in connection with outsourcing and additional working relationship issues, according to which, the employees of Cellcom are entitled to take organizational steps, including strikes. Cellcom rejected the assertions presented in the announcement regarding the aforementioned labor dispute. until now, no organizational steps have been taken; however, Cellcom is cannot predict whether such organizational steps will be taken, or nor their effect if taken. Future disputes with representatives of the employee union, such as with respect to the renewal of the fight over the collective agreement, may result in the initiation of organizational steps, as stated above, and in adverse effects on the services and on the customer service of Cellcom, changes may fail or may be implemented in a manner significantly different than planned, and as a result, may result in lower savings than planned. High costs following the renewal of the collective agreement, inability or limited ability to implement critical organizational and staff changes on time, and strikes or similar disruptions to Cellcom s business operations, and restrictions on the judgment of management, may result in harm to the quality and efficiency of Cellcom s activity, to brand damage, loss of customers, loss of market share and decline in Cellcom s profitability. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom is unable to estimate the scope of the impact that such disruptions will have on its activities and results. Cellcom allocates, from time to time, options to its employees and corporate officers. As of the reporting date, (unexercised) options exist which are exercisable into 2,764,334 Cellcom shares, which constitutes 2.75% of Cellcom s issued and paid-up capital. For additional details, see Annex B to the financial statements.

39 Suppliers 9.15 Financing Cellcom has a wide variety of information systems which allow it to provide high-quality customer service. Cellcom is engaged in agreements with a large number of providers for the acquisition of end user equipment and infrastructure, network equipment, information systems, content services, and more. some of those providers with whom Cellcom is engaged are material providers, where the scope of acquisitions from them amounts to material sums and/or where the termination of the engagement with them may harm the quality of certain services of Cellcom, or result in revocation of its mobile license, due to non-compliance with the license requirements. Presented below are details regarding Cellcom s engagements with its main providers: (1) Agreements with LM Ericsson Israel Ltd. and Nokia Solutions and Networks Israel, in which Cellcom acquired network systems, as well as ancillary equipment, products and services; (2) An agreement with Ericsson (which acquired Telcordia), according to which the aforementioned company provides to Cellcom a platform for the provision of advanced services; (3) agreements with several Israeli engineering companies for the construction of the mobile sites; (4) An agreement with Samsung International Co. Ltd. - which provides to Cellcom Samsung devices and replacement parts for those devices; (5) An agreement with Apple for the acquisition and distribution of iphone devices in Israel; (6) agreements with Mediterranean Nautilus Ltd. and Mediterranean Nautilus (Israel) Ltd. for the use of certain capacities in the communication cables of Med Nautilus, and ancillary operating and maintenance services. Terms of this agreement may be subject to regulatory intervention; (7) agreements with Bezeq and Hot, the main internet infrastructure providers in the Israeli market, on which Cellcom is dependent for the provision of its services; (8) agreements with Alcatel Lucent Israel Ltd. for the acquisition of certain of its transmission networks; (9) An agreement with Bynet Data Communications Ltd. for the provision of maintenance services, for the transmission network produced by Cisco; (10) An agreement with Nortel Networks Israel (Sales and Marketing) Ltd., for the acquisition of an international communication switch on which Cellcom bases its ability to provide international call services. Additionally, Cellcom engaged in an agreement with Geneband Inc. (which acquired a part of Nortel s operations) for the provision of support and maintenance services for the equipment which was provided in accordance with the agreement with Nortel; (11) An agreement with ECI Telecom Ltd. for the acquisition of transmission switches between the communication sites of Cellcom in Israel and outside of Israel; (12) An agreement with Broadsoft Ltd. for the acquisition of a system for the provision of switchboard services to business customers in the landline market; (13) Cellcom s main providers in the international call services market are Bezeq and Hot, as well as the Israeli mobile operators, and over 100 foreign operators which allow Cellcom to provide international call services; (14) An agreement with LM Ericsson Israel Ltd. for the provision of a Cellcom TV platform. The television services are depends on the DDT channel broadcasts; (15) An agreement with Altech for the acquisition of converters for the television services (16) An agreement with Vubiquity Management Ltd. for the international video content and content operation and management services; (17) agreements with RGE Group Ltd., One Sport Television Services Ltd., and Charlton Ltd., for the acquisition of sports channels which are operated by them; (18) in February 2016, several of Cellcom s agreements concluded by consent, with Amdocs (Israel) Limited, for the provision of billing and customer management services, and for the operation, maintenance, management and development of a billing and customer management system, and from that date onwards, those systems are primarily operated and maintained by Cellcom employees; (19) in May 2016, Cellcom engaged in several agreements with Salesforce Ltd., and Vlocity UK Ltd for the provision of a comprehensive CRM solution using cloud-based software services, which will replace the current CRM systems with a single system; (20) An agreement with Nortel Networks Israel (Sales and Marketing) Ltd., for the acquisition of a system for the management of incoming calls to its telephone customer service centers; (21) Cellcom uses ERP solutions which were provided to it by SAP; (22) Cellcom engaged in an agreement with Beeri Printing - Limited Partnership and with Beeri Printing Technologies (1977) Ltd., which is in effect until December 2017, for the provision of printing services, including invoice production and delivery services. In May 2015, Cellcom engaged in an agreement with two institutional investors (the Lenders ), according to which the lenders agreed to provide Cellcom with two deferred loans, in the amount of NIS 400 million. The first loan, in the amount of NIS 200 million, was provided to Cellcom in June 2016, and bears fixed annual interest of 4.6%. The principal is repaid in four equal annual payments on June 30 of each of the years , and the interest is paid in ten semi-annual payments on June 30 and December 31 of each year, beginning on December 31, 2016, to June 30, An additional loan in the amount of NIS 200 million will be given to Cellcom in June 2017 and will bear annual fixed interest at a rate of 5.1%. The principal will be repaid in four equal annual payments on June 30 of each of the years , and the interest will be paid in ten semi-annual payments on June 30 and December 31 of each year beginning on December 31, 2017 to June 30, For additional details, see Note 14.F.2.C to the financial statements. In August 2015, Cellcom engaged with an Israeli bank in a subordinated loan agreement in the amount of NIS 140 million, which was provided to Cellcom in December 2016, and which bears fixed annual interest of 4.9%. The principal will be repaid in five equal annual installments on June 30 of each of the years For additional details, see Notes 14.F.2.C. and 14.F.2.D. to the financial statements. For details regarding liabilities with respect to the debenture series and B D-K which were issued by Cellcom and which have not yet been repaid as of December 31, 2016, see Notes 14.A.1 and 14.F.2 to the financial statements.

40 37 Cellcom s debenture series are listed for trading, are non-convertible, and are not secured by any pledge, except for a negative pledge with respect to Series F-K, as stated below. Cellcom s outstanding debentures have a rating of A+ from Maalot, and Cellcom itself has a rating of A+, stable outlook, from Maalot. For details regarding a private issuance to institutional investors of debentures (extension of Series I), which Cellcom performed in March 2016, in consideration of a total of NIS 250 million, see Note 14.F.2.E to the financial statements. For details regarding a public offering of new series of debentures (Series J and K) in September 2016, in consideration of a total of approximately NIS 407 million, see Note 14.F.2.F to the financial statements. Additionally, for additional details regarding Cellcom s liabilities within the framework of an issuance of debentures (Series F to K) and financing agreements, including the financial covenants which are included therein, see Notes 14.A.1 and 14.F.2. to the financial statements. In the ordinary course of business, Cellcom engages, from time to time, in framework agreements with banks, for the receipt of various banking services, including credit facilities, hedging transactions, etc Restrictions on the receipt of credit. Cellcom undertook to refrain from pledging its assets until the repayment of all of the principal and interest amounts by virtue of the debentures (Series B), and Series F-K which it issued (excluding certain exceptions, as specified in the relevant deeds), and by virtue of other financing agreements with Cellcom. As of December 31, 2016, Cellcom is fulfilling the aforementioned restrictions on the receipt of credit. Cellcom is included in a group of borrowers and business group with other member companies of the IDB Group. See additional details in section 7.3 of this part Debt raising. According to Cellcom s assessment, its cash balance as of December 31, 2016, together with Cellcom s other financing agreements, will suffice to finance its current cash requirements, including investments and payment of debts in the coming year, including a dividend distribution if the Board of Directors of Cellcom resolved to renew dividend distributions. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom s assessment is based on many factors, including its total revenue, the timing and extent of its investment in marketing, and customers retention efforts, expansion of the sale and marketing activities, and the timing of the launch of new products or improvements to existing products, the timing and size of the investment in future networks, Cellcom s TV services and Cellcom s internet infrastructure services (based on the wholesale market), and any decision to resume distributing dividends. Cellcom s estimate may not materialize, or may materialize partially or differently than the estimate, if changes occur in the factors specified above Environmental risks and methods for the management thereof End user equipment and various types of mobile antenna sites are known to emit non-ionizing radiation, and are subject to regulations, including the Non-Ionizing Radiation Law, (the Radiation Law ), and regulations and rules enacted by virtue thereof, as well as the Pharmacists Regulations (Radioactive Elements and Their Products), public concern regarding non-ionizing radiation increased following the publication of a recommendation by the Ministry of Health to the public to take caution in connection with the use of end user devices. In May 2011, the International Agency for Research on Cancer (an agency of the World Health Organization) issued a press release which classified electromagnetic radio frequencies as a possible factor causing cancer in humans, based on the increased risk of glioma, a malignant type of brain cancer, in connection with the use of mobile telephones. in June 2011, the World Health Organization issued an announcement stating that, until that date, no substantiation was found indicating negative health consequences as a result of the use of mobile phones, and also that no substantiation was found for the increased risk of brain tumors. in the announcement, stated that the increased use of mobile telephones, and the absence of data regarding the use of mobile telephones over a period exceeding 15 years, justify continued study of the use of mobile telephones and the risk of brain cancer, particularly in light of the popular recent use of mobile telephones among young people with a longer potential exposure period to such radiation. In September 2014, the list of carcinogenic materials on the website of the Ministry of Health was updated in accordance with the classifications of the World Health Organization. Additionally, several legislative proposals were presented to the Knesset, which are intended to increase the awareness of the possible risks associated with the use of mobile telephones and/or the use of cautionary measures and/or restricting their use. Cellcom receives a class approval 23 for some of the end user equipment which Cellcom markets, while with respect to others, Cellcom informs the Ministry of Communication and receives its approval for the importation. The approvals require the model to meet all of the relevant standards, including the SAR level. 24 The SAR level of the 23 Class approval means approval given by the Minister of Communications in accordance with the Communications Law for a model of end user equipment, for the connection thereof to the communication network of a general license holder (section 1 of the Communication Law). In accordance with the policy which was published by the Ministry of Communication, with respect to class approvals for end user equipment, imported end user equipment must comply with the American (TDMA, CDMA) or European (GSM) standards. 24 with respect to mobile telephones which are held by the ear, the level of non-ionizing radiation emitted from the phone is measured

41 38 prototype of each model is measured by the manufacturer. Cellcom does not perform SAR tests for the end user equipment, and relies on the publications of manufacturers with respect to each model. According to the position of several government offices, due to considerations of radiation safety, sites which were built with a permit are preferable to wireless access facilities; 4G services involve a certain increase in the level of non-ionizing radiation to which the public is exposed, and therefore, it is necessary to restrict their use; and the use of a mobile network for the purpose of providing advanced services which can be provided through a landline network is not justified in light of the principle of preventive caution prescribed in the Radiation Law. For additional details, see section of this part Restrictions and supervision of Cellcom s activities General. Cellcom s activity is subject to general provisions of the law which regulate the relationship and the method of engagement between it and its customers. These provisions include, inter alia, the Consumer Protection Law, , and regulations enacted pursuant thereto (the Consumer Protection Law ), as well as provisions of the law which are unique to its area of engagement, as specified below. A significant part of Cellcom s activities are subject to the provisions of the Communication Law, regulations enacted by the Ministry of Communication, and the provisions of the licenses which were provided to Cellcom by the Minister of Communications. In accordance with the Communication Law, the provision of mobile services, landline telephone services, international telephone services and internet access and infrastructure services are conditional upon the receipt of a license The Concentration Law. For details regarding the Concentration Law, see section 7.2 of this part. in consideration of the holding structure of the IDB Group, Cellcom is considered a third tier company. Cellcom is included in the list of concentration entities and in the list of significant real corporations in accordance with the Concentration Law. In accordance with the Concentration Law, DIC is required to cause Cellcom to cease being a third tier company by December DIC and IDB Development have announced that they are evaluating ways to achieve this goal without giving up control of Cellcom. For additional details, see Note 3.F.3. to the financial statements. As of the reporting date, there is no certainty regarding the manner and date of occurrence of these ways, if any. the provisions of the Concentration Law with respect to the allocation of rights to its public assets may adversely affect Cellcom s ability to renew its mobile licenses and to receive new licenses. the Concentration Law may also adversely affect Cellcom s ability to raise debt, or other aspects associated with its business affairs Mobile segment Cellcom s mobile licenses. Cellcom has a general license for the provision of mobile services, which is in effect until January 31, 2022, and in which conditions are prescribed (including obligations and restrictions) in connection with the activities of Cellcom, its corporate officers and shareholders who hold certain rates of Cellcom. The license can be extended by the Ministry of Communication for consecutive periods of six years, if Cellcom fulfills the conditions of the license and the law, and routinely invests in the improvement of its service and network. there is no certainty that the mobile license will be extended, and even if it is extended, it may be extended in conditions which are inconvenient for Cellcom. the Ministry of Communication has changed in the past, and may changed in the future, the conditions of the license, without the consent of Cellcom, and in a manner which could restrict its ability to manage its business affairs, and harm its results of operations. The mobile license may be revoked, suspended or restricted, inter alia, in the following cases: the total holdings of the founding shareholders or their replacements (as defined in the license) has fallen below 26% of each of the means of control of Cellcom; The total holdings of Israeli entities (as this term is defined in the license) who are included among the founding shareholders or their replacements, has fallen below 5% of the total issued share capital and each of the means of control of Cellcom 25 ; Most of the directors do not have Israeli citizenship or residents of Israel; less than 10% of the Board members of Cellcom were appointed by the Israeli entities; The conduct of Cellcom involved an action or omission which harmed or restricted competition in the mobile branch; The aggregate equity of Cellcom, together with the aggregate equity of its shareholders who each hold 10% or more of its share capital, has fallen below USD 200 million. Cellcom is fulfilling the equity undertaking. Additional conditions which are included in the license determine, inter alia, that the transfer or acquisition of means of control at a rate of 10% or more in Cellcom, or which could transfer the control of Cellcom, including by way of creation of a pledge by Cellcom shareholders or by shareholders of its interested party, in a manner whereby the realization of the pledge will cause a change in ownership of 10% or more of any of the means of control in Cellcom, requires advance approval from the Ministry of Communication; 26 The corporate officers of Cellcom, and anyone according to the specific absorption rate in live tissue. This index is called SAR - Specific Absorption Rate. The SAR test is performed on a prototype of each model, and not on each individual device. therefore, Cellcom has no information regarding the SAR level of the end equipment throughout a lifetime, including after it is repaired. Cellcom informs its customers that in case of repair of equipment, changes in the SAR level are possible. 25 The requirement with respect to the holding of 5% of the total issued share capital, and of each of the means of control of Cellcom, by Israeli entities, will apply in July 2017, as stated below in this section. 26 Advance approval is not required for the creation of a pledge, as stated above, if the pledge agreement includes a including stating that the pledge cannot be realized without the advance consent of the Minister of Communications. For details regarding a pledge on part of DIC s shares which are held by IDB Development, see section 3.1 of this part. Cellcom s other licenses include similar prohibitions.

42 39 who holds 5% or more of its issued share capital, are not entitled to hold 5% or more of the means of control of Bezeq or of another mobile operator, or to serve as a corporate officer in any of them, subject to the exceptions which require advance approval from the Ministry of Communication; Cellcom, its corporate officer or any interested party in Cellcom will not be party to any arrangement whatsoever with Bezeq or another mobile operator, which are intended to, or could possible, reduce or harm competition in the segment for mobile, end user equipment for mobile services, and other services which are provided through mobile; Cellcom is required to refrain from preference in the provision of infrastructure services to license holders which are companies that have connections (as this term is defined in the relevant regulations) over another license holder, subject to certain exceptions. The general license, or any part thereof, may not be transferred, pledged and/or made subject to liens without the advance consent of the Minister of Communications. Additionally, the license establishes restrictions on the sale, rental or pledging of any of the assets which are used to implement the license. In light of the change which occurred in 2015 in the control structure of IDB Development, as specified in section 3.2 of this part, the control structure of Cellcom also charged, and required approval from the Ministry of Communication, including with respect to the Israeli holding requirements which are included in Cellcom s licenses, due to the fact that Mr. Eduardo Elsztain is not a citizen and resident of Israel. In January 2017, the Ministry of Communication approved the transfer of control, as stated above, including an amendment to Cellcom s mobile license, such that the requirement regarding the holding of Israeli entities in the share capital of Cellcom was reduced to 5%, and an extension was given for the purpose of complying with the updated requirements until July 2017 (subject to certain conditions). insofar as Cellcom does not meet the requirements of the conditions in its licenses, Cellcom may be subject to sanctions, which, in accordance with the terms of its licenses, may include suspension or revocation of its licenses. In accordance with the Communication Law, the Ministry of Communication is entitled to impose on the communication companies, including on Cellcom, financial sanctions due to a breach of license or law. The amount of the sanctions will be calculated as a percent of the operator s revenues, and in accordance with the extent of the severity of the breach, and may be in a significant scope. Cellcom was also given a license for the provision of mobile services in the Judea and Samaria region, which is in effect until the end of December Additional regulation which applies to communication services In August 2014, the Ministry of Communication published a hearing regarding roaming services provided to subscribers. in order to increase competition and reduce the payments with respect to roaming services, the hearing included, inter alia, the possibility for other Israeli communication operators to offer roaming services to subscribers of other mobile operators while abroad, using the permanent telephone number of that subscriber; Changes to the method used to calculate payment in consideration of roaming services abroad, including non-charging with respect to certain call times. The impact of the proposed changes with respect to increased competition, insofar as they will be adopted, significantly varies depending on the adopted option. The implementation of certain alternatives with respect to increasing competition and the change in the calculation of the payment may result in a significantly adverse impact on Cellcom s business. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom is unable to estimate whether the proposed changes will be adopted, and if so, which of the alternatives will be adopted, and therefore, the extent of the impact that the aforementioned changes will have on Cellcom s results of operations. Additionally, in August 2014, the Ministry of Communication published a hearing regarding the call centers of communication operators. In the hearing it was proposed, inter alia, in order to improve the quality of service given in the call centers, to establish new and/or stringent covenant with respect to the aforementioned services, including with respect to response times and the method of provision of the services. Additionally, the Ministry of Communication proposed to amend the Communication Law, in a manner which will allow customers to claim predetermined monetary damages in case of non-fulfillment of the proposed response time by a call center, in a hearing which was published in parallel, and in case of incorrect overbilling (in a manner which is more stringent on this matter than that set forth in the Consumer Protection Law). According to Cellcom s assessment, the adoption of the proposed changes, as proposed, could have a significantly adverse impact on Cellcom s business. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom is unable to estimate whether the proposed changes will be adopted, or the extent of the impact that the aforementioned changes will actually have on Cellcom s results of operations Supervision of tariffs. The Communication Regulations (Transmission and Broadcasts) (Payments for Reciprocal Connections), , include provisions regarding the gradual reduction of connectivity tariffs for mobile operators (i.e., payments to be paid by an intra-national operator, another mobile operator, or international operator, for the completion of a call minute on the network of a mobile operator, or for transferring a text message between mobile operators). This reduction resulted in a significant decrease in Cellcom s revenue. Additionally, the Communication Law authorizes the Minister of Communications to issue orders and to determine prices for reciprocal connection and the use of another operator s network, and the prices of supervised services, based not only on the previous method of cost (according to a calculation method which will be determined by the

43 40 Minister of Communications), with the addition of a reasonable profit, but also based on one of the following: (1) payment for the service given by the license holder; (2) Payment for another comparable service; or (3) comparison to the aforementioned services, or to payment for reciprocal connections in other countries. Additionally, the Minister of Communications was authorized to issue orders with respect to the structural separation for the purpose of providing various services, including a separation between the provision of services which are provided to a license holder, and the provision of services to a subscriber. For details regarding the prohibition on linking between transactions for the provision of mobile services and transactions for the acquisition of end user equipment, see section 9.10 of this part. In recent years, the exit fees from the mobile market have been canceled completely, except with respect to customers who hold over a certain number of mobile lines, or who pay monthly payments above a certain amount for packages or other services. The cancellation of the exit fees resulted in a significant increase in the churn rate, in the preservation and purchasing costs of customers, and in the accelerated erosion of tariffs. In accordance with the Communication Law, in the event that the hosting operator and the hosted operator do not reach an agreement regarding the terms with respect to the provision of hosting services, whether through intranational roaming of an MNO or hosting services for an MVNO, the Ministry of Communication, together with the Ministry of Economy, are authorized to intervene in the terms of the agreement, including by determining the price which will be charged for the services, in certain circumstances. the Ministry of Communication is also authorized to evaluate the reasonableness of the agreements for the provision of MVNO services (including with respect to existing agreements, in cases where a virtual operator wishes to amend an existing agreement, if the terms thereof do not allow it to compete with the mobile operators, and the parties to the aforementioned agreement have failed in their negotiations to amend it), according to the best tariff which was proposed by the mobile operator to a business customer. conditions and proceeds which are not beneficial towards Cellcom may result in a significantly adverse impact on Cellcom s results of operations. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom is unable to estimate whether any intervention of the Ministry of Communication or of the Ministry of Economy will occur, as stated above, nor the extent of its effect on Cellcom s activity in this segment. Cellcom s estimate may not materialize, or may materialize partially or differently than the estimate, if changes occur in the factors specified above Virtual operators (MVNO s). The Communications Law and regulations enacted pursuant thereto formalize the method of operation of virtual operators. For details regarding regulatory intervention in the event that Cellcom and a virtual operator do not reach an agreement regarding the terms of the services, see section above Operators with additional infrastructure. Golan and Hot Mobile began offering UMTS services in The tender conditions, according to which Golan and Hot Mobile were given the aforementioned licenses, included several benefits and easements, such as low minimal license fees, and a mechanism for reduction of the amount which they undertook to pay for the frequencies in accordance with the market share of the operator in the private sector (which is calculated based on several parameters), and a long timetable for the completion of the network s geographical coverage requirements and the right to use intra-national roaming services through the networks of other mobile operators. The entry into the market of Hot Mobile and Golan led to increased competition in the market, a significant increase in the churn rate of customers, and accelerated price erosion in the market, and had a significantly adverse affect on Cellcom s results of operations. The Communications Law requires the current mobile operators (excluding Hot Mobile) to provide intra-national roaming service to new UMTS operators, and to Hot Mobile for the period of seven to ten years, subject to certain conditions. For details regarding regulatory intervention in case Cellcom and a hosted operator do not reach an agreement regarding the service terms, see section above. In 2011, Cellcom engaged in an agreement with Golan for the provision of intra-national roaming services (which will be replaced with Cellcom s network sharing and hosting agreement with Golan (after it is owned by Electra), once it is completed. Hot Mobile engaged in an intra-national roaming agreement with Pelephone, and later with Partner (which was subsequently replaced with a network sharing agreement with Partner). Accordingly, the Ministry of Communication did not determine the terms of the services. In January 2015, the Ministry of Communication completed a frequencies tender in the 1800 MHz field for 4G networks, in which Cellcom won 3 MHz (in light of the current 1800 MHz frequencies of Cellcom), Pelephone won 15 MHz, and Partner, Golan, Hot Mobile and Xfone each one 5 MHz, for a consideration of NIS 6.4 million to NIS 6.9 million per 1 MHz (Xfone, Hot Mobile and Golan are entitled to a discount of 10% with respect to each additional 1% of their market share) (up to a total discount of 50%), to be realized in the next 5 years). The frequencies were allocated for a period of 10 years Network and site sharing agreements. In May and July 2014, the Ministry of Communication published certain requirements with respect to the approval of network sharing by the Ministry of Communication, the following principles the following principles: (1) encouragement of sharing of passive site components and active sharing of antennas between mobile operator; (2) Active sharing of mobile networks, using more shared equipment and frequencies, only between an operator with a partially distributed 3G network, and an operator with a full distributed 3G network, while such sharing will be between no more than two operators with a fully distributed 3G network;

44 41 (3) Sharing of transmissions from the sites between operators which share frequencies is permitted, in general; (4) investment in a 4G network will be considered as fulfilling an operator s undertaking regarding the distribution of the 3G network, under certain conditions; (5) approval of active sharing of mobile networks which make use of shared equipment and frequencies will be allowed for a limited period, and only if there are at least 3 independent mobile networks in Israel, and subject to certain conditions, including: (A) An undertaking to allow other operators to join under similar conditions as those which were provided to the operator with the smallest market share; (B) An obligation to provide hosting services to virtual operators without the consent of the other sharing operators; (C) The shared mobile network must be operated entity a shared entity, which will be held in equal rates between the sharing operators, which must receive a license from the Ministry of Communication when the shared network uses frequencies which will be allocated to the sharing operators; (D) The mobile components of the shared network will be held at an equal rate by the sharing operators; and (E) Each of the sharing operators will be entitled to use the passive infrastructure of the other sharing operators, including in case of termination of the agreement. For details regarding Cellcom s network sharing and hosting agreements with Xfone and Golan (following its acquisition by Electra), see section 9.18 above Permits for the construction of base sites. Cellcom s mobile services are provided, inter alia, through base sites which are distributed throughout the country, in accordance with various engineering requirements. The arrangements with respect to the distribution of the base sites, their method of construction and the approvals required for this purpose are primarily set forth in National Outline Plan 36 - small and micro broadcast facilities, and in the Radiation Law. The arrangement with respect to the distribution of wireless access facilities, which are base sites of smaller dimensions, is primarily regulated in the Communications Law and in the Radiation Law. The construction of the base sites requires building permits by virtue of the Planning and Construction Law, (the Planning and Construction Law ) (insofar as an exemption from the receipt of such permit does not apply), as well as additional approvals from various authorities and entities, including permits from the Radiation Supervisor in the Ministry of Environmental Protection (the Radiation Supervisor ). The construction of and operation of a site without the required permits constitutes a criminal offense. Non-receipt of the required permits may require discontinuing the operation of the relevant sites, or transferring them to an alternative location which is less suitable in terms of the network s requirements, which may result in reduced quality and network coverage, and as a result, in adverse effects on Cellcom s business results. Cellcom s estimate, as presented above in this section, constitutes forward looking information, as defined in the Securities Law. The primary facts and figures which were used by Cellcom as the basis for the aforementioned assessment are its experience over the years in the receipt of building permits and permits from the Radiation Supervisor, its experience in the identification of alternative locations for sites, and the difficulties associated therewith. This assessment may not materialize, or may partially materialize, due to the fact that Cellcom is working to obtain the required permits, and, if necessary, to identify alternative locations for its sites, and if there is legislative intervention, or if rulings will be issued which are different from those which are known as of the reporting date. The operation of sites and other facilities without the required permits, or in a manner which is not in accordance with a permit which was issued, may expose Cellcom, its directors and its corporate officers to civil claims and to criminal and administrative proceedings. Additionally, the sites and facilities may be subject to demolition orders and assertions of breach of contract. Legal proceedings (civil, criminal and administrative) are currently pending against Cellcom, in which assertions were raised with respect to the illegality of the activities in a small part of Cellcom s sites, due to the absence of permits in accordance with the Planning and Construction Law, or due to the construction of sites in a manner which deviates from the permit. As of December 31, 2016, a small part of Cellcom s total sites operate without a permit. It is possible that Cellcom operates a significant number of sites in a manner which does not fully comply with the building permit by virtue of which they were built, although approvals were received from the Ministry of Environmental Protection with respect to their levels. Cellcom did not request a building permit for approximately 33% of its base sites, based on an exemption from the requirement to obtain a building permit, primarily with respect to the exemption for wireless access facilities (the Exemption ). Within the framework of appeals which were filed by the mobile companies, in 2010, the Supreme Court issued a temporary order, at the request of the Attorney General of Israel (which was lessened, to a certain degree, in September 2011), prohibiting the mobile operators from continuing the construction of the aforementioned access facilities in the mobile networks based on the exemption, until regulations have been enacted on the matter, or until another decision has been reached by the Court, excluding the replacement of existing sites, under certain conditions. Hot Mobile and Golan are entitled to build access facilities based on the exemption, under certain restrictions. In March 2016, the Court approved, with the consent of the Attorney General of Israel, a certain easement on the prohibition, which allowed the replacement of access facilities under certain conditions. Additionally, in 2017, the State notified the Supreme Court that the Ministry of Finance had approved, and is in the process of discussions with other regulators on the matter, new draft regulations regarding the establishment of procedures for the implementation of changes in existing wireless access facilities, including replacing them and building a limited number of new wireless access facilities which are exempt from the receipt of a building permit, but require the fulfillment of certain procedures vis-à-vis the local authority. Cellcom is unable to assess the final

45 42 version of the regulations, nor whether they will facilitate or impose difficulties on the current procedures with respect to the implementation of changes and the construction of new access facilities. insofar as the regulations will be enacted, and the final regulations include significant restrictions on the ability to implement changes and to build wireless access facilities based on the exemption, the foregoing may adversely affect Cellcom s current networks, and the continued distribution of its networks. As of proximate to the publication of the report, a determination has not yet been regarding the appeals. In the rulings which were given by the District Court in the years 2008 and 2014, it was determined that the exemption does not apply to wireless access facilities if the roof level on which an existing facility is installed has a structure which is used by people on a permanent basis. Additionally, Cellcom provides repeaters and intra-building micro sites ( femtocells ) for its subscribers who desire solutions to problems involving weak reception inside buildings. based on an opinion which Cellcom received from its legal advisors, Cellcom did not request building permits for the repeaters which were installed on roofs, which constitute a small part of the total repeaters which were installed. It is unclear whether the installation of repeaters of another type and intra-building micro sites require a building permit. Some require a specific permit, while others require a class permit from the Ministry of Environmental Protection, in accordance with their radiation levels, and Cellcom is ensuring that each repeater operates in accordance with the set parameters for the relevant class permit. Cellcom also builds and operates microwave facilities as part of its transmission network. The various types of microwave facilities receive permits from the Ministry of Environmental Protection with respect to their radiation levels. based on an opinion which Cellcom received from its legal advisors, Cellcom believes that there is need for the receipt of a building permit in order to install these microwave facilities on rooftops. According to Cellcom s assessment, various factors could harm Cellcom s existing networks and their continued construction, and may also result in the dismantling of existing sites, adversely affect Cellcom s ability to receive permits in accordance with the Radiation Law for base sites, and may adversely affect the quality and coverage of Cellcom s networks (particularly in urban areas), and harm Cellcom s ability to continue marketing its products and services efficiently, and thereby adversely affect Cellcom s business and financial results. These factors include: changes to the legal requirements with respect to the construction of sites; The establishment of prohibitions on the placement of sites at certain distances from certain institutions, which was proposed in the draft legislation in amendment of the Radiation Law; the changes proposed in National Outline Plan 36, which was approved by the National Planning and Construction Council (which include restrictions and additional requirements regarding the process of building and operating sites); in the event that some of part of the regional planning and construction committees, according to which it is not possible to provide building permits in accordance with National Outline Plan 36 for base sites which operate in frequencies which are not expressly specified in the tables which are attached to National Outline Plan 36, is escalated, and/or if the position of the local authorities regarding the obligation to pay land betterment levies with respect to building permit expenses in accordance with National Outline Plan 36, is adopted by the courts; a determination stating that a building permit is required for repeaters and/or microwave facilities and/or wireless access facilities and/or intra-building micro facilities, including through cancellation of the exemption, or an inability to rely thereupon, or a significant restriction of the exemption. Cellcom s estimates, as stated above, constitute forward looking information as defined in the Securities Law. The primary facts and figures which were used by Cellcom as the basis for the aforementioned assessments are its experience over the years, and the knowledge which it has accumulated in the field of site construction and licensing. The aforementioned assessments may not materialize, or may materialize partially, if there is legislative intervention or if different rulings are issued than those which are known proximate to the publication of the report. Undertaking to indemnify. In accordance with the Planning and Construction Law, the regional planning and construction committees are required to receive, as a condition for the issuance of a permit for a base site, a letter of indemnity against claims for damages, in accordance with section 197 of the Planning and Construction Law. 27 Until December 31, 2016, Cellcom had deposited approximately 410 letters of indemnity as a condition for the issuance of the permits. In some of the cases, Cellcom has not yet built the sites. As of December 31, 2016, a demand for indemnification was received from one regional committee, based on the aforementioned letter of indemnity, in an immaterial amount. As a result of the requirement to deposit letters of indemnity, Cellcom may decide to dismantle or transfer sties to less suitable locations, or not to build certain sites, insofar as it has reached the conclusion that the risk involved in the provision of letters of indemnity, as stated above, exceeds the benefit from the construction of those sites. Such a decision may result in reduced quality of the mobile services provided in those locations, and in adverse effects on the network distribution. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law, which is based on Cellcom s work plan in the coming years with respect to the construction of sites, and on the accumulated knowledge and experience in Cellcom regarding the identification of locations for the construction of sites. The aforementioned assessment may not materialize, or may materialize partially, in 27 Section 197 of the Planning and Construction Law determines that a land owner is entitled, in principle, to receive damages from the regional planning and construction committee, with respect to impairment of their land due to the approval of a plan which applies in the area of their land, or in bordering land, in accordance with the conditions specified in the Planning and Construction Law.

46 43 light of the absence of information in Israel on all matters associated with claims by virtue of section 197 of the Planning and Construction Law, with respect to mobile sites, and in light of the significant variability, which is not predictable in advance, between the many potential claims. The Radiation Law, regulations and permits by virtue thereof. The Radiation Law, the regulations and the rules by virtue thereof include provisions with respect to the entire set of considerations associated with the regulation of the issue of non-ionizing radiation, including, inter alia, permitted levels of exposure. In May 2012, a position of the Ministry of Communication, the Ministry of Health and the Ministry of Environmental Protection was published, in connection with the provision of 4G services in Israel, according to which such services will involve a certain increase in the public s level of exposure to non-ionizing radiation, and in order to minimize this increase, the distribution of the 4G network must be based on existing base sites, additional small external and internal base sites, and where possible - use should be made of landline infrastructure, so that data transfer is primarily implemented through landline communication lines, and not through mobile infrastructure. In August 2014, the Ministry of Communication permitted the use of 3G infrastructure, and in January 2015, 4G frequencies were allocated to the mobile operators. The recommendations from May 2012, as stated above, were not included in the tender documents or in the aforementioned approval. In recent years, several proposed laws have been submitted with the aim of imposing additional restrictions on the issuance of permits in accordance with the Non-Ionizing Radiation Law and the Planning and Construction Law. Any amendment to these laws, which prohibits or significantly restricts the issuance of permits in accordance with these laws, will restrict Cellcom s ability to build new sites (and if it applies to existing sites, will restrict Cellcom s ability to renew operation permits for many of the current sites), will have an adverse effect on Cellcom s current networks, and on the continued distribution of its networks, particularly in urban areas, and may have an adverse effect on Cellcom s results of operations Landline segment Landline communication license. The construction and operation of the landline communication networks, and the allocation of spectrum, as relevant, require the receipt of a license in accordance with the Communications Law and the Wireless Telegraph Ordinance (New Version), provision of service beginning in July 2015, the wholly owned subsidiaries of Cellcom received three standard non-exclusive general licenses for the provision of landline telephone services, internet provider services and the provision of international call services, as well as network access point services (which replaced previous licenses for the provision of the aforementioned services). The licenses are in effect until 2025/2026, but are extendable by the Ministry of Communication for consecutive periods of up to 10 years. Cellcom deposited with the Ministry of Communication a bank guarantee in the amount of NIS 2 million with respect to each of these licenses. The provisions of the standard licenses are similar, in general, to those of Cellcom s general license for the provision of mobile services, as described in section above, subject to several changes, including a requirement for a minimum holding of 20% of the share capital by Israeli entities, which the Minister of Communications is authorized waive in case the holder of the standard license is controlled by a holder of a general license (as was the case for Cellcom). The standard license allows the holder thereof to provide each of the aforementioned services, as well as MVN services, subject to the inclusion of a relevant annex in the standard license, and is intended to facilitate the requirements on license holders who are not required to have a national infrastructure, with the aim of reducing the barriers to entry for additional competitors into those markets. The internet infrastructure services are also provided under the standard license. Cellcom s standard licenses are expected to be consolidated under a single standard license. The consolidation process of the standard licenses into a single standard license, and the timetable thereof, have not yet been determined between the Ministry of Communication and Cellcom, and it is possible that this process will have legal, financial, taxation and accounting implications on Cellcom s business affairs, insofar as the consolidation will require the transfer of assets, goodwill, rights and liabilities between the member companies of Cellcom group, or require operational consolidation. The provision of several services by one entity may also circumvent the restrictions on discrimination between operators. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom is unable to estimate when the transition to a standard license will be performed, nor the effect of the process on Cellcom and on the competition in the markets where it operates. Cellcom has additional landline communication licenses: a special license for the provision of transmission and intra-national data communication services (until December 2017), a special license for the provision of internet services, which was provided to a subsidiary of Cellcom (in effect until November 2017), and licenses for the provision of landline telephone services, internet services, international calls and a network terminal point in the Judea and Samaria area (in effect until 2025 / 2026). These licenses include similar terms to those of the general license for the provision of mobile services, as specified above Development of the wholesale market. In May 2012, the Ministry of Communication published a policy document on the subject of the wholesale market for landline communication services, whose provisions primarily include the following: (1) the establishment of an effective wholesale market for services allowing access to communication services - Bezeq and Hot will be required to allow the communication companies which do not own infrastructure to make use of their infrastructure for the purpose of providing services to end customers; (2) Gradual cancellation

47 44 of the structural separation in the Bezeq and Hot groups, and the replacement thereof with an accounting separation and changes to the method for oversight of Bezeq s retail tariffs and the maximum tariffs, instead of the current method for the determination of the fixed tariffs, which are dependent, in general, on the development of the wholesale market and the state of competition on the market, and with respect to television services - depends on the reasonable possibility to provide a basic package of television services through the internet by suppliers who do not have a national landline infrastructure. As of the reporting date, wholesale market services in the landline telephone segment, which were supposed to be provided beginning in May 2015 by Bezeq, are not provided. In December 2015, the Ministry of Communication published a hearing for the evaluation of a temporarily alternative to the wholesale telephone service for one year of repeat sales of Bezeq s telephone services, at significantly higher tariffs than the tariffs of the wholesale landline telephone service. Additionally, despite the fact that the wholesale market formally also included the Hot infrastructure, it was effectively not included in the wholesale market, and in January 2016, the Ministry of Communication published a hearing regarding the maximum tariffs for Hot s wholesale internet infrastructure services and passive infrastructure services, and noted that it will not intervene in the tariffs offerd by Hot for the wholesale landline telephone service, but since then, has not published maximum tariffs for Hot s wholesale internet infrastructure services (and Hot filed a petition against the Ministry of Communication in February 2017, alleging that the Ministry of Communication is required to conduct an additional hearing before determining the aforementioned maximum tariffs), and has also not decisions additional decisions regarding the technological implementation of the wholesale market on Hot infrastructure. Cellcom estimates that the alternative involving the resale of Bezeq telephone services is not a sustainable alternative, and that it will harm and that competition, and therefore, it objected to its adoption. Additionally, Cellcom estimates that the effective inclusion of Hot infrastructure in the wholesale market may increase the number of potential subscribers for Cellcom s triple services and integrated services. Additionally, in January 2016, the Ministry of Communication announced that it intends to cancel the structural separation obligation which applies to Bezeq and Hot as part of its plan to ensure significant investments in fiber optic infrastructure in Israel. In December 2016, the Economic Arrangements Law for the years amended the Communications Law, and imposed an obligation to offer wholesale services on all landline communication operators, including Cellcom, and required all of the operators to provide access for other operators to their passive infrastructure, in accordance with the conditions which will be agreed upon between the operators (excluding Bezeq, whose conditions are determined by the regulator). However, until October 2017, the aforementioned obligation will not apply to all of the standard landline license holders (including Cellcom and Partner), and IBC, Hot and Bezeq will not be able to use one another s infrastructure Regulation of multi-channel television services. As of the reporting date, television over internet services are not subject to regulation in Israel. In July 2015, the committee for the evaluation of the regulation of commercial broadcasts, which was appointed by the Ministry of Communication, inter alia, for the purpose of evaluating regulatory principles and rules which should apply to television broadcasts over the internet, and to television broadcasts of companies which operate in the market through cable and satellite, submitted its recommendations. In June 2016, the advisory committee regarding the regulation of broadcasts, which was appointed by the Minister of Communications, published its final recommendations, including the classification of audiovisual providers (defined as any provider which broadcasts its content primarily to the Israeli public, through any electronic-neutral technology) in the market into categories, and the establishment of regulation which will apply to each category, as follows: market share of less than 10% - self regulation; market share greater than 10% - narrow regulation requiring a license; market share greater than 10% for 3 consecutive years - full regulation, including an obligation to invest in original Israeli content. The implementation of the aforementioned recommendations is subject to their adoption in legislation. In March 2017, the Ministry of Communication adopted most of the aforementioned recommendations, while some of the recommendations remained in discussions. The implementation of the committee s recommendations, as presented above, is subject to their adoption in legislation. If the legislation which will be adopted will require Cellcom to make additional investments, or will impose regulations which do not benefit Cellcom s television over internet service, or Cellcom s ability to use the DTT infrastructure, or will impose the aforementioned regulation on Cellcom, and not on other providers of television over internet services, the matter may adversely affect Cellcom s television over internet services. Cellcom s estimate, as presented above, constitutes forward looking information, as defined in the Securities Law. Cellcom is unable to estimate the extent of the impact that the aforementioned regulation will have on the multi-channel television over internet market, nor the extent to which it will affect Cellcom s activity in this segment. In December 2016, the Economic Arrangements Law for the Years amended the provisions of the law which apply to the operation of DTT infrastructure (which is currently operated by a statutory television authority), which requires the state to conduct a tender over the operation of DTT infrastructure, in which Bezeq, Hot and the current commercial channels will not be allowed to participate, and to establish an obligation to broadcast, over the internet, DTT channels in the future.

48 Collaboration agreements In July 2016, Cellcom engaged with Xfone in a network sharing agreement for the 4G network and hosting services for the 2G and 3G networks (the Xfone Agreement ). The agreement is in effect for a period of 10 years, beginning on the earlier of either: (1) the commercial launch date of mobile services by Xfone; and (2) 12 months after the receipt of the required regulatory approvals. In October 2016, approval was received from the Antitrust Commissioner, and in March 2017, approval was received from the Ministry of Communication. The agreement will be extended for additional periods, save in the event that one of the parties has announced otherwise Further to that stated in section 9.3 of this report, the mediation proceedings which were held Further to the motion to liquidate which was filed by Cellcom against Golan, concluded in January 2017, with a mediation agreement with Golan (the Mediation Agreement ), after which a network sharing agreement was signed with respect to the 3G and 4G networks and hosting services for the 2G network with Electra Ltd. (the Electra Agreement ), which concurrently engaged with Golan and Golan s shareholders in an agreement for the acquisition of Golan s share capital. Within the framework of the mediation agreement, it was agreed, inter alia, to strike the legal proceedings which Cellcom and Golan had filed against one another, a reduced monthly installment arrangement for intranational roaming services which Golan will pay to Cellcom for a certain period, and arrangements in case the acquisition of Golan by Electra agreement is not completed within a certain period, including continuation of the mediation proceedings, a reduced monthly payment arrangement for intra-national roaming services which Golan will pay to Cellcom for a certain period, and the right to renew the legal proceedings, including with respect to past differences with respect to intra-national roaming payments. In March 2017, the Antitrust Authority and the Ministry of Communication approved the acquisition of Golan by Electra, and the Electra agreement. As of the publication date of the report, the Electra agreement is subject to the completion of the acquisition of Golan s share capital by Electra. The principal terms of the Electra agreement include, inter alia: the entry into effect, upon and subject to the receipt of the required regulatory approvals, which were received, and the completion of the acquisition of Golan by Electra agreement; the agreement is in effect for a period of 10 years, from the date of receipt of the required approvals, as stated above, and will be extended for additional periods, unless one of the parties has announced otherwise. Termination of the agreement before the passage of the first 10 years due to a breach by Golan will entitle Cellcom to receive liquidated damages in the amount of NIS 600 million plus VAT. On the completion date of the share purchase by Electra agreement, Cellcom will provide to Golan a loan in the amount of NIS 130 million, for a period of 10 years, to be secured by a second priority floating charge on the assets and rights of Golan (excluding certain exceptions), or another equivalent collateral; These arrangements with respect to a possible interim period which will begin on the completion date of the acquisition of Golan by Electra agreement, if it is completed before the receipt of the regulatory approvals for the Electra agreement, and until the completion of the Electra agreement, including the continued exclusive acquisition of intra-national roaming services by Golan from Cellcom, where the consideration which will be paid will be identical to the consideration in accordance with the Electra agreement, and liquidated damages in the amount of NIS 600 million, plus VAT, in case of discontinuation of the aforementioned acquisition, except due to the completion of the Electra agreement; and the settlement of differences with respect to past payments for intra-national roaming services. For additional details regarding the collaboration agreements, see Note 3.H.1 to the financial statements In February and March 2017, the parties agreed to implement immaterial amendments to the Electra agreement and the Xfone agreement, including the provision of certain discounts, in immaterial amounts, out of the consideration under the agreements. Additionally, Cellcom, Xfone and Electra also engaged in a separate tri-party agreement which consolidated the 4G network sharing arrangements. Until proximate to the publication of the report, Cellcom is unable to assess the chances of the completion of the Electra agreement, including the impact of the non-completion of the Electra agreement on Cellcom s ability to collect the amounts which are owed to it from Golan, or on the production of future income from Golan. A significant reduction of the future income from Golan have a significant effect on Cellcom s profits and results of operations Roaming agreements. As of December 31, 2016, Cellcom is engaged in roaming agreements with 551 operators in 180 countries around the world. A roaming agreement allows the customers of Operator A to receive mobile network services from Operator B, when a customer of Operator A is located outside of that operator s coverage area, but is in the coverage area of Operator B (incoming and outgoing roaming services). The incoming roaming services to Cellcom s network are affected by Cellcom s ability to maintain roaming agreements in convenient conditions. The entry of additional operators has led to increased competition, over both outgoing roaming services and over incoming roaming services. in recent years, tariffs for roaming services have been declining. The continued decrease of the roaming tariffs, including as a result of the increased competition and/or regulatory changes, may have an adverse effect on Cellcom s profitability and business results Legal proceedings For details regarding material legal proceedings which are pending against Cellcom as of December 31, 2016, see Note 21.C.2.B to the financial statements.

49 46 For additional details regarding legal proceedings against Cellcom in 2016 and proximate to the publication of the report, see the reports of IDB Development: Summary description of the claim In September 2016, a claim and a motion to approve it as a class action were filed against 013 Netvision Ltd., a wholly owned subsidiary of Cellcom, and against two additional Israeli operators of international telephone services (the Defendants ), alleging that the defendants illegally collected from occasional customers excessive and unreasonable prices for outgoing calls from Israel. Claim amount Reference to immediate report Targets and business strategy; Expected development The main components of Cellcom s business strategy are as follows: offering comprehensive solutions for the landline and mobile communication services - Cellcom offers to its customers a wide variety of landline and mobile communication services, and Cellcom intends to continue leveraging its leading status and large market share in order to expand its array of offered communication services. Cellcom is working to optimize the expenses structure, including by implementing increased efficiency measures Discussion regarding risk factors Macro factors Financial risks - Cellcom is exposed to changes in exchange rates, due to the fact that a significant part of its expenses with respect to infrastructure and end user equipment for subscribers, roaming services and rental agreements are in USD, although its revenues are in NIS. With respect to some of the debenture series of Cellcom, Cellcom is exposed to changes in the index. Cellcom aims to reduce the exposures by means of financial hedging transactions. Changes in exchange rates and changes in the index may have an adverse effect on Cellcom s business results. Restrictions on credit amounts - Cellcom is a member company of the IDB Group, and is included in a group of borrowers and in a business group with member companies of the IDB Group. Cellcom has also undertaken to fulfill certain covenants. See additional details in section 7.3 of this part and Note 14.D.1 to the financial statements. Regional conflict - The activities of Cellcom and its network are located in Israel, as are some of its suppliers. A significant part of Cellcom s communication network, as well as a significant part of Cellcom s information systems, are located within the range of missile attacks launched from the Gaza Strip and Lebanon. Any damage caused to the communication network and/or to the information systems may harm Cellcom s ability to continue providing services, in whole or in part, and/or may harm the activities of Cellcom in other ways, and may adversely affect its business results. Additionally, negative effects of this kind may materialize due to an increase in criticism of Israel by international community. In general, any armed conflict, terror attack or political instability in the region may result in a decrease in Cellcom s income, including from roaming services of incoming tourism, and may thereby adversely affect its business results. Branch-specific factors Aggressive competition - The communication market is characterized by significant competition in many of its segments, including mobile communication and internet provider services. The trends specified in section 9.10 of this part continued in 2016, and caused a high section 9.10, high customers acquisition and retention costs, continued erosion of prices, and finally, reduced income and profitability for Cellcom. The current level of competition in all markets in which Cellcom is active, including the market for the sale of end user devices and the offering of aggressive price plans by Cellcom s competitors, is expected to continue. For details, see section 9.10 of this part. The materialization of any one of the developments described below will result in a significantly adverse impact on Cellcom s profitability: non-completion of the Electra agreement (which is subject to the completion of the transaction for the acquisition of Golan s share capital by Electra), or any other development which will result in loss of income from Golan, and an inability for Cellcom to compensate for the foregoing, for example, in case of Golan s insolvency, or increased efforts by the other competitors on the market to recruit Golan s customers; Tariffs remaining at their current rates, or an additional drop in rates, including as part of a package of services; An ineffective wholesale market for landline communication, including due to the effective exclusion of Hot infrastructure, the effective exclusion of telephone services from the wholesale market, the offering of services not in accordance with the criteria of the wholesale market, without implementation of enforcement measures by the Ministry of Communication, or the pricing thereof in a manner which could harm Cellcom s ability to offer competitive services packages, and to compete against Bezeq and Hot (due to their dominant status in the landline communication market), particularly if the structural separation which applies to the Bezeq and Hot groups is canceled before the creation of an effective landline wholesale market; Cancellation or easement of the structural separation which applies to the Bezeq and Hot groups; The entry of new competitors into markets in which Cellcom is engaged, or the entry of existing competitors into segments in which they were not previously active, or were

50 47 partially active; distribution or acquisition of a landline infrastructure by one of Cellcom s competing companies, which does not own such infrastructure, or collaboration of a competitor company with an operator which has such infrastructure, if Cellcom does not distribute or acquire such infrastructure, or enter into a collaboration with an operator which holds such infrastructure; regulatory changes which facilitate the transition of customers between operators; continued increased competition in the end user equipment market, and the entry of additional competitors into the end user equipment market and/or legislation or new judicial decisions which may restrict Cellcom s activities in the end user equipment sale market, and adversely affect its income or profitability. The aforementioned estimate constitutes forward looking information as defined in the Securities Law. Cellcom s assessment is based on past experience, including with respect to the impact of competition until now. This assessment may not materialize, or may partially materialize, due to the fact that there is no certainty regarding the occurrence of some or all of the events specified above, nor the manner of their occurrence, nor their precise impact on the level of competition in the market. Changes in legislation and significant regulatory intervention - Changes in legislation (primarily the legislation specified in section 9.16 of this part) and the extent of significant regulatory intervention may have adverse effects on Cellcom s activities, due to a cancellation or easement with respect to the structural separation obligation which applies to Bezeq and Hot, particularly if such cancellation or easement is given before the creation of an effective wholesale market in the landline communication market, if competition-encouraging tariffs are not established, or if other regulations are established in the landline wholesale market, which do not benefit Cellcom; Provision of easements and benefits to competitors, over Cellcom; Granting permission for other operators to provide services to Cellcom subscribers which were previously provided only by Cellcom, non-renewal of Cellcom s licenses and/or frequencies, or restriction of their use, and non-allocation of additional frequencies, if required; The establishment of additional requirements for the provision of easements to competitors with respect to safety or health, including with respect to the construction and operation of base sites; The establishment of additional restrictions or requirements regarding the provision of services and products and/or intervention in their terms of marketing, advertising and provision, including regarding existing agreements; The establishment of a higher standard of service; The establishment of a more stringent policy with respect to protection privacy; The imposition of regulations on Cellcom s television over internet service, the establishment of non-beneficial conditions for the use of DTT broadcasts, or the imposition of such non-beneficial conditions on Cellcom and not on other operators of the television over internet service. Regulatory developments also affect the risk factors of tariff oversight, licensing of sites and the indemnification obligation, non-ionizing radiation and dependence on licenses, as specified in section 9.17 of this part. Licensing of sites - Cellcom (and its competitors) encounters difficulties in obtaining some of the required approvals for the construction and operation of base sites, and particularly in obtaining the building permits from the various planning authorities. Cellcom s ability to maintain the quality of its mobile services is partially based on Cellcom s ability to build base sites. The difficulties encountered by Cellcom in obtaining the required permits and approvals may adversely affect the currently existing infrastructure, and the continued development of its mobile network. Additionally, the inability to obtain these approvals on time nay also prevent achievement of the mobile service quality targets which were determined in Cellcom s mobile license, may result in loss of customers, and may adversely affect its business results. For additional details, see section of this part. Non-ionizing radiation from end user equipment and from sites - Non-ionizing radiation is emitted from two sources: end user equipment and mobile sites of various kinds. for details, see sections 9.16 and of this part. The construction and operation of base sites is conditional upon the receipt of a construction permit and an operation permit from the Radiation Commissioner. For details, see section of this part. If the public s concern with respect to non-ionizing radiation increases, if it is found that there are health risks due to non-ionizing radiation, or if it is found that the radiation standards in the sites or in the end user equipment are being exceeded, or if a court rules against Cellcom or against another mobile operator, or if a settlement is reached in a claim which pertains to health damages, the foregoing may have a significantly adverse impact on Cellcom. Such significant impact may arise, inter alia, due to the following reasons: claims of various types for damages with respect to property damage and physical injury of significant scopes, difficulty in the construction, operation and rental of sites, decrease in income as a result of a decrease in the use of mobile communication, and realization of letters of indemnity which were deposited with planning institutions in connection with section 197 of the Planning and Construction Law, as specified in section of this section. Cellcom has no insurance coverage for such cases. Dependence on licenses - Cellcom provides communication services in accordance with licenses which were given by the Ministry of Communication, which are subject to changes by the Ministry of Communication, including against the position of Cellcom. A fundamental breach of the provisions of the licenses may result in the cancellation of the licenses (and, as a result, in Cellcom s inability to continue operating in each of the fields of communication in which it operates by virtue of the aforementioned licenses). A breach of the provisions of the licenses may result in the imposition of significant financial sanctions on Cellcom (see also section 9.6 of this part). Technological changes and dependence on technology - The communication market is characterized by rapid and significant changes in technology, requiring investment in advanced technologies in order to stay competitive. The increase in the consumption of internet and content provider services through advanced mobile end user

51 48 equipment has resulted in increased data communication volumes on mobile networks, and is expected to continue growing rapidly. The transition of subscribers to unlimited packages has significantly contributed to the increasing demand for data transmission on Cellcom s network, as well as text messages and calls. In order to meet the increasing demand for data communication, Cellcom is required to upgrade its transmission network, and also to continue investing in its 4G network, which will allow greater capacity and faster data transfer. Additionally, in order to provide provider performance on the 4G network, Cellcom makes use of additional frequencies on the Cellcom network, beyond those which were allocated to it in the 4G frequencies tender (for details, see section 9.12 of this part). In the event that Cellcom s sharing agreements with Xfone and Golan (after it is owned by Electra) are realized, Cellcom will benefit from their frequencies. If the aforementioned frequencies are not made available to its use, Cellcom will hold a lower number of frequencies than its competitors, which could affect its competitive position. For additional details, see section 9.12 of this report. Cellcom s activities are dependent upon several complex information systems and technologies. Additionally, Cellcom s array of packages including mobile and landline services has increased the number of information systems and complex technological systems which are involved in the provision of service to Cellcom customers. Malfunctions in the constantly changing and expanding complex systems are unavoidable. A malfunction in any one of Cellcom s systems which adversely affects its ability to provide services and products to its customers, or to charge for them, may result in loss of income for Cellcom, and may adversely affect the perception of Cellcom s brand, and could expose Cellcom to claims. Additionally, Cellcom is in the process of implementing a shared customer service system for the mobile segment and the landline segment, which may result in higher costs than expected, may require significant managerial attention, which could have been referred to routine management, and may also result in unexpected operational difficulties and failures, which may result in loss of income, legal claims and regulatory sanctions. All of the above may have an adverse effect on Cellcom s results of operations. Cellcom was exposed, and continues to be exposed, to frequent cyber attacks. Additionally, unauthorized penetration to the information systems of Cellcom, or disruptions to their operation, including due to internet hacks (including in customer systems which are protected by information security products provided by Cellcom), may cause Cellcom and its customers to incur damage, including due to the inability to provide certain services, or due to the provision of such services in a disrupted manner, the inability to charge with respect to the provision of those services, loss of information of Cellcom or of customers, or malicious use of customer information. All of the above may expose Cellcom to claims and liabilities. Cellcom has no insurance coverage for this type of claims and liabilities. Provision of services through other operators - Cellcom s roaming services are provided through foreign operators; Connecting to the other networks requires connectivity between Cellcom and those operators. The absence of accessible or high-quality service (and, with respect to roaming services, also competitive service vs. the service offered by competitors see section 9.18 of this part for details regarding roaming tariffs) may harm Cellcom s ability to compete in the market, and may affect its business results. Emergency situations - In emergency situations, the legislative directives and certain provisions of the mobile license confer upon the entities which are authorized by law to take steps as required to ensure state security and/or public peace, including: requiring Cellcom (as a mobile license holder) to provide service to the security forces, recruitment of Cellcom s engineering equipment and facilities, and even taking control of the system. Special factors Significant debt - Cellcom has raised a significant amount of debt. This situation increases Cellcom s exposure to market changes, and makes it difficult to respond quickly to changes in the industry and in the competitive market conditions, including by raising additional debt. As of December 31, 2016, Cellcom s net debt amounts to approximately NIS 2,633 million 28. for additional details with respect to Cellcom s debt, see section 9.15 of this part. A change for the worse in Cellcom s results of operations, and any additional reduction of Cellcom s rating and its debentures may adversely affect also the price and terms of Cellcom s current debt, and the raising of additional debt. Dependence on suppliers - Cellcom is dependent upon several suppliers which provide it with network equipment, end user equipment, content and content operation services, information systems and infrastructures. Cellcom s business results may be adversely affected if any of those suppliers does not provide its support products and/or services at the required level of quality or on time, or in conditions which do not benefit Cellcom, or provides to Cellcom s competitors preferable conditions, or if the suppliers do not succeed in creating successful or in-demand products / content, in the absence of an equivalent alternative (see also section 9.14 of this part). thus, for example, Bezeq suffered from strikes and breaches of regulatory duties with respect to the provision of wholesale services in an egalitarian manner to those which are provided to its retail customers, or refused to offer services at all. Similar scenarios to the foregoing may occur in the future and adversely affect Cellcom. Legal proceedings - Cellcom is party to legal proceedings which are filed against it from time to time, including motions to approve claims as class actions in material amounts (see section 9.19 of this part). Additionally, due to the scope and size of Cellcom s operations, including with respect to the risk of non-correspondence between the tariff plans and the great deal of information which is processed in Cellcom s information systems, and in light of the frequent regulatory changes in Cellcom s operations and in its pricing plans, due to regulatory changes or 28 The net debt amount includes a total of NIS 86 million which is attributed to accrued interest.

52 49 changes in the market and the involvement of thousands of sales and customer service representatives in the sale process, and later in connection with the customer, the risk increases of non-correspondence between the pricing plans and the information which is processed in Cellcom s information systems, or the provision of insufficient information, and despite Cellcom s efforts to prevent it, Cellcom s exposure to a large number of claims increases, including class actions in material amounts. Cellcom employs thousands of employees, and is therefore also subject to the risk of employee claims, including by way of class actions. In recent years, an uptrend has been apparent in the number of motions to approve claims as class actions and in the number of claims approved as class actions, including with respect to claims which were filed against Cellcom and the increased involvement of consumer associations (by way of the filing of claims or encouragement thereof, and objection to settlement agreements) and of the Attorney General of Israel (through objection to settlement agreements), which result in an increase in Cellcom s exposure and legal expenses with respect to defense against claims of this kind, which may have an adverse effect on Cellcom s financial results. This trend is expected to continue. in addition to the seven class actions which were approved against it as of the reporting date, Cellcom is also party to several settlement agreements, mostly in immaterial amounts, and dozens of additional motions are pending against it for the approval of claims as class actions, of which many are in material amounts. If claims are approved as class actions which will eventually be accepted, the foregoing will have a significantly negative impact on Cellcom s results. Cellcom is also exposed to intellectual property claims, including regarding with respect to the content which Cellcom acquires from third parties. The aforementioned estimate constitutes forward looking information as defined in the Securities Law. Cellcom s assessment is based on past experience. This assessment may not materialize, or may partially materialize, due to the fact that there is no certainty regarding whether motions to approve class actions will be filed and approved, nor the extent of their exact impact on Cellcom s financial results. Share of the IDB Group - Cellcom is a member of the IDB Group, which is a large Israeli business group which is subject to significant oversight. Due to the limited size of the market in Israel and the significant regulation (particularly in the communication market), the foregoing may restrict Cellcom s ability to expand its business operations, to engage in strategic partnerships with other players in the communication market, etc. Due to Cellcom s status as a member of the IDB Group, Cellcom is included in the group of borrowers and in the business group with member companies of the IDB Group. For details regarding the restrictions on the scopes of credit which apply to a group of borrowers and business groups, see section 7.3 of this part. For details regarding the Concentration Law, see section of this part. For details regarding the provisions which are included in Cellcom s licenses, see sections and of this part. For details regarding the position of IDB Development, see section 3.2 of this part. The financial position of IDB Development may have an adverse effect on the rating of Cellcom s debentures, or on the terms of the raising of new debt. Dividend distribution policy and harm to Cellcom s profitability - If Cellcom does not comply with its dividend distribution policy, or if it distributed dividends at a rate lower than expected by the investors, this may result in an adverse impact on Cellcom s share price. Furthermore, the aforementioned dividend policy may reduce Cellcom s cash balances and harm its ability to finance unexpected expenses in the future. As a result, Cellcom may be required to borrow additional funds or to issue additional shares in accordance with unattractive conditions, or may encounter difficulties in obtaining financing sources for these funds. For details regarding the dividend policy of Cellcom and restrictions on its ability to distribute dividends, inter alia, following the issuance of debentures (Series F-K) of Cellcom, and in accordance with financing agreements, see section 9.4 of this part. Investment in new business operations - Cellcom invested, and is expected to continue investing, in the development of new business operations, with the aim of expanding and supplementing its abilities and its array of offered products, such as television over internet services, and a possible investment in a nationally distributed, broad scale cable infrastructure which Cellcom is considering. These efforts involve significant risks and uncertainties, including deviating managerial attention, loss of focus in sales and marketing efforts from core operations, absence of sufficient income to balance out the liabilities and expenses which are associated with the new investments, adverse effects on cash flows, particularly in business operations which require a long term investment and fixed amounts, such as with respect to the acquisition of content for the television over internet service, insufficient return on investment, regulatory changes which may impose additional unplanned liabilities, inability to effectively compete with the current competitors in the market or with new competitors entering the market, issues which were not identified in the evaluation of the aforementioned strategies and products, such as operational difficulties and significant investments which were insufficiently predicted, if at all. The aforementioned investments are dangerous by nature, and therefore, there is no certainty that the aforementioned strategies or products will be successful, and will not have a significantly adverse effect on Cellcom s goodwill, financial position and results of operations. Additionally, its entry to new business operations, as stated above, may result in the intensification of the competitive pressures by the current suppliers of competing services over Cellcom s core operations, in order to prevent its efforts to compete against them in the relevant market. Employee unions - The employee union described in section 9.13 of this part may restrict Cellcom s operating activities, including Cellcom s possibility of implementing organizational and personnel changes, and may require significant managerial attention. Additionally, future disputes with representatives of the employee union, such as

53 50 concerning the renewed fight over the collective agreement, may result in the initiation of organizational steps and in adverse effects on the services and on the customer service of Cellcom, changes may fail or may be implemented in a manner significantly different than planned, and as a result, may result in lower savings than planned. For details, see section 9.13 of this part. Presented below are Cellcom s estimates regarding the extent of the impact that the aforementioned risk factors could have (excluding the risk factor with respect to radiation) on Cellcom: Risk factors Macro factors Branch-specific factors Special factors Major impact Aggressive competition Changes in legislation and significant regulatory intervention Extent of impact Medium impact Financial risks 10. Property & Building Ltd. and Projects in Las Vegas Licensing of sites and indemnification obligation Technological changes and dependence on technology Non-ionizing radiation from end user equipment and sites Significant debt Legal proceedings Investment in new business operations Employees union Minor impact Restrictions on scope of credit Regional conflict Dependence on licenses Provision of services through other operators Emergency situations Dependence on suppliers Part of the IDB Development group Dividend distribution policy and harm to Cellcom s profitability 10.1 Presented below is a description and details regarding Property & Building Corporation and projects in Las Vegas, which constitute operating segments of IDB Development (according to the operating segment tests specified in IFRS 8, as specified in section 2 of this part): Presented below are data regarding the investments of IDB Development in Property & Building Corporation and projects in Las Vegas as of December 31, 2016: Name of holding company DIC in Property & Building Corporation IDB Development and Property & Building Corporation in IDBG (in equal parts) Holding rate (in percent) Investment amount (concatenated) in Property & Building and projects in Las Vegas, as recorded in the books of IDB Development (NIS millions) Rate which constitutes the investment amount in Property & Building and projects in Las Vegas, out of the total capital attributed to the owners of IDB Development Market value of the investment in Property & Building and projects in Las Vegas 29 (NIS millions) Contribution to results attributable to the owners of IDB Development in 2016 (NIS millions) Description of activity Approximately 64.4% 1, % 1, Real estate 100% 29 This figure is based on: (1) The value of Property & Building on the stock exchange (concatenated) and (2) IDB Development s direct investments in projects in Las Vegas, according to their cost in the books of IDB Development.

54 51 Presented below are data from the consolidated financial statements of Property & Building Corporation as of December 31, 2016 (amounts are in millions of NIS): Income in 2016 Profit attributable to the owners of Property & Building Corporation in 2016 Capital attributable to the owners of Property & Building Corporation as of December 31, 2016 Total assets as of December 31, 2016 Accounting reference in the books of IDB Development 1, ,928 15,727 Consolidated company 10.2 Property & Building Corporation is a public company whose securities are listed for trading on the Tel Aviv Stock Exchange Property & Building Corporation is engaged, independently and through its subsidiaries and associate companies, some of which are public companies, in various areas of the real estate branch in Israel and abroad. The main operating segments of Property & Building Corporation in Israel and abroad include the revenue-generating properties segment (in Israel and abroad) - its core activity, and the residential construction segment (in Israel and abroad). Property & Building Corporation is also engaged in the agriculture segment, which is immaterial to IDB Development.

55 Presented below is a structural diagram of the primary holdings of Property & Building Corporation, from the perspective of IDB Development, proximate to the publication date of the report: Property & Building Corporation 100% 100% 55.06% 45% PBC International Investments (6) PBEL Real Estate Ltd. 90% 100% PBEL Property Development (India) Private Ltd PBEL Holdings Ltd 56.6% 56.6% Hadarim Properties Ispro (3) Neveh Gad (4) 43.4% 100% Gav-Yam (1) Matam - Scientific Industries Center Haifa Ltd. (2) Matam 50.1% PBEL Real Estate India Private Ltd 90.7% 98% PBEL Developers India Private Ltd Mehadrin (5) 45.4% Gav-Yam Negev Ltd. 73.5% 100% England Hotels Property & Building Ltd. 20% (9) TPD Investments Limited UK(8) Bartan Holdings and Investments Ltd. 30.9% Gav-Yam Maman Properties in Lod Ltd. 50% 100% PBC USA Investments Inc. 100% PBC USA Real Estate LLC Ramat HaNasi Gav-Yam Rasco Ltd. 50% 50% IDBG (7) 100% GW 50% PBS Real Estate Holdings S.R.L 25% Science Based Industries Park Ltd. 25% (1) Gav-Yam is a public company whose securities are listed for trading on the Tel Aviv Stock Exchange. Most of Gav-Yam s activities are in the revenue-generating properties segment, primarily hi-tech parks, business parks, offices and logistical centers, as well as construction and marketing, together with a partner, of a residential neighborhood in Haifa. On December 5, 2016, Property & Building sold, to several institutional entities, 14% of the issued share capital of Gav-Yam, for a gross consideration of approximately NIS 391 million. As a result, the holding rate of Property & Building in the issued capital of Gav-Yam decreased to approximately 55.06%. for details, see Note 3(H)(2) to the Financial Statements. (2) Matam is the rights holder to revenue-generating properties in Science Based Industries Park, one of the largest hi-tech industry parks in Israel, located in the southern suburbs of the city of Haifa. (3) Ispro is a wholly owned company of Property & Building, whose activities primarily include revenue-generating properties, primarily commercial centers and logistical areas. (4) Neveh-Gad - a private company wholly owned by Property & Building, whose activities are primarily in the residential construction segment. (5) Mehadrin is a public company whose securities are listed for trading on the Tel Aviv Stock Exchange. Most of Mehadrin s activities are in the agricultural segment. Hadarim Properties and Phoenix Holdings Ltd. (which holds, through a wholly owned subsidiary, 41.4% of Mehadrin) are considered to be joint holders, by virtue of the shareholders agreement between them, of approximately 86.8% of the voting rights and of the right to appoint directors in Mehadrin. (6) PBC International Investments was incorporated in Israel for the purpose of operating in the field of revenue-generating properties and residential construction abroad, through foreign subsidiaries and associate companies. (7) As of proximate to the publication date of the report, a wholly owned subsidiary of IDB Development holds the balance of

56 53 IDBG s share capital (50%). IDBG holds, together with additional investors, real estate corporations which operate in Las Vegas. The real estate corporation GW holds the rights to a commercial and office areas (which is being built in stages). For additional details, see section of this part. (8) For details regarding a dispute and legal proceedings in connection with the aforementioned holdings, see section of this part. (9) As described below, Property & Building filed a claim against the dilution of its holdings to 6.39% Dividend distribution The distributable earnings (as this term is defined in section 302 of the Companies Law) of Property & Building as of December 31, 2016 amount to a total of approximately NIS 518 million. On February 22, 2016, the Board of Directors of Property & Building Corporation resolved to pay dividends in the amount of NIS 100 million, which were paid on March 15, On March 21, 2017, the Board of Directors of Property & Building resolved to pay dividends in the amount of NIS 150 million (approximately NIS per share), which will be paid on April 25, For details regarding financial covenants and restrictions on dividend distributions which were determined in the debentures (Series F-I) of Property & Building Corporation, see section F.3.C. in Note 14 to the Financial Statements.

57 Presented below is financial information regarding the operating segments of Property & Building (NIS millions) 2016 For the year ended December 31, 2016 (NIS millions) Revenuegenerating properties in Israel Revenuegenerating properties in the United States Residential construction in Israel Agriculture Others Consolidated Total revenues From externals ,199 Increase in the fair value of investment property Share of Property & Building in the profits (losses) of associate companies Total ,576 Total attributed costs External costs (*) Total Results in the segment from the perspective of Property & Building Corporation Attributable to the owners of Property & Building Corporation Attributable to noncontrolling interests Total segmental results ,040 Unattributed expenses 110 Operating profit Attributable to the owners of Property & Building Corporation Attributable to noncontrolling interests Total operating profit 930 Financing expenses, net (385) Taxes on income (62) Total net income (loss) 483 Of which - attributable to the owners of Property & Building Corporation 263 Attributed to non-controlling interests 220 Total net income (loss) 483 Segmental assets from the perspective of Property & Building 7,872 3, ,861 Investments in investee companies ,072 1,283 Liabilities in the segment from the perspective of Property & Building Corporation 4,024 1, ,

58 For the year ended December 31, 2015 (NIS millions) Revenuegenerating properties in Israel Revenuegenerating properties in the United States Residential construction in Israel Agriculture Others Consolidated Total revenues From externals ,034 Increase in the fair value of investment property Share of Property & Building in the profits (losses) of associate companies (28) (26) Total (28) 1,402 Total attributed costs External costs (*) Total Results in the segment from the perspective of Property & Building Corporation Attributable to the owners of Property & Building Corporation (28) 823 Attributable to noncontrolling interests Total segmental results (28) 1,010 Unattributed expenses (118) Operating profit Attributable to the owners of Property & Building Corporation Attributable to noncontrolling interests Total operating profit 892 Financing expenses, net (351) Taxes on income (210) Total net income (loss) 331 Of which - attributable to the owners of Property & Building Corporation 188 Attributed to non-controlling interests 143 Total net income (loss) 331 Segmental assets from the perspective of Property & Building 7,397 3, ,415 Investments in investee companies ,063 Liabilities in the segment from the perspective of Property & Building Corporation 3,639 1, ,

59 For the year ended December 31, 2014 (NIS millions) Revenuegenerating properties in Israel Revenuegenerating properties in the United States Residential construction in Israel Agriculture Others Consolidated Total revenues From externals ,053 Increase in the fair value of investment property From the realization of investments, fixed assets and investment property (30) (30) Share of Property & Building in the profits (losses) of associate companies (2) (64) (66) Total (2) (94) 1,388 Total attributed costs External costs (*) Total Results in the segment from the perspective of Property & Building Corporation Attributable to the owners of Property & Building Corporation (2) (94) 744 Attributable to noncontrolling interests Total segmental results (2) (94) 902 Unattributed expenses (90) Operating profit Attributable to the owners of Property & Building Corporation Attributable to noncontrolling interests 143 Total operating profit 812 Financing expenses, net (385) Taxes on income (163) Total net income (loss) 264 Of which - attributable to the owners of Property & Building Corporation 146 Attributed to non-controlling interests 118 Total net income (loss) 264 Segmental assets from the perspective of Property & Building Corporation 6,888 2, ,634 Investments in investee companies ,104 Liabilities in the segment from the perspective of Property & Building Corporation 3,908 1, ,107 (*) Total attributed costs, including costs and expenses which are attributable to a specific operating segment, and which constitute variable costs only. 669

60 57 Presented below are data regarding IDB Development s share in profit from operating activities (operating profit) from the operating segment of Property & Building and projects in Las Vegas (NIS millions) (these data were calculated according to the holding rates at the end of each of the aforementioned years): Attributable to the owners of IDB Development Attributable to non-controlling interests For an analysis of the results of operations of Property & Building and projects in Las Vegas, see section of the Board of Directors Report General environment, impact of external factors and restriction and supervision of Property & Building Property & Building Corporation is indirectly controlled by IDB Development. For details in connection with the current situation of IDB Development, including the status of the control thereof, and its implications on IDB Development, see section 3.2 of this part. It is noted that Property & Building has shared projects in Las Vegas with IDB Development, as specified in sections and of this part Activities in Israel As a corporation engaged in the real estate segment in Israel, including its various branches, Property & Building is affected by changes in the state of the economy in general, and by the real estate branch in particular. Presented below are details regarding the main factors which affect the aforementioned position State of the economy was characterized by improvement in the economic parameters in Israel, alongside an increase in growth to a level of approximately 4.0% (as compared with approximately 2.5% in 2015), and very low unemployment of approximately 4.3% (as compared with approximately 5.3% in 2015). growth per capita amounted in 2016 to approximately 2.3%. at the end of December 2016, the Bank of Israel updated the macro-economic forecast, according to which the expected growth in 2017 and in 2018 is expected to amount to approximately 3.2% and 3.1%, respectively. Additionally, the Bank of Israel predicts a continued low unemployment rate of approximately 4.6%. Israel is significantly affected by developments in the global economy. Real global activity continued to be moderate in Property & Building Corporation estimates that its financial stability and the status of its properties, cash balances and significant operating cash flows which it generates will allow it to deal adequately with the possible continuation of the economic crisis, and to continue financing its activities and service its liabilities The real estate branch in Israel. The growth rates and scope of activities in the Israeli economy are among the most influential factors on the scopes of demand for rental areas and for residential units in Israel Revenue-generating real estate segment was characterized by continued stability in the revenue-generating real estate branch, which is reflected both on the level of demand and on the level of rental prices and occupancy rates. during the reporting period, demand for office, commercial, industry and logistics areas was evident in most operating areas of Property & Building in Israel, which were reflected in the stability of prices and maintenance of a high occupancy rate of approximately 97% Residential construction segment. 31 In 2016, stability was apparent in the demand for residential apartments in Israel, although in the months October to December of 2016, relatively low numbers of transactions were recorded, in light of the decrease in acquisitions on the part of investors. in 2016, approximately 29 thousand new apartments were sold (through private and public initiative), a decrease of approximately 5% relative to , a year in which approximately 31 thousand units were sold, was a record year in terms of apartment sales in the market, and the level of sales in 2016 is still higher than the level in the years In 2016, an increase was apparent in the mortgage interest rate, which amounted to approximately 3.8% per year (CPI-linked) at the end of 2016, as compared with approximately 2.6% at the end of The inventory of new apartments in the market (through private and public initiative) amounted, in November 2016, to approximately 31 thousand residential units, as compared with approximately 28 thousand residential units at the end of The capital market. In the capital market, the securities of Property & Building are subject to fluctuations, due to the impact of economic and political factors, in Israel and around the world, including fluctuations in the prices of securities which are traded on the stock exchange, including the prices of corporate debentures, and the scope of the public s activities in the capital market. These fluctuations may also affect Property & Building and the possibilities 30 Based, inter alia, on published data by the Bank of Israel at boi.org.il, by the Central Bureau of Statistics at and by the Ministry of Finance at 31 Based on published data by the Central Bureau of Statistics at the Real Estate Appraisers Association in Israel at the Bank of Israel at and the Ministry of Construction & Housing at

61 58 which are available to it to raise financing, and indirectly, on the acquisition of properties, the performance of investments and its business results Executing contractors for construction works. Property & Building engages with contractors for the purpose of performing construction works of the projects which it initiates, both in the revenue-generating real estate segment and in the residential construction segment. in 2016, several contractors in Israel encountered economic difficulties, and some also reached insolvency, stay of proceedings, etc. The economic position of construction contractors in Israel has a direct effect on the real estate segment, both in terms of construction prices, and in terms of fulfillment of timetables. The discontinuation of the activities of skeleton contractors causes, and may continue to cause in the future, a reduction in the scope of contractors in Israel, an increase in construction prices, and an increase in rental and housing prices Availability of workforce. In 2016, the shortage of workforce in the construction segment continued, a branch in which a significant part of workers are foreign workers (including from the Judea and Samaria region).currently, only about 8,200 foreign workers work in the construction segment, through manpower corporations. The security situation in Israel, as well as the closure which is sometimes imposed in the areas of Judea and Samaria, have also resulted in an ongoing shortage in this workforce, and in 2016, a small number of foreign workers from Judea and Samaria worked in the branch. It is noted that, in 2015, a government decision was reached to increase the recruitment quota to approximately 20 thousand foreign workers by the end of 2016, in order to advance a solution for the housing crisis, although this government decision has not yet been implemented. In light of the intensification of the shortage in skilled workforce, the work wages of workers in the construction segment in general, and of the foreign workers in the construction segment in particular, increased. The shortage and unavailability of skilled workforce affects construction costs and extends the timetables for the performance of projects Hi-tech industries. In 2016, lively demand was seen among hi-tech companies in the high demand areas where Property & Building operates (such as the Matam's parks in Haifa, Herzliya and Beer-Sheva), with demand existing both for new areas and for the expansion of existing areas Market concentration. For details regarding the Concentration Law, see section 7.2 of this part. in consideration of the holding structure of the IDB Group, on the publication date of the Concentration Law, Property & Building Corporation was considered a third tier company. the provisions of the Concentration Law (as applicable), also with respect to the companies Gav-Yam, Ispro and Mehadrin, which are under the control of Property & Building Corporation, which are considered tier companies. So long as Property & Building Corporation is considered, in accordance with the Concentration Law, a third tier company, it is entitled to continue holding control of reporting corporations which are under its control on the publication date in the Official Gazette of the Concentration Law (i.e., Gav-Yam, Ispro and Mehadrin), until the end of four years after the publication date (i.e., until December 10, 2017). DIC is currently considered a second tier company, which is entitled to continue holding control of Property & Building Corporation until the end of six years after the publication date of the Concentration Law (i.e., until December 10, 2019). Provisions were established in the Concentration Law regarding the case of control of a reporting corporation in breach of the law, which primarily involves depositing the aforementioned means of control with a trustee, for the purpose of selling them in accordance with the instructions which the trustee received from the Court. so long as a company is considered, by law, a third or greater tier company, its Board of Directors is required to include independent directors in a number which constitutes a majority among the Board members, and the number of its outside directors must constitute at least half of the number of Board members, less one, rounded upwards, and no less than two outside directors. The provisions of this section will also apply to the reporting corporations which are under the control of Property & Building Corporation. The structure of the Board of Directors of Property & Building Corporation and the boards of directors of reporting corporations which are under its control is in accordance with the provisions of the Concentration Law (see Note 3.G.3 to the Financial Statements). DIC and IDB Development are evaluating several alternatives on all matters associated with the reduction of the number of tiers in the IDB Group, with the intention of allowing DIC to continue holding control of reporting corporations which are under its control also after December 2019, and are also evaluating alternatives for dealing with the provisions of the Concentration Law with respect to the law s requirement for As IDB Development was informed, in parallel with the evaluation which is being performed by IDB Development and by DIC regarding their fulfillment of the provisions of the Concentration Law, Property & Building Corporation is also evaluating the implications of the law with respect to the reporting companies which are under its control (i.e., Gav- Yam, Ispro and Mehadrin), with the aim of maintaining the control thereof. Insofar as any of the alternatives which are being evaluated by IDB Development and DIC in connection with the requirements of the law for 2017, Property & Building Corporation may become a second tier company, which would allow it to defer the solution for the concentration issue with respect to the reporting companies which are under its control by an additional two years, until December In parallel, further to the decision of the Board of Directors of Property & Building Corporation, the audit committee of Property & Building Corporation is evaluating the various alternatives which are available to Property & Building Corporation for solving the concentration issue by December 2017, in order to present its recommendations to the company s Board of Directors, within a period of time, in order to allow the achievement of this goal. According to the assessment of Property & Building Corporation, it will retain the control of the aforementioned companies, and therefore the implications of the Concentration Law have no effect on the Financial Statements of Property & Building Corporation as of December 31, However, Property & Building

62 59 Corporation is unable to assess with certainty the dates and scopes of the various actions which it may be required to perform in connection with the implementation of the Concentration Law. The reference presented above with respect to the preparations of Property & Building Corporation for the implementation of the Concentration Law constitutes forward looking information, which is not necessarily under the control of Property & Building Corporation, and which is uncertain, and may not materialize Monetary policy and money market 1) Fluctuations in the Index and in the basic market interest rate - Property & Building finances most of its business activities in Israel through loans linked to the consumer price index. Most of Property & Building s rental revenues are linked to the Index. Accordingly, Property & Building is affected by changes in the index and in the market interest rate. in 2016, the Index (based on the known index decreased by approximately 0.3%, as compared with a decrease of approximately 0.9% in Additionally, in light of the economic crisis in the West, the Bank of Israel adopted a policy of maintaining a low basic market interest rate, which remained at 0.1% for the entire year. 32 Property & Building considers its investment property in Israel as a long term economic hedge against its index-linked financial liabilities, for the reason that the fair value of the investment property is derived, inter alia, from its CPI-linked rent. 2) Fluctuations in the construction input price index - the engagements of Property & Building with the building contractors during the construction stages of the projects, as well as most of the agreements for the sale of residential units, are prepared in NIS amounts which are linked to the construction input price index. in 2016, the construction input price index increased by approximately 1.3%, as compared with 0.9% in changes in the construction input price index also affect the cost of works under construction of Property & Building in connection with the construction of revenue-generating properties. 3) Fluctuations in foreign currency (based on, inter alia, data of the Bank of Israel) - Property & Building is exposed to currency risk due to its foreign investing activities, the financing of those investments, as well as the operating activities with respect to those investments. Additionally, in light of the fact that some of the customers of Property & Building in Israel are international companies, which manage their activities in USD. The revaluation of the USD vs. the NIS results in increased rent in USD terms, and therefore, insofar as such changes occur in the USD exchange rate vs. the NIS, pressure may be created on international lessees to reduce the NIS rent accordingly. Additionally, changes in the USD exchange rate have a certain effect on inflation in Israel. 4) Bank financing terms - in 2016, the directives of the Bank of Israel remained in effect which restrict the banks in Israel regarding the provision of credit to the construction segment, as follows: The requirement of the Bank of Israel for banks to increase capital adequacy (the ratio between the bank s regulatory capital and the total credit which it provides), and the restriction according to which the banks were required to limit the credit which they provide to each operating branch, including to the real estate branch, to a rate of up to 20% of their credit portfolio, restricts the banks in Israel regarding the provision of credit to the branch. in 2016, the entities in the real estate branch continued expanding the financing sources for raising debt, primarily through the institutional market. Property & Building Corporation and its subsidiaries issued, in 2016, debentures (Series H and I) for a total consideration of approximately NIS 1.5 billion. For details regarding such issuances, see Note 14.A and Note 14.F.3 to the Financial Statements. Property & Building Corporation endeavors to defend itself against the majority of financial risks which were specified above, through various means, inter alia, through matching the linkage bases of expenses to those of revenues (take into account the average lifetime of the aforementioned expenses and revenues), and by diversifying the financing sources and credit types. The Company evaluates, on a routine basis, the credit terms in various alternatives, and the estimates regarding projected changes in inflation rates and the market interest rate. The policy of Property & Building Corporation on the matter, as of proximate to the publication date of the report, is to protect itself against economic exposure; however, the Board of Directors of Property & Building Corporation, from time to time, upon changes in circumstances, or in its discretion, may change this policy Laws, regulations and ordinances. Similarly to other companies which are engaged in the operating segments of Property & Building, Property & Building is subject to statutory restrictions which pertain to planning and construction of the projects which it performs, including planning and construction laws, regulations regarding safety at work and quality, terms of lease contracts, and directives of the Israel Land Administration. Approximately 90% of the land in Israel is owned by the Government of Israel through the Israel Land Administration, and a large part of the land, on which Property & Building operates, is leased from it through long term leases. therefore, the rights to the Land and the transactions in connection therewith are subject to provisions of the contracts and provisions in connection with changes in the designation and use of the rights to the land. Property & Building may 32 The data is based, inter alia, on the publications of the Bank of Israel at:

63 60 also bear various payments to the administration, such as permit fees, consent fees, lease fees and capitalization fees. The provisions of this section 10.7, with respect to Property & Building s general operating environment, and the external factors which affect its business activities and results, include forward looking information, as defined in the Securities Law, and is based on the estimates and assessments of Property & Building Corporation (in consideration of past experience) and on publications and surveys of professional entities in connection with the state of the Israeli economy and the real estate branch, and the state of the economy in countries where Property & Building is active. The data presented in this section constitute estimates only, and may be incomplete; however, according to the assessment of Property & Building Corporation, they provide a general, though incomplete, picture of the markets in which it is engaged, in its various operating segments. Accordingly, actual results may differ significantly, positively or negatively, from the aforementioned assessments, if changes occur to one or more of the factors which were taken into account in preparing these assessments, or due to the materialization of any of the risk factors specified in section of this part. The extent of impact of the factors specified below on Property & Building, if any, is dependent, inter alia, on the intensity of the events, the duration of their occurrence, and the ability of Property & Building to deal with them Foreign operations State of the economy and financing terms in Property & Building s countries of operation. In 2016, Property & Building continued operating in its primary operating segments in the United States and India State of the economy abroad. According to surveys of the Ministry of Finance, the Bank of Israel and the International Monetary Fund, in 2016 the global economy was characterized by decelerated growth and global trade, in light of the weakness in developed markets and the deceleration in leading developing countries, weak demands, low commodities prices, and high volatility in capital markets. The elections in the United States towards the end of 2016 resulted in administration change in early The economic impact is expected to be reflected in an expansive fiscal policy and changes in the United States trade relationships. American GDP grew by 1.6% in 2016, and is expected to grow by 2.2% in The unemployment rate in the United States continues to fall, and reached a level of 4.7%. The employment report in the United States for December 2016 demonstrated that it was the sixth straight year when over two million new jobs were added to the American economy, and there are many indicators signaling that the economy is nearing full employment. These figures support the acceleration of the interest rate increase plan in the United States. in 2016, 2 interest rate increases of 0.25% were implemented by the American Federal Reserve, for the first time since The Fed s most recent forecast update for 2017 expects 3 additional interest rate increases, beyond the increase which was performed in March The economy of the European Union underwent many storms this year. The geopolitical instability, and the continued refugee crisis, resulted in a low growth rate. The International Monetary Fund predicts that growth in the next three years will amount to 1.6%-1.7% per year. A significant change in political direction was seen mid-year, when Great Britain voted in favor of leaving the European Union (Brexit). The process increased regional instability, and led, in the short term, to devaluation of the EUR and declines in capital markets, as well as a significant weakening of European currency. Despite the pessimistic forecasts, it is clear that the decision of the British people has not yet significantly affected the economy of Great Britain, which grew in the third quarter of 2016 at a faster rate than the average growth in the EU, and was even the fastest growth rate among the large countries in the EU. The European economy is exposed to additional political risks, such as the instability of the banking system, primarily in light of the recent events involving the resignation of the government in Italy, and the increased tension associated with the relief plan for Greece. In summary, the weakness which was recorded in 2016 on the part of the developing countries and most European countries decreased global growth. The global growth forecast for 2017 is 3.4%, due to concerns regarding increased barriers to global trade, led by the United States, and the process of increasing the interest rate in the United States, which endanger the recovery in some emerging markets. However, in 2016, stock exchanges around the world saw price increases, which reflected the forecast of stability in the markets. 33 The data are based, inter alia, on the data which were published by the Bank of Israel, by the International Monetary Fund, by the Bureau of economic analysis at by the Eurostat, the statistical office of the European Union, at and by the Central Bank of India, at

64 Real estate markets in which Property & Building is engaged. 1) United States 34 - In 2016, the increased activity in the revenue-generating real estate in Manhattan continued. The scope of real estate transactions in Manhattan amounted in 2016 to approximately USD 42 billion, the second highest amount in the last 5 years, which were record years in the history of transactions in Manhattan. The occupancy rate amounted at the end of 2016 to approximately 90%, similarly to the end of Rent increased by approximately 1.2% relative to last year, and amounted to USD 81.2 per square foot. In highquality properties, returns at the end of 2016 reached a level of approximately 4.2% (as compared with 3.8% in 2015). The increased rates of return, based on transactions which were performed in the last quarter of 2016, were due to several factors, inter alia, the multiplicity of transactions involving the partial sale of ownership, complex financial transactions and the sale of Class A properties of lower quality. In Las Vegas, the macroeconomic data improved in The number of visitors to the city amounted in 2016 to approximately 42.9 million people (an increase of approximately 1.5% relative to 2015), and the unemployment rate decreased to 5% (as compared with 6.2% in 2015). 2) India - In 2016, many economic reforms were implemented in India. The most prominent of these involved fighting black capital. In November 2016, the government surprisingly announced the removal of bills from circulation, and replacement with new bills. The step created chaos for several weeks, but is expected to increase transparency over the long term. In parallel, laws were enacted against the acquisition of real estate properties in the name of another person. These steps led to a significant deceleration in many segments, including the real estate segment, in the fourth quarter of Additional reforms pertain to taxes, affordable housing, liberalization and foreign investments. The Indian economy continues to present one of the highest growth rates in the world. In 2016, India s GDP grew at a rate of 6.6%, as compared with 7.6% in In 2017, the GDP of India is expected to grow by 7.2% Additional factors. The activities of Property & Building outside of Israel are affected by fluctuations in demand in the real estate markets of those countries, exposure to interest rates in those markets, and exposure to changes in foreign currency. Property & Building is taking steps to reduce these exposures, including the creation of a managerial infrastructure in the target countries, and the receipt of financing in the local currency of those countries. The financing of Property & Building s business activities abroad (beyond the self resources which are invested by Property & Building Corporation) is implemented through large local financial institutions, and in the relevant local currency. In the foreign revenue-generating properties segment, the loans are long term, and the property generally serves as the only security to finance its acquisition (without right of recourse to the borrower) Laws, regulations and ordinances. The activity of Property & Building in the foreign revenue-generating properties and residential construction segment is subject to the laws and regulations of the various countries in which it operates, including laws and regulations with respect to the initiation and construction of real estate properties in those countries Revenue-generating properties segment Property & Building is engaged in the initiation, planning, development, construction (through contractors), rental and management, acquisition and sale of revenue-generating properties in all areas of Israel. The revenue-generating properties of Property & Building in Israel, including land reserves which are intended for construction in the future, are mostly located in high demand areas throughout the country. Additionally, as of proximate to the publication date of the report, Property & Building holds revenue-generating properties abroad, including, inter alia, the HSBC Tower in New York, a commercial and office project in Las Vegas, hotels in Great Britain, and lands on which is planned the construction of residential apartments, commerce and logistics projects in India, in accordance with the demand and the financing possibilities. Property & Building operates in the foreign revenue-generating properties segment through its managerial staff, which operates with the assistance of local management companies Structure of the segment Property & Building has extensive activities in the revenue-generating properties segment in Israel and in the United States, within the framework of two operating segments which are reported as separate operating segments of Property & Building Corporation - the revenue-generating properties segment in Israel, and the revenue-generating properties segment in the United States. As of December 31, 2016, Property & Building owns areas intended for rent, in Israel, at a scope of approximately 1,160 thousand square meters 36 (as compared with approximately 1,110 thousand square meters as of December 31, 2015), revenue-generating properties in the United States - the HSBC Tower in New York with an area of approximately 80 thousand square meters, and the Tivoli project in Las Vegas, with an area of approximately 31 thousand square meters (the share of Property & Building), as well as land reserves with associated building rights at a scope of approximately 655 thousand square meters, which are intended for the 34 Based on New York Quarterly Snapshot Q4 2016, which was published by Jones Lang Lasalle. 35 Based on published data on the website of the International Monetary Fund at 36 The aforementioned area includes the area of an associate company of Property & Building Corporation, at a scope of approximately 26 thousand square meters in Israel, of which, the share of Property & Building is approximately 13 thousand square meters.

65 62 construction of revenue-generating properties in Israel, most of which include approved rights in accordance with the relevant zoning plan. The construction on these lands will be performed in accordance with demand. The revenue-generating areas of Property & Building in Israel and in the United States are used for various uses, of which the primary ones are as follows: Areas rented for the use of offices and high tech industries ( Office and Hi-Tech Uses ). The areas of Property & Building which are leased for Office and Hi-Tech Uses in Israel are divided into two main types: Business parks and office buildings for hi-tech industries - Property & Building has expertise in the provision of solutions for the special requirements of this industry, and builds designated buildings which are adjusted to the needs of the lessees, and also provides management services for those buildings. Office buildings - The office buildings of Property & Building are located in high demand areas, and most are leased, at high occupancy rates, to lessees which are mostly large, stable companies, some international, generally for long lease periods. Areas for office use are characterized by areas used as parking lots, which constitute an inseparable part of the buildings. In the foreign activities of Property & Building, the main property for office use is the HSBC Tower on Fifth Avenue in New York Areas rented for industry, workshop, logistics and storage uses ( Industry and Logistics Uses ). Areas for Industry and Logistics Uses in Israel are characterized by areas with a large single space, service yards and large operational areas. In light of the rent which can be collected for areas of this kind, which is relatively low, and the fact that their construction generally requires construction on large areas of land, Property & Building concentrates, as do other companies operating in the segment, most of its industrial areas in periphery areas and in areas located close to airports and seaports. The turnover rate of lessees in areas for industrial use is low, and a significant part of the industrial areas of Property & Building are leased to lessees who have been using the same areas for many years Shopping malls, commercial centers and recreational areas ( Uses for Commercial and Recreational Centers ). Property & Building s areas which are leased to commercial and recreational centers in Israel include commercial centers, Power Center areas, which are located in central areas or areas near major junctions at highways from major cities, conference centers and recreational centers. The areas of Property & Building which are rented for commercial purposes abroad primarily include its share in the Tivoli project in Las Vegas Associated services in the revenue-generating properties segment in Israel. Property & Building also provides management and maintenance services, primarily to lessees in areas which are used for office and commercial purposes Geographical distribution For the purpose of the annual report, Property & Building divides its properties into two main regions - Israel and the United States, and five sub-regions: in Israel - North, Center and South; in the United States - Northeast and West. According to the assessment of Property & Building Corporation, the difference between the regions in Israel is primarily due the fact that, in Central Israel, rent is significantly higher than the average rent in Northern and Southern Israel. For additional details, see section of this part. The common uses in Central and Northern Israel are offices, hi-tech and commerce, while in Southern Israel most properties are used for logistics and industry, as well as commerce. In the United States, the properties of Property & Building are located in various states, with different economic characteristics. According to the assessment of Property & Building Corporation, the difference between the regions in the United States is primarily due to the fact that the average rent in the Northeast United States is significantly higher than the average rent in Western United States (for additional details, see section of this part), primarily due to the different locations and uses (luxury office and commercial buildings in the Northeastern United States, as compared with commercial centers in occupancy and positioning processes in Western United States), as well as the location of the properties (the centers of large cities such as New York in the Northeastern United States, as compared with their locations in residential neighborhoods in the Western United States). However, even within each region (both in Israel and in the United States), there are differences between the various sites, as well as difference, in some cases, between the various properties in each site, due to the type of property, the different designation of each property, the age of the property, its physical condition, etc.

66 Mix of lessees The revenue-generating properties segment is characterized by a wide variety of customers, including large and small companies and business customers, as well as private customers. Property & Building engages with its customers mostly through medium and longer term rental contracts, and in general, rental contracts in Israel involve unprotected leases, and rent linked to the consumer price index. The policy of Property & Building is to engage, as much as possible, in long term contracts with high-quality lessees. The agreements with respect to areas which are built according to the designated construction method in Israel are characterized by buildings which are adapted to the specific requirements of the designated customer. In light of the relatively significant initial investment in the property, and the adjustment thereof to the lessee s specific needs, rental agreements for buildings of this kind are signed for long periods, and generally include options for the lessee to extend the lease period. Additionally, some of the Group s lessees perform, at their own expense, works in the areas of the leased properties, and adapt them to their needs. According to the assessment of Property & Building Corporation, these investments may lessen the profitability of lessees in transferring to other areas. Property & Building has no major lessee whose rent paid in 2016 constituted 10% or more of the total income in the consolidated financial statements of Property & Building Corporation Acquisition and realization policy Property & Building has no fixed policy with respect to acquisition and realization, and each case is evaluated independently, on its own merits, in light of the business opportunity and its inherent potential. Property & Building works to identify business opportunities with future betterment potential in the revenuegenerating properties segment in Israel and abroad, while initiating projects on lands which it owns, and realizing land reserves and existing revenue-generating properties which do not constitute strategic properties for Property & Building, and which have exhausted, according to the assessment of Property & Building Corporation, their betterment potential Critical success factors in the segment Property & Building estimates that the factors specified below are the main success factors in connection with its activities in Israel in this segment, which have contributed to the business results of Property & Building Corporation, and have a positive impact: (1) Broad distribution and location of sites in high-demand areas throughout the country for offices, hi-tech, commerce and industry: (2) Financial stability, which allows providing an immediate response to attractive business opportunities; (3) Significant accessibility to the capital market, both banking and extra-banking, in order to allow the raising of financing sources for the performance of investments; (4) Reputation and accumulated knowledge regarding the construction of high-quality properties, and significant experience in the provision of high quality maintenance services; (5) Reputation and knowledge regarding the construction and management of commercial areas; (6) Expertise in the construction of properties adapted to the needs of the lessee, regarding which Property & Building Corporation has engaged in rental contracts in advance; (7) Customer service and stable ongoing relationships with strategic lessees; (8) Operation of an effective collection unit; and (9) Strict adherence to its scope of management and operation costs. Property & Building estimates that the main success factors in this segment in the United States are similar in nature to those which contribute to its success in Israel, as described above, and include the following factors: (1) An indepth understanding of the commercial real estate market in major city centers (primarily Manhattan), including the key entities in the market (agents, investment banks and professional consultants); (2) Exposure to business opportunities in the target markets, and identification of revenue-generating properties which are leased for long periods to lessees with significant financial stability; (3) Establishment of a professional and skilled staff to work in the target countries; and (4) Financial stability which allows the provision of an immediate response to attractive business opportunities, and accessibility of financing sources and convenient financing terms, in order to allow the receipt of surplus rent returns, relative to the financing cost.

67 Competition structure in the segment The revenue-generating real estate market is a multi-participant market which is characterized by the highest level of competition, in which each property owner, large or small, which offers their property for rent, is also competing against the activities of Property & Building. In light of the above, the number of competitors in the aforementioned segment is large, and Property & Building is unable to estimate its market share. The competition in the revenue-generating properties segment mainly involves: (1) The geographical location of the properties and the level of demand for rental areas in that area; (2) The amount of rent, the quality of buildings and maintenance costs; (3) The construction quality of the leased buildings; (4) The level of associated services; and (5) The reputation of the lessors. As of proximate to the publication date of the report, Property & Building competes, within the framework of its activities in this segment, in addition to the companies which are engaged in its segment, also against institutional entities which invest in real estate in Israel and around the world. The competition in the branch takes place between the entrepreneurs from the stage of identifying the land for initiation purposes, through the development and construction of the properties, to the process of acquiring new revenue-generating properties Summary of Property & Building s results of operations Parameter For the year ended NIS millions Total income from activity 826 (consolidated 37 ) Revaluated profits 339 (consolidated) Operating profits (consolidated) 1,004 1,025 1,006 Same property NOI 38 in the last 636 two reporting periods (consolidated) Same Property NOI in the last 466 two reporting periods (Corporation s Share 39 ) Total NOI (consolidated) Total NOI (Corporation s 482 Share) Consolidated means the share of Property & Building in accordance with its consolidated financial statements (hereinafter: Consolidated ). 38 NOI Net Operating Income. With respect to revenue-generating properties: all operating income which was recorded in the financial statements of Property & Building Corporation with respect to the property (excluding income due to the charging of changes in fair value to the statement of income), after deducting all operating expenses which were recorded in the financial statements of Property & Building Corporation with respect to the property, excluding depreciation expenses (if any). With respect to the operating segment: the NOI amount of all properties in the operating segment (as the term property is defined in the proposed draft amendment to the Securities Regulations (Details, Structure and Form of Prospectus and Draft Prospectus), , for establishing directive regarding disclosure with respect to investment property activity. 39 Corporation s share means the share of Property & Building, in accordance with its consolidated financial statements, after deducting the share of non-controlling interests (hereinafter: the Corporation s Share ).

68 Segments Segmentation of Property & Building s income-generating real estate areas by regions and uses Commercial and Parking lots and Percent of total area of Offices and hi-tech Industry and logistics Total Uses recreational centers service areas the properties Areas In thousands of square meters Consoli ,146 1,093 91% 85% dated Total Israel Total USA Total Perce nt of total Area of the prope rties The Corpora tion s Share Consoli dated The Corpora tion s Share Consoli dated The Corpora tion s Share Consoli dated The Corpora tion s Share % 78% % 15% % 22% ,257 1, % 100% % 100% 36% 35% 25% 30% 17% 13% 22% 22% 100% 100% 31% 31% 26% 34% 23% 15% 20% 20% 100% 100% Segmentation of fair value of Property & Building s revenue-generating real estate by regions and uses 40 Property & Building presents its investments in companies under joint control ( Joint Ventures ) according to the equity method. The data presented in this section also includes the share of Property & Building Corporation in the relevant parameters of the Joint Ventures revenue-generating properties.

69 Areas Total Israel Total USA (*) Total (NIS millions) Percent of total asset value Uses Consolid ated The Corporat ion s Share Consolid ated The Corporat ion s Share Consolid ated The Corporat ion s Share Consolid ated The Corporat ion s Share Offices and hi-tech Industry and logistics 66 Commercial and recreational centers Parking lots and service areas Total Percent of total area of the properties (*) (*) NIS / USD millions, according to the operating area (Israel / USA) 3,581 3,392 1,303 1,171 1,989 1, ,395 6,734 64% 65% 1,619 1, ,770 1, ,453 4,524 52% 56% , - 1, % 35% , - 1, % 44% 6,869 6,600 1,303 1,371 2,764 1, ,458 10, % 100% 4,908 5, ,059 2,545 1, ,517 8, % 100% 60% 63% 11% 13% 24% 19% 5% 5% 100% 100% 58% 62% 9% 13% 30% 21% 3% 4% 100% 100% (*) The financial data presented in USD in this section is included in the total data of Property & Building Corporation, in NIS, as translated for the purpose of including it in the consolidated financial statements of Property & Building Corporation. The data presented in percent in this section, which is attributed to the aforementioned financial data in USD, was calculated in accordance with amounts translated into NIS.

70 Segmentation of Property & Building s NOI (actual) by regions and uses Areas Total Israel Total USA (*) Total (NIS millions) Percent of total NOI of assets (*) Uses Consolidate d The Corporation s Share Consolidate d The Corporation s Share Consolidate d The Corporation s Share Consolidate d The Corporation s Share Offices and hi-tech Industry and logistics Commercial and recreational centers Parking lots and service areas Total Percent of total NOI in the properties (*) For the year ended For the year ended For the year ended For the year ended For the year ended For the year ended NIS / USD millions, according to the operating area (Israel / USA) % 77% 78% % 69% 71% % 23% 22% % 31% 29% % 100% 100% % 100% 100% 60% 57% 54% 15% 17% 18% 18% 19% 22% 7% 7% 6% 100% 100% 100% 57% 54% 50% 15% 18% 18% 23% 23% 27% 5% 5% 5% 100% 100% 100% (*) The financial data presented in USD in this section is included in the total data of Property & Building Corporation, in NIS, as translated for the purpose of including them in the consolidated financial statements of Property & Building Corporation. The data presented in percent in the section, which is attributed to the aforementioned financial data in USD, was calculated in accordance with amounts translated into NIS. (**) The data presented above reflects, as stated above, actual NOI. For the purpose of calculating the representative return in the following table, Property & Building performed several adjustments, in order for the data to represent Property & Building s representative NOI at the end of the year. The tables presented below indicate representative NOI after the aforementioned adjustments.

71 Segmentation of Property & Building s representative NOI by regions and uses Areas Total Israel Total USA (*) Total (NIS millions) Percent of total NOI of assets (*) Uses Consolidate d The Corporation s Share Consolidate d The Corporation s Share Consolidate d The Corporation s Share Consolidate d The Corporation s Share Offices and hi-tech Industry and logistics Commercial and recreational centers Parking lots and service areas Total 68 Percent of total NOI in the properties (*) For the year ended For the year ended For the year ended For the year ended For the year ended For the year ended NIS / USD millions, according to the operating area (Israel / USA) % 66% 64% % 55% 54% % 34% 36% % 45% 46% % 100% 100% % 100% 100% 60% 62% 60% 12% 14% 15% 22% 18% 20% 6% 6% 5% 100% 100% 100% 60% 61% 58% 10% 14% 14% 26% 21% 24% 4% 4% 4% 100% 100% 100% (*) The financial data presented in USD in this section is included in the total data of Property & Building Corporation, in NIS, as translated for the purpose of including it in the consolidated financial statements of Property & Building Corporation. The data presented in percent in this section, which is attributed to the aforementioned financial data in USD, was calculated in accordance with amounts translated into NIS.

72 Segmentation of the revaluation profit (loss) of Property & Building by regions and uses Areas Total Israel Total USA (*) Total (NIS millions) Percent of total Revaluation profits (*) Uses Consoli dated The Corporat ion s Share Consoli dated The Corporat ion s Share Consoli dated The Corporat ion s Share Consoli dated The Corporat ion s Share Offices and hi-tech Industry and logistics Commercial and recreational centers Parking lots and service areas Total 69 percent of total revaluation profit or loss (*) For the year ended For the year ended For the year ended For the year ended For the year ended For the year ended NIS / USD millions, according to the operating area (Israel / USA) % 54% 41% % 42% 31% (6) (8) (11) % 46% 59% (6) (8) (11) % 58% 69% (13) (5) % 100% 100% (2) (18) (9) % 100% 100% 84% 87% 90% 10% 8% 8% 4% (3%) (1%) 2% 8% 3% 100% 100% 100% 87% 93% 94% 11% 8% 7% (1%) (6%) (3%) 3% 5% 2% 100% 100% 100% (*) The financial data presented in USD in this section is included in the total data of Property & Building Corporation, in NIS, as translated for the purpose of including it in the consolidated financial statements of Property & Building Corporation. The data presented in percent in this section, which is attributed to the aforementioned financial data in USD, was calculated in accordance with amounts translated into NIS.

73 Segmentation of Property & Building s average actual rent per square meter in the commercial currency (*) Uses Offices Industry Trading Parking lots For the year ended For the year ended For the year ended For the year ended Areas Israel - North (in NIS) Israel - North: Range Israel - Center (in NIS) Israel - Center: Range Israel - South (in NIS) Israel - South: Range USA - Northeast (in USD) USA - West (in USD) (*) The broad range in rental prices in all regions and for all uses is due to the variability in the quality of the leased property, its ages, the finishing level of the various properties, and additional parameters which are not reflected in this table Segmentation of Property & Building s average occupancy rates by regions and uses (in percent) Uses Offices Industry Trading Areas As of December As of December As of December For 2016 For 2015 For 2016 For , , , 2016 For 2016 For 2015 Israel - North Israel - Center Israel - South USA - Northeast USA - West

74 Segmentation of the number of Property & Building s revenue-generating buildings by regions and uses Uses Areas 71 Offices Industry Trading Parking lots Total number of revenuegenerating properties As of Israel - North Israel - Center Israel - South USA - Northeast USA - West Total number of revenuegenerating buildings: Segmentation of Property & Building s average actual rates of return (according to value at year end) by regions and uses (in percent) Uses Offices Industry Trading Areas Israel - North Israel - Center Israel - South USA - Northeast USA - West The data presented above reflects the returns which are obtained from the distribution of actual NOI in a certain year, by the property value at year end. The data regarding returns which are obtained by the aforementioned calculation does not take into account various effects, such as properties which have been completed and occupied during the period, and expected revenues with respect to available areas. Accordingly, presented below is information regarding the rates of return which would have been received after several adjustments to NOI ( Representative Rate of Return ). The adjustments which were performed to the Representative Rate of Return are as follows: (1) Annual representation of the revenues with respect to properties which began generating revenue during the reporting years; (2) Revenue additions with respect to available properties; (3) Reduction of NOI for properties which were sold during the year (and which are not included in Property & Building s investment property at year end).

75 Segmentation of Property & Building s average representative rates of return (by value at year end) by regions and uses (in percent)(*) 72 Uses Hi-tech and offices Industry and logistics Commercial and recreational centers Areas Israel - North Israel - Center Israel - South USA - Northeast USA - West (*) Representative return, which reflects the representative NOI of the properties had they been leased for a full year, and had the available areas therein been leased at real prices. With respect to properties in the United States, the representative return reflects the NOI in the year when theoretical realization (exit) is implemented, in the valuations of those properties Expected revenue of Property & Building with respect to signed rental contracts as of December 31, Revenue recognition period Revenue from fixed components (NIS millions) Assuming non-exercise of the lessees option periods Number of concluding contracts Area subject to concluding agreements (in thousands of square meters) Q Q Q Q Total and thereafter 1, Total 3,751 1,203 1, Main lessees - aggregate disclosure Property & Building has no lessee whose income constitutes 10% or more of total revenues, in consolidated terms. Approximately 21% of Property & Building s revenue in 2016 was due to rent which is paid by lessees which operate in the hi-tech segment, and therefore, Property & Building may be affected by a potential crisis in the hitech segment. However, according to the assessment of Property & Building Corporation, the exposure aforementioned of Property & Building is limited, for several reasons: (A) The hi-tech segment includes many different operating segments, as do the customers of Property & Building which are engaged therein. A crisis in one segment would not necessarily lead to a crisis in other segments, and a crisis in the entire hi-tech segment would signify a general crisis in the economy, which does not constitute specific exposure of Property & Building to any particular branch; (B) Most of the customers which are engaged in the hi-tech segment are well-established, international companies, which are less affected by periods of crisis in the hi-tech segment, and not startup companies; (C) Even in times of crisis, no harm is caused to the revenue-generating property itself, which remains owned by Property & Building; and (D) Past experience has shown that most of the large companies in the hi-tech

76 73 segment, so long as they do not go bankrupt, service their liabilities, even in crisis periods. In light of the above, the risk is limited to contracts which conclude during a crisis period. It is also noted that most hi-tech companies invest in finishing works, in order to adapt the leased property to their requirements, such that, in case of the departure of one lessee or another, due to the fact that the finishing works remain in the leased property, it can be re-leased Revenue-generating properties under construction of Property & Building - aggregate disclosure Area Central region (hi-tech, offices and logistics) Southern region (hitech, offices and logistics) Northern region (offices and parking lot) Variables As of (year ended on) Number of properties under construction at the end of the year Total areas under construction (planned) at the end of the year (in thousands of square meters) Total costs which were invested in the current year (consolidated) (NIS millions) The amount at which the assets are presented at the end of the year (consolidated) (NIS millions) Construction budget in the subsequent year (estimate) (consolidated) (NIS millions) Total balance of the estimated construction budget for the completion of the construction works (consolidated) (estimate) at year end (NIS millions) Rate of built area for which rental contracts have been signed (%) % Expected annual income from projects which will be completed in the subsequent year, and in which contracts have been signed with respect to (*) (*) (*) 50% or more of the area (consolidated) (estimate) (NIS millions) Number of properties under construction at the end of the year Total areas under construction (planned) at the end of the year (in thousands of square meters) Total costs which were invested in the current year (consolidated) (NIS millions) The amount at which the assets are presented at the end of the year (consolidated) (NIS millions) Construction budget in the subsequent year (estimate) (consolidated) (NIS millions) Total balance of the estimated construction budget for the completion of the construction works (consolidated) (estimate) at year end (NIS millions) Rate of built area for which rental contracts have been signed (%) Expected annual income from projects which will be completed in the subsequent year, and in which contracts have been signed with respect to (*) 28 (*) 50% or more of the area (consolidated) (estimate) (NIS millions) Number of properties under construction at the end of the year 2-1 Total areas under construction (planned) at the end of the year (in thousands of square meters) Total costs which were invested in the current year (consolidated) (NIS millions) The amount at which the assets are presented at the end of the year 25-37

77 Area Variables (consolidated) (NIS millions) Construction budget in the subsequent year (estimate) (consolidated) (NIS millions) Total balance of the estimated construction budget for the completion of the construction works (consolidated) (estimate) at year end (NIS millions) 74 As of (year ended on) Rate of built area for which rental contracts have been signed (%) Expected annual income from projects which will be completed in the subsequent year, and in which contracts have been signed with respect to 50% or more of the area (consolidated) (estimate) (NIS millions) (*) - (*) (*) At year end, contracts have not yet been signed with respect to the rental of 50% or more of part of the areas in the projects which are included in this table Lands of Property & Building which were classified as investment property (aggregate) by regions Israel Parameters Year ended The amount at which the lands are presented in the financial statements of Property & Building Corporation at year end (NIS millions) Total area of the lands at year end (in thousands of square meters) Total building rights to the lands, by plans Hi-tech and offices Approved, by uses (in thousands of square meters) Industry and logistics Commercial and convention centers Total building rights Acquisition and sale of properties by Property & Building - aggregate disclosure by region Israel Area Variables For the year ended Number of properties acquired during the year 1-1 Cost of properties acquired during the year (consolidated) (NIS Acquired millions) properties NOI of acquired properties (consolidated) (NIS millions) Area of properties acquired during the year (consolidated) (in thousands of square meters) 20-2 Number of properties during the year Consideration from the realization of properties assets during the year (consolidated) (NIS millions) Sold properties Area of properties which were sold during the year (consolidated) (in thousands of square meters) NOI of properties which were sold (consolidated) (NIS millions) Profit which was recorded with respect to the realization of the

78 75 Area Variables For the year ended properties (consolidated) (NIS millions) (*) The NOI with respect to properties which were sold / acquired, as presented in the table above, reflects an annual representation. (*) The profit is included under the item for income from increase in the fair value of investment property List of material revenue-generating properties on the level of IDB Development Name and characteristics of the property Area New York, New York, USA Specification of functional currency USD Primary use Offices Year Item of information Additional data Fair value and book value at year end (Consolidated) (USD millions) Revenue during the year (Consolidated) (USD millions) Actual NOI during the year (consolidated) (USD millions) Actual rate of return (%) Adjusted rate of return (%) Actual rate of return on cost (%) Loan to value ratio of the property (LTV) (%) Revaluation profit (loss) (consolidated) (USD millions) Occupancy rate at year end (%) Average rent Per square meter per month (USD) Planned betterment - area planned for addition - thousands of square meters Planned balance which has not yet been actually invested (USD millions according to functional currency) Identify of the valuer (name and experience) CB Richard Ellis Inc. ( CBRE ) (1) Valuation model used by the valuer Discounted cash flows (DCF) (2) Additional assumptions underlying the estimate Rentable area which was taken into account for the calculation (thousands of square meters) - 80 Representative occupancy rate out of the rentable area for the purpose of the appraisal (%) Representative NOI for the purpose of the valuation (USD millions) - 65 Average periodic expenses to maintain the status quote (USD millions) - 1 Current discount rate until theoretical realization (%) Theoretical time to realization - 14 years Rate of return upon theoretical realization - 5% Sensitivity analysis for the discount rate - increase of 0.25%: decrease of USD 47 million; Decrease of 0.25%; increase of USD 52 million

79 HSBC Tower in Manhattan 76 Name and characteristics of the property Year Item of information Additional data Fair value and book value at year end (Consolidated) (USD millions) Revenue during the year (Consolidated) (USD millions) Actual NOI during the year (consolidated) (USD millions) Actual rate of return (%) Adjusted rate of return (%) Actual rate of return on cost (%) Loan to value ratio of the property (LTV) (%) Revaluation profit (loss) (consolidated) (USD millions) Occupancy rate at year end (%) Average rent Per square meter per month (USD) Planned betterment - area planned for addition - thousands of square meters Planned balance which has not yet been actually invested (USD millions according to functional currency) Identify of the valuer (name and experience) Valuation model used by the valuer Additional assumptions underlying the estimate Rentable area which was taken into account for the calculation (thousands of square meters) - 80 Representative occupancy rate out of the rentable area for the purpose of the appraisal (%) - 99 Representative NOI for the purpose of the valuation (USD millions) - 63 Average periodic expenses to maintain the status quote (USD millions) - 1 Current discount rate until theoretical realization (%) Theoretical time to realization - 14 years Rate of return upon theoretical realization - 5% Sensitivity analysis to discount rate - increase of 0.25%: decrease of USD 29 million; Decrease of 0.25%: increase of USD 32 million Rentable area which was taken into account for the calculation (thousands of square meters) - 80 Representative occupancy rate out of the rentable area for the purpose of the appraisal (%) - 99 Represents for the purpose of the valuation (USD millions) - 62 Average periodic expenses to maintain the status quote (USD millions) - 1 Current discount rate until theoretical realization (%) Theoretical time to realization - 15 years Rate of return upon theoretical realization -

80 Name and characteristics of the property Cost in USD millions from the perspective of Property & Building Corporation Share of Property & Building Corporation (share of IDB Development) (%) Area (thousands of square meters) USD 495 million (3) Offices Trading Storage Total 100% 71 thousand square meters 5 thousand square meters 4 thousand square meters 80 thousand square meters 77 Year Item of information Additional data Fair value and book value at year end (Consolidated) (USD millions) Revenue during the year (Consolidated) (USD millions) Actual NOI during the year (consolidated) (USD millions) Actual rate of return (%) Adjusted rate of return (%) Actual rate of return on cost (%) Loan to value ratio of the property (LTV) (%) Revaluation profit (loss) (consolidated) (USD millions) Occupancy rate at year end (%) Average rent Per square meter per month (USD) Planned betterment - area planned for addition - thousands of square meters Planned balance which has not yet been actually invested (USD millions according to functional currency) Identify of the valuer (name and experience) Valuation model used by the valuer Additional assumptions underlying the estimate 5.25% Sensitivity analysis to discount rate - increase of 0.25%: USD 39 million; Decrease of 0.25%: increase of USD 44 million (1) CBRE provides to Property & Building services in various fields: marketing of rental areas in the HSBC Tower (until October 2014), management, maintenance and bookkeeping for the HSBC Tower, as well as one-time consulting services with respect to the acquisition of the HSBC building and one-time consulting with respect to the acquisition of an additional revenue-generating property in the United States, which has since been sold. The position of Property & Building Corporation is that CBRE is independent of Property & Building Corporation, in accordance with its declaration, and due to the following reasons: to the best of Property & Building Corporation s knowledge, in accordance with the data published on the website of CBRE ( CBRE is among the largest service providers in the world in the field of commercial real estate, which employs, as of the end of 2016, approximately 75 thousand employees. In 2016, CBRE s revenues amounted to approximately USD 13.1 billion. CBRE provides services in a variety of areas, such as marketing of rental areas, property management, agency in real estate transactions and valuations. To the best of Property & Building Corporation s knowledge, each segment is independent, and those engaged in it constitute a separate and independent profit unit. (2) The valuation was primarily based on the income capitalization approach, and specifically, cash flow discounting (DCF), and the valuer examined the valuation also according to the Sales Comparison approach and the Direct Capitalization approach. According to the aforementioned approaches, the value of the property was not significantly different from the valuation in accordance with the DCF approach. (3) Including cost as of the acquisition date, plus costs which were subsequently invested.

81 78 As of the publication date of the report, Property & Building and a member company of HSBC Bank Group, which leases approximately 60% of the office area in HSBC Tower in Manhattan, are conducting negotiations regarding the extension of the lease agreement, after it expires in There is no certainty that the aforementioned negotiations will continue or develop into a binding agreement between the parties. The lessee is a primary lessee of the property. One of the grounds for demanding immediate repayment which were determined in the loan agreement with the bank which provided the loan for the acquisition of HSBC Tower (in the amount of approximately USD 400 million) determines that in case of significant harm or concern of significant harm to the business, assets, liabilities, business results, financial or other position of 452 Fifth Owners (which is a corporation wholly owned by Property & Building), the immediate repayment of the loan will be demanded, unless the lease agreement with that lessee is in effect, and the lessee is not subject to financial difficulties at that time. Additionally, one of the grounds for discontinuing the release of receipts from the Building to 452 Fifth owners is a case involving nonrenewal of the lease agreement by the lessee until the date which was determined in the agreement, or clearing of the leased area by it without replacing it with another lessee, according to the conditions which were specified in the agreement Activities in the revenue-generating properties segment through companies under joint control and others IDBG Presented below are the main details regarding the investments of the Company and of Property & Building Corporation in associate companies and companies under joint control of Property & Building, the investment in which is recorded based on the equity method, which hold revenue-generating real estate properties abroad. 41 IDBG is a company incorporated in Delaware, USA, which is under joint control and equal ownership of Property & Building Corporation and IDB Development. In September 2005, IDBG engaged with three American real estate corporations which are engaged in the project construction and initiation segment 42 (the Real Estate Corporations or the Project Companies ) in agreements for the initiation, development and construction of three real estate projects in Las Vegas, USA, which will include residential towers and residential and commercial complexes (the Development And Construction Agreements and the Projects ). By virtue of agreements from March 2008 and November 2012, IDBG holds control of and manages the Real Estate Corporations. In accordance with the decisions of the general meetings of IDB Development and Property & Building Corporation, IDB Development and Property & Building Corporation will be entitled to provide additional financing, including by way of the provision of collateral, to IDBG, insofar as may be required for the purpose of financing the projects, provided that the financing will be implemented in equal parts between them. In accordance with the decision of the general meeting of Property & Building Corporation from September 2015, a wholly controlled subsidiary of Property & Building Corporation provided financing to IDBG in accordance with the conditions specified below (see under Framework Agreement ). Until that date, the investments in IDBG had been financed equally by IDB Development and Property & Building Corporation. For details regarding an additional loan which was received from an Israeli financing entity subsequent to the reporting date, see the section regarding additional financing below. Proximate to the publication date of the report, IDB Development intends to advance the efforts to sell IDB Development s holdings in IDBG. Presented below is a general description of the Real Estate Corporations and projects: Tivoli project ("GW" project) As of proximate to the publication date of the report, IDBG holds, directly and indirectly, the entire share capital and voting rights of GW. The Tivoli project is a real estate project which is located near a prestigious neighborhood in Las Vegas, which is intended to mixed use, primarily including commercial and office areas, as a unique recreational 41 Through Property & Building International Investments (2005) Ltd., which is held at a rate of 100% by Property & Building. 42 Queensridge Towers LLC ( QT ), GW and Sahara Hualapay LLC ( SH ). The properties of SH were sold in 2012.

82 79 and shopping center, and which includes three parts, with a total area of approximately 80 thousand square meters (the Commercial Area ). The first part of the Tivoli project ( Triad A ) is open to the public. Triad A has an area of 368 thousand square feet (approximately 34 thousand square meters), which includes approximately 196 thousand square feet (approximately 18 thousand square meters) of commercial areas, and approximately 172 thousand square feet (approximately 16 thousand square meters) of office areas. Additionally, the underground parking lot of the entire commercial area is under construction. As of the end of 2016, approximately 87% of the commercial and office areas in Triad A have been rented. Proximate to the publication date of the report, GW is working to market the remainder of areas for rent. The construction of the second part of the Tivoli project ( Triad B ) has concluded, and it opened to the general public in October It includes commercial areas with an area of approximately 155 thousand square meters (approximately 14 thousand square meters), and office areas of approximately 149 thousand square feet (approximately 14 thousand square meters). Until now, rental agreements have been signed in Triad B with an anchor tenant and additional tenants, with respect to commercial areas of approximately 95 thousand square feet (approximately 9 thousand square meters), and with respect to office areas of approximately 52 thousand square feet (approximately 5 thousand square meters). The third part of the Tivoli project ( Triad C ) is planned to include commercial and office areas with an area of approximately 198 thousand square feet (approximately 18 thousand square meters). The construction of Triad C is in the planning stages, and is scheduled for implementation in accordance with progress in marketing. It is also noted that GW has rights for the construction of 300 residential units on land located near the GW project. GW has a loan from a local bank, the balance of which, as of December 31, 2016, is approximately USD 59 million. The interest with respect to the aforementioned loan was set as LIBOR plus 5% per year. 43 The repayment date of the loan was extended by an additional two years to December 31, The project is presented in the reports of GW at fair value, based on a valuation of an external independent valuer as of June 30, 2016, in the amount of USD 295 million. As a result, IDB Development and Property & Building Corporation each recorded an amortization of approximately NIS 21 million in the second quarter of Until proximate to the publication date of the report, the share of Property & Building Corporation in the investments in GW amounted to a total of approximately USD 274 million (including a total of USD 212 million with respect to loans (which bear interest of 15% per year), in accordance with the memorandum of understanding (as defined below), and includes a total of USD 50 million of loans, in accordance with the framework agreement (see below)). See additional details regarding the GW project in sections 2.C and 2.D. in Note 3.H to the Financial Statements. The information presented above in connection with the planning and implementation of the aforementioned projects in this section, includes forward looking information, as defined in the Securities Law, which is based on the assessments of Property & Building Corporation and the Real Estate Corporations, in consideration of their experience, the state of the residential and commercial construction market in Las Vegas, and the planning stage of the properties, construction and financing costs, and various agreements which were signed in connection therewith until proximate to the publication date of the report. Actual results may differ significantly from the estimates specified above, if changes occur to any of the factors which were taken into account in the assessment, or due to the materialization of one or more of the risk factors specified in section of this part. QT project As of proximate to the publication date of the report, following the acquisition of the share of some of the rights holders in QT, and the completion of the re-organization agreement, IDBG holds, directly and indirectly, 88% of the share capital of QT, and 100% of its voting rights 44 (the share of IDBG with respect to the distributions which will result from the profits of the QT project are different from its share in capital, and depends on the amount of profits). It is noted that as of proximate to the publication date 43 Proximate to the publication date of the report, the effective interest rate is approximately 5.2% per year. 44 The excess voting rights in QT are due to powers of attorney which were given to IDBG by the sellers within the framework of the transaction involving the acquisition of rights in QT, to vote with respect to the balance of their rights in QT, on any issue which is presented for approval to the meeting of rights holders in QT, excluding certain exceptions.

83 80 of the report, QT has no profits. In consideration of the financing which IDBG provided to QT (which bears interest of 15% per year), and the order of priorities with respect to the recoupment of investments to the partners in the project, and based on the market value of the project properties, the entire free cash flow from the QT project will be distributed to IDBG. In 2015, the last four residential units in the QT project were sold. Additionally, IDBG has land reserves which include rights to the construction of 166 residential units in Stage B of the QT project. Until proximate to the publication date of the report, the share of Property & Building Corporation in the investments in QT amounted to investments USD 37 million (include a total of approximately USD 1 million in loans (bearing interest of 15% per year), per memorandum of understanding (as defined below)). Agreements between the holders of the rights to the Real Estate Corporations and the financing of the projects by IDBG The Development And Construction Agreements between the holders of the rights to the Real Estate Corporations, with respect to each of the Real Estate Corporations, include principles regarding the routine management of the Real Estate Corporations, the decision making process, engagements with related parties, additional investments, rights to profits, right of first refusal, joining rights, etc. In accordance with the memorandum of understanding and the collaboration between the holders of rights to the Real Estate Corporations, which was signed in March 2008, and which formalizes issues which pertain to the financing of the projects and the method for management of the Real Estate Corporations and the projects (the Memorandum Of Understanding ), and which determined, inter alia, that subject to certain conditions, IDBG will control the Real Estate Corporations and the projects, so long as it provides financing or securities to the Real Estate Corporations beyond the relative share which it is required to provide in accordance with the existing agreements between the holders of the rights to the Real Estate Corporations ( QT and GW Financing ). The Memorandum Of Understanding established, inter alia, that the QT and GW Financing will bear annual interest at a rate of 15%, and that there is priority in the repayment of the loans which IDBG provided to QT and GW within the framework of new QT and GW Financing with respect to other shareholder s loans, and with respect to any distribution of profit to the other rights holders, respectively. Additionally, in accordance with the provisions of the Memorandum Of Understanding, so long as the loan of the self financing to GW, which was given within the framework of the new QT and GW Financing, has not been repaid, IDBG will be entitled to cause a pledge on some or all of the properties of the real estate corporation, for the purpose of providing a security to the lender which will provide to GW a loan for the purpose of repaying the self financing loan to GW, and to initiate the sale of part or all of the properties of the real estate corporation, for the purpose of repaying the loan involving self financing to GW. Until proximate to the publication date of the report, IDBG had provided, within the framework of the new QT and GW Financing, amounts, in which the share of Property & Building Corporation is as specified in this part above, in the description of each of the projects. Due to the fact that only IDBG participated in the QT and GW Financing, there is priority in the repayment of the aforementioned financing which IDBG provided, relative to the other shareholder s loans which were provided to QT and to GW by the other rights holders therein, and relative to any distribution of profit to the other rights holders in the real estate companies. In consideration of the aforementioned financing (which bears annual interest at a rate of 15%), the order of priorities for payment, and the losses which have accrued for the Real Estate Corporations, and based on the current fair value of the projects, the entire available cash flows from the projects will be distributed to IDBG. Re-organization agreement - In November 2012, the re-organization agreement was signed between IDBG, the Real Estate Corporations, the management companies of the Real Estate Corporation, and the local partner which managed the real estate corporation until that date, according to which the general management of the Real Estate Corporations and of the projects was transferred to IDBG, as were all of the ownership rights of the local partner in GW, and most of the rights of the local partner in QT. 45 Framework Agreement In September 2015, Property & Building Corporation engaged, following the approval of its general shareholders meeting, in a transaction for the provision of a facility for the provision of collateral in favor of an entity which will provide external financing to IDBG and/or for the provision of credit in the total amount of USD 50 million to IDBG (the Facility ). Out of the aforementioned amount, a total of 45 It is noted that the rights to profits and the voting rights with respect to most of the local partner s holdings in the project companies have long since been held by IDBG, further to the Memorandum Of Understanding.

84 81 USD 25 million was provided with respect to the share of IDB Development, which is subject to restrictions regarding the performance of additional investments in projects in Las Vegas. Proximate to the publication date of the report, the credit facility had been used in its entirety. For additional details, see Note 3.H.2.C to the Financial Statements. For details regarding an additional loan which was received from an Israeli financing entity subsequent to the reporting date, see the section regarding additional financing below. Revenues and profitability - The contribution of IDBG to the loss of IDB Development, with respect to IDB Development s direct holding, amounted in 2016 to loss of NIS 37 million, which was primarily due to the amortization in the value of the GW project, as stated above. The amortization is included in the item for decrease in fair value of investment property. For additional details, see Note 6.B(3) to the Financial Statements. Additional financing Subsequent to the reporting date, in January 2017, IDBG received additional financing, in the amount of USD 41.4 million, from an Israeli financing entity (the New Loan and the Lender ). The New Loan will be repaid in a single payment after 24 months, will bear fixed annual interest at a rate of 7%, and will be used to finance the continued construction and rental of Triad B, and to finance any activity and/or goal which is associated with the construction and rental of the project. Several securities have been provided in favor of the Lender, including, inter alia, guarantees, jointly and severally, which were provided by Property & Building and IDB Development with respect to the entire guaranteed amounts (the Guarantee ), accompanied by liabilities of Property & Building and IDB Development not to transfer their holdings in IDBG to third parties, in a manner which is not in accordance with the provisions of the loan agreement. IDBG s liability to the Lender will have priority over liabilities to repay shareholder s loans, which were provided to it by the Company and Property & Building, as stated above. For details regarding the New Loan and the Guarantee, see Note 14.F.3.E to the Financial Statements. Customers The GW project is marketed for rental to lessees operating through national and regional distribution in the United States, including branded home furniture, fashion and clothing chains, as well as recreational chains, including restaurants. Marketing and distribution The GW project is located near the prestigious Summerlin neighborhood and is being built as a unique recreational and shopping center, competing with commercial centers of standard characteristics in the area. The marketing and distribution of the GW project are being done through a local staff which is engaged in marketing, both independently and through brokers, by creating direct contact with potential lessees, and also through advertising and participation in conferences. Order backlog As of December 31, 2016, the annual rent, in accordance with the rental agreements which were signed until proximate to the publication date of the report, in Triad A of the GW project, amounted to a total of approximately USD 15 million per year. Competition The Tivoli project is located proximate to the prestigious Summerlin neighborhood, and is being built as a unique recreational and shopping center, which is competing with commercial centers of standard characteristics in the area. Land reserves As of proximate to the publication date of the report, IDB Development and Property & Building Corporation, through their holdings in IDBG and the Real Estate Corporations, have land reserves for residential construction in Las Vegas, at a scope of approximately 466 residential units. The exercise of the building rights described above is subject to the receipt of permits and approvals by virtue of the aforementioned rights, and to the local legislative provisions in Las Vegas. It is noted that also the exercise of the building rights with respect to the parts of the GW project which are located in planning processes (Triad C), at a scope of approximately 198 thousand square feet, is subject to, inter alia, the receipt of building permits. The information presented in this section regarding the land reserves, building rights and the possibilities for exercising them, constitute forward looking information, as defined in the Securities Law, which is based on the information that is available to IDB Development and

85 82 Property & Building Corporation, and to the law which applies in the United States as of proximate to the publication date of the report, whose materialization is dependent, inter alia, on the approval and implementation of those plans in accordance with their terms and timetables set forth therein. Actual results may differ from the estimates specified above, if changes occur to one of the factors which were taken into account in the aforementioned estimates or plans, or the approval or implementation thereof, or due to the materialization of one or more of the risk factors specified in section of this part TPD Investment Limited (in England): Property & Building and DIC, through England Hotels - Property & Building Ltd. (a company wholly owned by Property & Building Corporation) ( Property & Building Hotels ) owns rights (20%) to TPD Investment Limited ( TPD or the English Company ), which primarily holds two hotels: the Hilton in London, and the Hilton in Birmingham, as well as the rights associated therewith (including approximately 1,900 hotel rooms (cumulatively) and conference halls). The aforementioned hotels are primarily geared to businesses and the conferences and conventions market, and are managed by the Hilton chain, in accordance with long term management agreements (until 2036), with options to extend the management periods. The overall acquisition cost of the Hilton London and Hilton Birmingham by TPD amounted to approximately GBP 455 million, including expenses. The acquisition cost was financed through a bank loan, which was provided by a British bank, repayable in July 2014, with no right of recourse, in the total amount of approximately GBP 395 million. The balance of the acquisition amount, as stated above, in the amount of approximately GBP 60 million, was financed from equity, where the share of Property & Building Corporation in equity amounted to a total of approximately GBP 16.6 million, which was given as a shareholder s loan, and which bears annual interest of 6%. In March 2014, the English partner (the English Partner ) in the English Company announced that refinancing had been performed, in which the English Partner announced, inter alia, to Property & Building Corporation, that it has the option to maintain its holdings (20%) through the provision of a shareholder s loan in the amount of GBP 5 million, and conversion of the previous shareholder s loan in the amount of GBP 5.6 million to capital, or alternatively, to have its holding rate diluted to 6.39%, and also stated, in its announcement, that the dilution had been effectively implemented. After the failure of the negotiations which were conducted between Property & Building Corporation and the additional partner with the English Partner, Property & Building Corporation filed, together with the additional partner, in April 2014, a claim with the Court in London, demanding that the English Partner acquire their holdings in TPD, in accordance with their market value, as will be determined by the Court, as well as additional conventional remedies in accordance with English law (the Claim ). On March 3, 2015, the English Partner and TPD filed a motion for the receipt of an injunction against Property & Building and the additional partner, according to which Property & Building and the additional partner would refrain from performing any action in connection with the sale of the hotels, and for the receipt of damages in the amount of over GBP 100 thousand (the Counterclaim ). Property & Building and the additional partner reject the assertions raised in the aforementioned motion, in all respects. In August 2015, Property & Building, the additional partner and their corporate officers received a statement of claim from the English Partner and from TPD, in which damages were claimed which were allegedly incurred by TPD and the English Partner, in an amount which will not fall below GBP 88.5 million (the Statement Of Claim ). Property & Building rejected the statement of claim in all respects. The hearing of the Claim commenced in the Court in London at the end of June 2016, continued in January 2017, and concluded in February A ruling has not yet been given PBEL Holdings Limited (India): Property & Building Corporation is a party to the agreement with third parties with respect to the collaboration in connection with the initiation and construction of projects in the revenue-generating real estate segment in India, and holds, together with partners, land reserves with a total area of approximately 170 dunams, in the cities of Hyderabad and Chennai, which are intended for mixed use, primarily for office and commercial purposes.

86 Residential construction segment 46 In Israel, Property & Building is engaged in the initiation, planning, development, construction and sale of high-quality residential neighborhoods and unique projects which it builds in high demand areas. Property & Building Corporation is also engaged in the initiation of residential projects (construction and marketing), primarily in India Activities of Property & Building in the residential construction segment in Israel Structure of the residential construction segment in Israel Many entities are engaged in the residential construction segment, which initiate, identify, plan and build residential neighborhoods, buildings and residential units of various types. In Israel, there are contractor companies which independently build and market the residential units to the target market. There are also companies, such as the Property & Building companies, which engage with contractors for the performance of the construction works, and independently market the built residential units Impact of external factors According to the assessment of Property & Building Corporation, the activity in the residential construction segment, and the level of demand, are affected by the following primary external factors: (1) Government regulation on all matters associated with the establishment of housing and land prices, including the associated taxation; (2) State of the economy - fixed revenues of households in Israel and security regarding the ability to maintain the aforementioned revenues are the primary factors which determine the demand for residential units over the long term; (3) Fluctuations in the construction input price index; (4) Fluctuations in the prices of raw materials around the world, primarily metal and oil; (5) Availability of highly skilled workforce in the construction segment; (6) Fluctuations in the exchange rates of the EUR and USD, which affect the profitability of investment by foreign residents; (7) Changes in the prices of securities on the stock exchange, which affects the sense of wealth and economic security among the public; (8) Moderation in the population growth rate and decrease in the rate of immigration to Israel; (9) Cancellation of bonuses from the Ministry of Housing for the acquisition of residential units in periphery regions; (10) Changes in the average interest rate for mortgages of apartment buyers; (11) Restrictions on the amount of mortgages which the banks are licensed to provide; (12) Taxation of investment apartments; and (13) Government initiatives to reduce housing prices, such as the Discount Residential program. For details regarding the general environment and its impact on the activities of Property & Building, see sections 7 and 10.7 of this part Critical success factors in the residential construction segment in Israel and changes occurring therein Property & Building Corporation estimates that the main success factors in connection with its activity in the residential construction segment in Israel, which have contributed to its results, and which had positive effects, include: (1) The construction of high-quality neighborhoods and projects in high demand areas; (2) Leverage of the experience and expertise in the construction of high quality residential neighborhoods; (3) The reputation and branding of Property & Building among entities engaged in the branch; (4) The financial power of Property & Building, which provides a sense of security to apartment buyers and to land owners; (5) The quality of planning, and the attention to detail in the planning of the residential units; (6) The strong marketing capabilities, which provide Property & Building an advantage over its competitors; (7) Work with the leading contractors in the branch; (8) The provision of high quality service to its customers; (9) Specialization in the segment involving urban renewal (demolitionconstruction) projects Main barriers to entry and exit in the residential construction segment in Israel, and changes which occurring therein According to the assessment of Property & Building Corporation, entities which are engaged in the initiation segment in the residential construction branch primarily require strong equity and financial stability, in order to allow activities in the initiation segment at relatively low financing costs. There is also a great deal of importance in knowledge, experience in the initiation segment, reputation and available and planned land reserves in areas with high demand for residential units. Property & Building Corporation estimates that it has a strong business and financial position. The barriers to exit the residential construction segment primarily depend on the scope of demand in the market for the acquisition of residential units. 46 The residential construction segment in Israel constitutes a separate operating segment in the financial statements of Property & Building Corporation, while its activities in the residential construction segment abroad are included under the Others segment.

87 Structure of competition in the residential construction segment in Israel and changes occurring therein The initiation segment in the residential construction branch in Israel is characterized by a high level of competition. The competition takes place from the stage involving the identification of land for construction, and in advanced stages of the construction and marketing of the projects themselves, which are also exposed to competition against the supply of second hand apartments. According to the assessment of Property & Building Corporation, the competition causes a relative erosion in the entrepreneurial margins of companies operating in the segment. The competition in Israel takes place, as stated above, both vs. the large companies, which advertise throughout the entire country, and at significant scopes, such as Property & Building, and vs. small entrepreneurial companies, which operate in a particular geographical area. The competition primarily takes place over the prices of the residential units. The structure of the branch is highly decentralized, and there is no single company in Israel which holds a significant share of this segment. According to the assessment of Property & Building Corporation, the financial stability of Property & Building, its positive reputation, the location of its inventory of lands and projects (primarily in high demand areas in Central Israel), and the strict planning with respect to the construction of residential neighborhoods and residential units, provide it with competitive advantages in the field Products of Property & Building in the residential construction segment The products which are sold by Property & Building in the residential construction segment are residential units offered for sale. The residential units are built in the framework of complete residential neighborhoods, including full environmental development and associated community services. The activities of Property & Building in the residential construction segment also include the identification and development of new lands which are appropriate for residential construction, in urban renewal projects (demolition-construction). As of December 31, 2016, the balance of approved construction rights for the projects in which Property & Building is a partner amounted to approximately 1,790 residential units intended for construction (of which the share of Property & Building is approximately 1,076 residential units), where approximately 1,230 residential units are currently in construction stages (of which, the share of Property & Building is approximately 820 residential units). In 2016, the construction of approximately 230 residential units was commenced, as compared with approximately 590 residential units in In 2016, 480 residential units were sold (as compared with approximately 355 residential units in 2015). Property & Building s revenues from the sale of residential units and land which were applied to the statement of income in 2016 amounted to approximately NIS 337 million, as compared with approximately NIS 216 million in The scope of income from residential units in the Financial Statements is affected by the timing of the recognition of profit, in accordance with international accounting standards, according to which income is only recognized when the apartments are transferred to the apartment buyers. In 2016, 230 of Property & Building s residential units were occupied, as compared with approximately 130 in Additionally, in 2016, approximately 70 residential units were occupied in a project which is being built by an associate company of Property & Building (50%), whose results are reported as part of Property & Building s share in the profits (losses) of investee companies, as compared with approximately 140 residential units in 2015.

88 85 Property & Building builds and markets, in the residential construction segment in Israel, as of December 31, 2016, approximately 900 residential units in 8 different complexes throughout the country, as specified in the tables presented below. Projects under construction as of December 31, general data regarding the projects The data is presented according to 100% of the projects Name of project Ofen and Eli Beer Sheva buildings 7,8 The Garden Kfar Sabba, buildings 16,17 Karkur Building 16 Marom Naveh Bashdera in Holon, Building 2 Rehovot Sheli Building 4 Neveh Avivim in Netanya Building 1-2 Marom Naveh in Petach Location Beer Sheva Kfar Sabba Pardes Hannah - Karkur Marom Naveh Bashder a in Holon Land acquisitio n date Construction commencemen t date Estimated completio n date Total units in the project The corporation s effective share in the project (%) Squar e meters per unit Engineering performanc e rate as of December 31, 2016 Total units for which binding sale agreement s have been signed Total residentia l units which have not yet been sold as of December 31, 2016 Total expected revenue s (NIS millions) Total expecte d costs (NIS millions ) Rate of equity to costs investe d in the project Total projecte d gross profit (NIS millions) 2013 May 16 Jan % % % 11 18% Jan 16 Apr % % % 17 8% Jan 16 Mar % % % 8 31% July 15 Apr % % % 7 5% 25 Rehovot 2011 Jan 15 Jun % % % 12 13% 24 Netanya 2013 May 15 June % 97 57% % 37 15% 69 Petach Tikva 2011 July 16 July (of which the share of Total rate of gross profit Expected retained earnings upon completion, including invested equity (NIS millions) 100% % % 4 2% 43

89 86 Name of project Tikva Building s 3,4 Ramat HaNasi Stage C Location Land acquisitio n date Construction commencemen t date Estimated completio n date Total units in the project the land owners is 42 residentia l units) The corporation s effective share in the project (%) Squar e meters per unit Engineering performanc e rate as of December 31, 2016 Total units for which binding sale agreement s have been signed Total residentia l units which have not yet been sold as of December 31, 2016 Total expected revenue s (NIS millions) Total expecte d costs (NIS millions ) Rate of equity to costs investe d in the project Total projecte d gross profit (NIS millions) Haifa 2007 Aug 14 Aug % % % 89 27% 134 Total ,365 1, Total rate of gross profit 13 % Expected retained earnings upon completion, including invested equity (NIS millions) 363 Projects under construction as of December 31, data regarding income, costs and prices The data is presented according to 100% of the projects Name of project Ofen and Eli Beer Sheva buildings 7,8 The Garden Kfar Sabba, Locatio n of the project Beer Sheva Kfar Sabba Land Costs invested in the project as of December 31, 2016 (NIS millions) Construction Discounted financing costs Others Balance of expected costs which have not yet been invested as of December 31, 2016 (NIS millions) Average selling price per square meter in contracts which were signed in the project in each period, excluding VAT (NIS) From January 1, 2017 to the publication of the report In the year ended December 31, 2016 In the year ended December 31, 2015 Income from signed contracts (NIS millions) Unrecognized income from contracts Income recognized Advance payments received Balance of amounts receivable by contracts Inventory for which binding sale contracts have not yet signed as of December 31, 2016 Book value of unsold inventory (NIS millions) Revenue forecast from unsold inventory (NIS millions) Average price per square meter which was used to calculate the revenue forecast of inventory (NIS) Total unrecognized income (NIS millions) Total unrecognized gross profit (NIS millions) ,304 9, , % ,199 16,590 16, , % Total expected rate of gross profit

90 87 Name of project buildings 16,17 Karkur Building s 16 Marom Naveh Bashdera in Holon Rehovot Sheli Building 4 Neveh Avivim in Netanya Building 1,2 Marom Naveh in Petach Tikva Building s 3,4 (2) Ramat HaNasi Stage C Locatio n of the project Pardes Hannah - Karkur Land Costs invested in the project as of December 31, 2016 (NIS millions) Construction Discounted financing costs Others Balance of expected costs which have not yet been invested as of December 31, 2016 (NIS millions) Average selling price per square meter in contracts which were signed in the project in each period, excluding VAT (NIS) From January 1, 2017 to the publication of the report In the year ended December 31, 2016 In the year ended December 31, 2015 Income from signed contracts (NIS millions) Unrecognized income from contracts Income recognized Advance payments received Balance of amounts receivable by contracts Inventory for which binding sale contracts have not yet signed as of December 31, 2016 Book value of unsold inventory (NIS millions) Revenue forecast from unsold inventory (NIS millions) Average price per square meter which was used to calculate the revenue forecast of inventory (NIS) Total unrecognized income (NIS millions) Total unrecognized gross profit (NIS millions) ,046 12, % Holon ,834 14,664 14, , (1) 7 5%(1) Rehovot ,814 11, , % Netanya ,602 14,814 13, , % Petach Tikva ,018 12, , (2) 4(2) 1% Haifa ,991 13,055 12, , % Total , % Including the value of construction services in the amount of approximately NIS 29 million (gross profit after neutralizing construction services - 7%), from the perspective of Property & Building. Including the value of construction services in the amount of approximately NIS 37 million (gross profit after neutralizing construction services - 2%), from the perspective of Property & Building. Total expected rate of gross profit

91 88 Additional details regarding banking accompaniment for the residential construction projects in Israel of Property & Building, which are in performance stages as of December 31, 2016: According to the assessment of Property & Building, it is able to finance the projects under construction and the planned projects using its own sources. Presented below is a list of projects with closed bank accompaniment Name of project The Garden (Kfar Sabba) - Combination Transaction Building 16,17 Marom Naveh Bashdera in Holon Rehovot (Rehovot) Sheli Marom Naveh in Petach Tikva Neveh Avivim in Netanya Property & Building s share 50% 20 Investment of equity (NIS millions) 100% Around 25 50% % 66 70% 31 Yuvalim Karkur 100% - Pledged assets The Company s entire rights to the land and the project The Company s entire rights to the land and the project The Company s entire rights to the land and the project The Company s entire rights to the land and the project The Company s entire rights to the land and the project The receipts are pledged until the Quantitative and monetary performance conditions Fulfillment of the project s income and expenses, budget and rate of sales. Fulfillment of the project s income and expenses, budget and rate of sales. Fulfillment of the project s income and expenses, budget and rate of sales. Fulfillment of the project s income and expenses, budget and rate of sales. Equity of no less than NIS 100 million, guarantee from the parent company (Hadarim Properties Ltd.) in the amount of NIS 14 million, which will be in effect until sales of 40% are reached. Fulfillment of the project s income and expenses, budget and rate of sales. Breaches of the accompani ment agreement Use of monetary credit as of December 31, 2016 NIS millions None - - None - - None - 32 None - 60 None None - - Balance of monetary credit for capital use as of December 31, 2016

92 89 Ramat Stage C HaNasi Ofen and Eli Beer Sheva 27.5% 100% 16 Approximately 22 recording of a mortgage on the land The Company s entire rights to the land and the project The Company s entire rights to the land and the project Depositing of receipts in the accompaniment account, submission of a bi-monthly report. Fulfillment of the project s income and expenses, budget and rate of sales. None - 50 None - 18

93 90 Projects whose construction was completed and whose has not yet been entirely completed as of December 31, 2016 Balance of inventory in the books attributed to projects whose construction has concluded, and whose sale has not yet been completed (In cost terms, in millions of NIS) (Property & Building s share) Aging of inventory of residential units in projects whose construction has concluded, and whose sale has not yet been completed (in residential units) Number of months which have passed since the completion date of the construction North Center South Total Over Total Over Total Expected gross profit (in millions of NIS, Property & Building s share) Binding sale contracts which were signed since the end of the reporting period * * Updated as of March 19, 2017.

94 91 Projects whose construction was completed and whose has not yet been entirely completed as of December 31, 2016 The data is presented according to 100% of the projects Name of project Marom Naveh Bashdera in Holon, Building 1 The Garden Kfar Sabba, Building 15 Marom Naveh in Petach Tikva, Building s 1,2 Neveh Yam Tower in Bat Yam Ramat HaNasi Location Land acquisit ion date Holon 2010 Kfar Sabba Petach Tikva Bat Yam Constr uction comme ncemen t date May 12 Jan 12 Sep 12 Sep 09 Const ructio n compl etion date June 15 Aug 14 Sep 16 May 14 The corporation s effective share (%) Residential units remaining in inventory as of Cost of inventory attributed to the residential units which remain in inventory as of Rate of equity to cost Average square meter per resident ial units remaini ng in inventor y Number of bindings sale contracts which were signed in the project, by periods From the end of the period until proximat e to the reporting date Q Q Q Q Expected income from apartmen ts in inventory (NIS millions) Expected gross profit from apartmen ts in inventory (NIS millions) Expect ed rate of gross profit on apartm ents in invento ry % % % % % % % % % 90 Aug Feb Haifa % % % Total % 214 Expected surplus upon the completio n of the project, including equity (NIS millions)

95 92 Projects whose construction was completed and whose has not yet been entirely completed as of December 31, additional data regarding the balance of expected income: Name of project Average price per square meter which was used to calculate the revenue forecast of unsold inventory Selling price per square meter in signed contracts (NIS) Q Q Q Q From the end of the period until proximate to the reporting date Marom Naveh Bashdera in Holon, Building 1 20,833 15,738 16,022 15, Marom Naveh in Petach Tikva, Buildings 1,2 15,053 13,117 13,301 13,731 13,635 - Kfar Sabba, Building 15 18, Neveh Yam Tower in Bat Yam Building 1 27,920 20,905 20,748 19,320 24,140 28,298 Ramat HaNasi Stage B 13,043 11,768 13,003 11,857 12,282 16,367 Projects in planning stages - general data as of December 31, 2016 The data is presented according to 100% of the projects Name of project Neveh Avivim in Netanya Location Land acquisition date Current cost in the books (NIS millions) Planned construction commencement date Estimated completion date Has financing / bank accompaniment been obtained for the project? Corporation s effective share in the project Residential unit in the project Current planning status Residential units Average square meters per unit Residential unit in the project Planned planning status Residential units Netanya Mar 17 Sep 19 Yes 70% Average square meters per unit

96 93 Name of project Building 3 Ofen and Eli Beer Sheva buildings 1,2,3 Rehovot Sheli Building 5 The Garden Kfar Sabba, buildings 18,19 Ramat HaNasi Stage D Location Beer Sheva Land acquisition date Current cost in the books (NIS millions) Planned construction commencement date Estimated completion date Has financing / bank accompaniment been obtained for the project? Corporation s effective share in the project Residential unit in the project Current planning status Residential units Average square meters per unit Residential unit in the project Planned planning status Residential units Apr 17 Apr 19 Yes 100% Rehovot Apr 17 Jul 19 Yes 50% Kfar Sabba Jan 17 Apr 19 Yes 50% Haifa May 17 Oct 20 No 27.5% Total Average square meters per unit

97 94 Planned projects - data regarding income and costs as of December 31, 2016 The data is presented according to 100% of the projects Name of project Neveh Avivim in Netanya Building 3 Ofen and Eli Beer Land Amounts invested in the project: (NIS millions) Discounted financing costs Planning and others Total balance of costs which have not yet been invested (NIS millions) The average selling price per square meter in advance contracts which were signed in the project, excluding VAT, for the year ended December 31, 2016 Signed contracts (if any) Binding sale contracts Proximate to the reporting date Income from signed contracts Advance unrecognized (NIS millions) Number of contracts signed in advance Advance payments received Balance of amounts receivable by contracts Inventory for which binding sale contracts have not yet been signed Revenue forecast from unsold inventory (NIS millions) Average price per square meter which was used to calculate the revenue forecast (in NIS) Total income (in millions of NIS) Total unrecognized gross profit (NIS millions) , , % , , % Total rate of gross profit

98 95 Sheva buildings 1,2,3 Rehovot Sheli Building , , % 5 The Garden Kfar Sabba, 1* , , % buildings 18,19 Ramat HaNasi , % Stage D Total % * Combination

99 96 The data presented in the above tables, including, inter alia, the information pertaining to expected costs and expected profits constitute forward looking information, as defined in the Securities Law, which is based, inter alia, on the assessments of Property & Building Corporation, in consideration of the prices of the apartments which have already been sold, on market conditions, on the construction costs and the various agreements which were signed in connection therewith. Actual results may differ significantly from the estimates specified in the tables presented above, inter alia, if changes occur to one of the factors which were taken into account in the assessment, such as changes in apartment prices in a certain area, or in the entire market, or the materialization of one or more of the risk factors specified in section of this part Segmentation of income and profitability of products and services Presented below is the segmentation of the Company s income from the sale of residential units and land in Israel: Year Revenues (NIS millions) % % % Rate of Property & Building s total income Income from apartment sales is primarily affected by the timing of the application of projects to the statement of income, in accordance with international accounting standards, according to which income is recognized upon transfer of the apartments to the buyers. Property & Building is evaluating the early adoption of IFRS 15, Revenue from Contracts with Customers, beginning in The adoption of this standard will allow Property & Building to report its income from apartment sales in accordance with the rate of apartment sales and the progress on construction Trade receivables The sale of residential units by Property & Building is done directly to end customers, which are characterized by the fact that they are not regular customers. Therefore, there can be no dependence on any individual customer, or on a limited number of customers. Most of Property & Building s customers are housing improvement customers. According to the assessment of Property & Building, the residential units which Property & Building is building are located in high-quality residential neighborhoods in high demand areas, and are characterized by a high level of construction quality. Despite the fact that the construction works are performed through primary contractors, Property & Building is independently responsible towards the buyers of residential units, on all matters, including the date of occupancy, the quality of construction, etc. The customers of Property & Building generally pay, on the signing date of the agreement, an amount equal to 15% of the residential unit price. An additional 10% is paid upon the transfer of possession of the apartment, and the balance is paid through periodic payments throughout the construction period. The transfer of residential units to buyers is performed upon the receipt of the entire consideration for them. Contracts vis-à-vis apartment buyers are mostly linked to the construction input price index, and a small number are lined to the consumer price index. Property & Building is responsible, in accordance with and subject to the provisions of the Sales (Apartments) Law, (the Sales Law ), to repair construction deficiencies during the liability period, and the warranty periods. In its agreements with construction contractors, Property & Building includes Bback to Back liability sections and indemnification sections in connection with the fulfillment of timetables, the repair of construction deficiencies and inspection. Property & Building is also responsible for securing the funds of buyers in accordance with the Sales Law (Apartments) (Securing Investments of Apartment Buyers), Marketing and distribution The marketing of residential units which are built by Property & Building is done through advertising in the relevant local media, to the potential target market for each project (local newspapers, billboards and sales promotion activities to the target group, as well as internet advertising). The marketing activities of Property & Building are done from the main offices of the companies which are engaged in this segment in Property & Building, and the office buildings which are located on the construction sites. In its marketing activities, Property & Building generally enlists the assistance of several external marketing firms. The consideration to marketers is based on success as a percent of the sale of residential units in that project. According to the assessment of Property & Building Corporation, none of the member companies of Property & Building have any liability to any marketer, and each agreement is cancelable unilaterally, via advance notice, within a reasonable period of time in advance, and therefore, there is no dependence on any of the aforementioned marketers. The projects which are built by the member companies of Property & Building generally include several residential

100 97 buildings in each project. The progress on marketing of the residential units in one of the buildings of a certain project and the mix of residential units in that project affect the scheduled date for the commencement of construction and marketing of a new building in that project. This policy is adopted in order to prevent or reduce Property & Building s exposure, primarily in light of the fluctuations in the levels of demand for residential units, and the trends in the residential construction segment Order backlog in the residential construction segment in Israel The order backlog in the residential construction segment in Israel includes the consideration from the sale of residential units which were sold as of a certain date, whose construction has not been completed, and the income from which has not yet been applied to the statement of income of Property & Building Corporation.

101 98 Presented below is a table specifying the aforementioned order backlog as of December 31, 2016 (NIS millions): Revenues Period Q Q Q Q4 155 Total for Income in Income in Total order backlog Presented below is table specifying the aforementioned order backlog as of December 31, 2015 (NIS millions): Revenues Period Q Q Q Q4 267 Total for Income in Income in Total order backlog The assessments with respect to the expected receipts from the sale of residential units, residential unit, constitutes forward looking information, as defined in the Securities Law, which is based on information which is known to Property & Building Corporation on the Reporting Date, on the assessments or intentions of Property & Building Corporation as of proximate to the publication date of the report, and on the assessment of Property & Building Corporation, in consideration of past experience. Actual results may differ significantly from the assessments specified above, and from their implications, for various reasons, including the rate of progress on the performance of construction According to the assessment of Property & Building Corporation, it is able to finance, out of its own sources, the projects under construction and projects being planned Land reserves for residential construction in Israel The manufacturing capacity of Property & Building in the residential construction segment is measured according to the land reserves which it owns or leases, its equity and the knowledge and experience which it has accumulated in the planning and construction of residential projects. These resources are additional to the financial stability of Property & Building, its cash flows and its ability to raise financing for the construction of new projects. As of December 31, 2016, Property & Building had rights to land reserves for the construction of approximately 550 residential units throughout the entire country, including units being planned whose has not yet begun, regarding which there are mostly valid zoning plans. The land reserves are primarily in one of three types: (1) Owned lands (independently or together with partners); (2) Lands to which rights have been granted under a development or lease agreement from the Israel Land Administration, whether the rights were purchased directly, by way of an Administration tender which was won, or acquired from a third party which acquired them from the Administration; and (3) Lands which were acquired from the holders of the rights to land, within the framework of a combination agreement in kind or, in consideration of receipts from the sales of units in the project. With respect to some of the lands, Property & Building engaged with the holders of the rights to land in combination agreements which confer upon the holders of the rights to the land the right to receive some of the sales receipts of the residential apartments or some of the built areas which will be built in the project, or a combination of the two. Some of the aforementioned transactions are conditional upon changes in the designation of the land on the dates specified in the agreements. The rights to the land are transferred to Property & Building, generally, upon the completion of the undertakings of Property & Building towards the rights holders, and sometimes on the date when the actual performance stage begins (against a guarantee which is given to the rights holders to secure the consideration which is owed to them in accordance with the terms of the agreement with them). In agreements of this kind, generally, the risk level inherent in the project is small compared to the reduction of the potential level of profitability Urban renewal ("Demolition-Construction") projects

102 99 Property & Building is engaged in two main complexes in the urban renewal (Demolition-Construction) segment - in the Dafna Arlozorov complex in Tel Aviv and in Nahalat Yehuda in Rishon Letzion. The project in Rishon Letzion includes 800 residential units (214 current apartment owners), as well as commercial and office areas at a scope of approximately 8,000 square meters. The zoning plan was approved for the presentation of objections, subject to amendments which were requested by the regional committee. Property & Building engaged in an agreement with a third party which handles engagements with the apartment owners in the complex, and promoted the project in its initial stages. The agreement sets forth a mechanism for management fees and the distribution of profits. In the Dafna Arlozorov project in Tel Aviv, Property & Building operates in 5 complexes at a scope of approximately 1,230 residential units, of which approximately 400 residential units are intended for the apartment owners in the complexes, and approximately 170 residential units are intended for rental. The zoning plan was validated in 2016, and Property & Building operates in this project together with a partner. The foregoing with respect to the approval of zoning plans, the scope of expected residential units, and the timing of their construction and marketing, refers to the rights which are partially conditional upon the receipt of appropriate approvals for the zoning plans which apply to some of the lands specified above, and constitutes forward looking information, as defined in the Securities Law, whose materialization is dependent, inter alia, on the approval of zoning plans and the signing of the majority of tenants in demolitionconstruction projects. Actual results may differ from the estimates specified above, if changes occur to or more of the aforementioned assumptions, including, inter alia, if a zoning plan is not approved, and/or if one or more of the risk factors specified in section of this part materialize Suppliers and liability towards customers Property & Building performs its business activities as an entrepreneurial company in the real estate segment through external contractors and additional service providers. For the purpose of performing the construction works, Property & Building engaged with contractor companies, generally, in turn-key (final fixed price) agreements. In light of the foregoing, Property & Building generally does not have direct activities which involve the acquisition of raw materials or the holding of inventory of raw materials. For the most part, the construction prices are linked to changes in the construction input price index, and therefore, Property & Building Corporation is exposed to changes in the aforementioned index. The increased costs of raw materials and work costs, and their impact on the construction input price index in Israel, have caused a decrease in the number of subcontractors in the construction segment in Israel, and have directly affected the primary contractors, and indirectly affected the construction costs of the entrepreneurial entities in the branch, including Property & Building. The main suppliers of Property & Building in Israel are the executing contractors and engineering service providers (planners, supervisors, architects and consultants), with whom it engages in all stages of the construction of the projects. These suppliers are usually chosen out of a list of the leading suppliers and contractors in their fields. The engineering department of Property & Building closely accompanies the projects throughout all stages of construction. It is the practice of Property & Building to receive securities from the contractors for the performance of the construction works and for the warranty and liability periods, usually through a bank guarantee at a certain rate of the contract with the contractor. In light of the fact that the aforementioned liability applies to the contractors, Property & Building does not record a provision in the books with respect to the inspection warranty. Property & Building also insures the projects independently on the date of their construction, at the expense of the contractors. Property & Building Corporation has no dependence on any particular supplier and/or service provider Activities of Property & Building in the residential construction segment abroad Proximate to the publication date of the report, Property & Building is active in the residential construction segment abroad, primarily in India Structure of the residential construction segment abroad Similarly to the revenue-generating properties segment abroad, in this segment as well, Property & Building operates with the assistance of its managerial staff, which enlists the assistance of local employees and consultants Restrictions, legislation, standardization and special constraints which apply to the international residential construction segment The law in India imposes restrictions and oversight on the activities of foreign companies and foreign residents in India, including a prohibition on shareholder s loan from foreign residents to real estate companies in India, restrictions and conditions on all matters associated with the investments of foreign residents in India, conditions and minimum requirements for the performance of real estate projects, and restrictions on methods for financing banks in India and foreign banks of projects in the real estate segment in India.

103 Changes in the scope of activities in the residential construction segment abroad and the profitability thereof An associate company of Property & Building engaged, in early 2016, in a transaction for the sale of its rights to the residential project in Hyderabad, India, to the local partner in the project, and the marketing and construction of Stages A and B of the project commenced in Chennai. Property & Building also holds (together with partners) lands in India and Romania which are intended for residential projects. In October 2016, Property & Building signed a preliminary agreement for the sale of the land which is held by Property & Building in Romania. In addition to the general assessments regarding the foreign markets in which Property & Building is engaged, according to the assessment of Property & Building, as of the date of this report, the residential branch in India is characterized by a shortage of residential units, and this segment is expected to grow in the coming years. The factors which are expected to positively contribute to the continued demand in India include an increase of available income, development of the mortgage market, an increase in population and a decrease in the number of individuals per residential unit. For additional details regarding the economy in India, see section of this part Critical success factors in the segment and changes occurring therein: According to the assessment of Property & Building Corporation, in connection with the activity abroad, the success factors listed in section of this part are added to the following factors: (1) Project management by the managerial staff of Property & Building Corporation, together with the local staff and local partners in the target countries, who have a great deal of expertise and experience in the promotion, marketing and management thereof vis-à-vis local entities and authorities (primarily in India), and (2) Good access to convenient financing sources for the construction of projects. It is emphasized that, given the current state of the markets, the success of Property & Building in this activity primarily depends on the extent of the markets recovery from the economic crisis Main barriers to entry and exit of the residential construction segment abroad and changes occurring therein According to the assessment of Property & Building Corporation, the main barrier in the initiation segment of the residential construction branch abroad is the possibility of raising financing to build the projects, primarily due to the credit crisis. The additional barriers to entry are similar to those which exist in Israel. There is also a great deal of importance to having an familiarity and understanding of the local market and the characteristics of the activity in the residential real estate construction segment in those countries.

104 Structure of competition in the residential construction segment abroad and changes occurring therein According to the assessment of Property & Building, in the foreign markets where it is engaged, as of the date of this report, its market share is insignificant. Property & Building Corporation estimates that the international markets in which it is engaged are each characterized by unique market conditions; however, according to the assessment of Property & Building Corporation, the main parameters of the competition are similar to those in Israel Products and services Property & Building holds an associate company which plans and builds residential projects in India. Additionally, Property & Building, through PBS Real Estate Holdings S.R.L ( PBS ) 47, engaged in an agreement for the sale of the rights to the land division which is intended to residential construction in Bucharest, Romania, as specified in section below. Property & Building also holds, through IDBG, residential land in Las Vegas, as specified in section above Land reserves for construction abroad within the framework of companies under joint control of Property & Building As of the date of this report, Property & Building, together with partners (share of Property & Building - 25%) have a land reserve for the construction of a residential project in Romania, with an area of 27.5 dunams, in Bucharest, which is designated for residential construction, at a scope of approximately 800 residential units, with a total area of approximately 80,000 square meters. As stated above, in October 2016, Property & Building signed a preliminary agreement for the sale of the land reserves which are held by Property & Building in Romania, which is contingent upon the receipt of various approvals Suppliers and liability towards customers abroad The raw materials and suppliers in the residential construction segment abroad are similar, in terms of their characteristics, to those described in the residential construction segment in Israel Data in connection with projects in the residential construction segment abroad Land reserves for residential construction Las Vegas, USA: IDBG, together with additional investors, holds Real Estate Corporations which operate in Las Vegas, including a real estate corporation (QT) which primarily operates in the residential segment. Presented below is data regarding the land reserves in the QT and GW projects: Name and location of project Stage B - QT project Stage B - GW project Total available residential units whose constructi on has not yet begun Share of Property & Building in available residential units whose constructi on has not yet begun Acquisiti on date of the land rights Descri ption of the rights to the land Owners hip Owners hip Terms and required authorizat ions Function al currency * Translated according to the USD exchange rate as of December 31, Activities in the residential construction segment abroad through associate companies Total costs which accrued as of December 31, 2016 (share of IDB Development and Property & Building Corporation, each) Total in million s of USD Total (NIS millions) * No USD No USD Presented below are additional primary details regarding the investment of Property & Building in PBEL Real Estate Limited, which is an associate company of Property & Building, which holds real estate properties in the residential construction segment in India. 47 PBS is a company incorporated in Romania, and 50% of its rights are held by Property & Building through PBC International Investments. To the best of Property & Building s knowledge, the owner of the other PBS shares is B.S.T. Romania Ltd., which is held at a rate of 35% by B.S.T. Initiation and Development Ltd., 35% by Mr. Yanus Subahi, and 30% by Yokland Ltd.

105 102 A. General PBEL RE, an associate company which is held by Property & Building (indirectly) at a rate of 45%, is the owner of 90% of the rights to a joint Indian company called PBEL Property Development (India) Private Limited ( PBEL Property ). The balance of holdings in PBEL Property (at a rate of 10%) are held by the Indian partner, while, in certain cases, an increase in the holdings of PBEL RE is possible, at a rate of an additional 6.16% of the share capital. As of the date of this report, PBEL Property has two real estate land divisions - land with an area of approximately 130 dunams, in the city of Chennai (on which the construction of a residential project has begun, as specified below), and land with an area of approximately 40 dunams, in the city of Mysore. B. Projects Until now, marketing and construction have begun on two stages of the project in Chennai - Stage A, which includes 388 residential units, of which, as of December 31, 2016, 355 residential units have been sold (of which approximately 150 residential units have been occupied), and Stage B, which includes 160 residential units, of which 40 residential units have been sold. For the purpose of executing the aforementioned projects, PBEL Property created a local operations unit, including workforce in the field of engineering, bookkeeping and project management, managed by the third party. C. Land reserves In early 2013, the marketing and construction of Stage A (of two stages) was commenced in the Chennai project, at a total scope of 388 residential units (of which, as of December 31, 2016, approximately 355 residential units have been sold). There are also 650 residential units in the Chennai project whose construction has not yet begun. The total cost of the acquisition of the land for the project in Chennai amounted to approximately USD 34 million, and the share of Property & Building amounted to approximately USD 17 million, financed from its own sources. In the city of Mysore, the investee company holds land whose cost is approximately USD 5 million, and the share of Property & Building amounted to approximately USD 2.5 million, financed from its own sources. Additionally, in early 2016, the balance of the project in Hyderabad was sold. The consideration from the sale, in the amount of USD 34 million, will be paid in installments by the end of 2018, at the latest, where a part of the land will be transferred upon each payment. As of the present date, two stages in the transaction have been completed, in which USD 18.5 million has been paid. As a result of the transaction, the investee company is expected to record net profit in the amount of approximately USD 5 million. Romania: In October 2016, Property & Building signed a preliminary agreement for the sale of the land which Property & Building holds in Romania Human capital As of proximate to the publication date of the report, Property & Building employs 119 employees (113 employees at the end of 2015) (not including employees of associate companies in Israel and abroad, and operation and maintenance employees in subsidiaries) Working capital Presented below are details regarding the composition of Property & Building s working capital as of December 31, 2016: Amount included in the financial statements of Property & Building Corporation (NIS millions): Adjustments (for twelve month period) Total Current assets Liquid balances 2,070-2,070 Trade receivables and other receivables Inventory of buildings for sale 732 (558) 174 Total current assets 2,940 (558) 2,382 Current liabilities Advance payments from apartment buyers 322 (240) 82 Current financial liabilities 1,359 (125) 1,234 Liabilities to suppliers and service

106 103 providers and other creditors Total current liabilities 2,051 (365) 1,686 Working capital 889 (193) Financing The operating cycle of the residential construction segment of Property & Building is greater than one year. Therefore, current assets include properties (inventory of buildings for sale) which are expected to be realized during a period greater than one year, and accordingly, current liabilities include items which are expected to be realized during a period greater than one year (advance payments from apartment buyers, bank credit o finance construction and liabilities for construction services). The adjustments for a period of twelve months, as presented above, were calculated in accordance with the estimate of Property & Building Corporation regarding the timing of realization of the aforementioned sections Presented below are details regarding the average interest rate on the long term loans and short term loans which were in effect during 2016, which are not intended for designated use by Property & Building: Long term Short term Amount (NIS millions) Interest rate % Average Average effective interest rate (%) Amount (NIS millions) Average interest rate (%) Average effective interest rate (%) Extra-banking sources - CPI-linked financing 5, Extra-banking sources - linked Banking sources - NIS unlinked 1, Banking sources - USD 1, Banking sources - NIS unlinked financing Total financial liabilities 9, See also Note 14.C.2 to the Financial Statements regarding loans from banks which Property & Building Corporation and its subsidiaries received in Property & Building is considered as part of a group of borrowers, and as part of the IDB Group. For additional details, see section 7.2 of this part. As of proximate to the publication date of the report, these restrictions did not affect the ability of Property & Building Corporation to receive bank credit, nor the scope of the bank credit which it received Property & Building pledges assets (including additional rights associated with those assets), where the finance for their acquisition was obtained through bank credit, and in certain cases, also pledges holdings of companies in Property & Building For details regarding the liabilities with respect to the series of debentures which were issued by Property & Building, and which have not yet been fully repaid as of December 31, 2016, see Notes 14.A, 14.C.3, and 14.C.4 and 14.C.5 to the Financial Statements. All of the debentures which were issued by Property & Building are not convertible into shares. Debentures (Series C-I) of Property & Building Corporation, debentures (Series E-G) of Gav-Yam, and debentures (Series B) of Ispro are listed for trading on the Tel Aviv Stock Exchange. All of the debentures which were issued by Property & Building are not secured by pledges, and do not require the fulfillment of any financial covenants, excluding the debentures (Series F-I) of Property & Building Corporation, the details of which are provided in section F.3.C in Note 14.F to the Financial Statements As of December 31, 2016, Property & Building has binding credit facilities in the amount of approximately NIS 1.5 billion (including Sale Law guarantees), within the framework of residential construction projects with bank accompaniment, of which approximately NIS 830 million were used For details regarding a loan in the amount of USD 400 million which was provided to Property & Building in

107 104 connection with the HSBC building, see section 3.A. in Note 14.F to the Financial Statements Credit rating Presented below are details regarding the last credit rating which was provided by Property & Building during the reporting period: Name of rating company Date of change Changes in rating Type of rated credit Maalot Approval for rating of ila/stable (stable rating outlook) Midroog Approval for rating of A1.il (stable rating outlook) Outstanding debentures (Series C-D) of Property & Building Debentures (Series C-D and Series F-I) of Property & Building Presented below are details regarding the last credit rating which was provided for Gav-Yam during the reporting period: Name of rating company Date of change Changes in rating Type of rated credit Maalot Ratification of rating of ilaa- /Stable (stable rating outlook) Midroog Ratification of rating of Aa3 (stable rating outlook) Outstanding debentures (Series E, F and G) of Gav-Yam Outstanding debentures (Series E, F and G) of Gav-Yam Presented below are details regarding the last credit rating which was provided for Ispro during the reporting period: Name of rating company Date of change Changes in rating Type of rated credit Maalot Ratification of rating of ila/stable (stable rating outlook) Debentures (Series B) Raising of additional sources The raising of financing additional sources during the coming year will be evaluated by all of the companies in Property & Building, in consideration of their operating activities, market conditions, business opportunities, business development, and any other requirements, in accordance with the resolutions which between passed by the competent organs of each of the companies, and in Property & Building, including financing of the equity component in the acquisition and initiation of new projects Guarantees Presented below are details regarding main guarantees which Property & Building provided in favor of subsidiaries: Property & Building provided guarantees in favor of commercial banks to secure loans which Ispro received, with no restriction as to amount. As of December 31, 2016, the balance of the loans which was taken by Ispro, in connection therewith, for which Property & Building serves as a guarantor, as stated above, amounted to a total of NIS 67 million Within the framework of a loan which was provided to Property & Building, in the amount of USD 400 million, in connection with the HSBC building, as specified in section above, Property & Building provided a guarantee for the payment of losses which may be incurred by the lender as a result of certain cases only, which were defined as conventional cases in agreements of this kind (such as fraud, misrepresentation, etc.) ( Carve Out" guarantee), which is limited to a total of up to USD 125 million In connection with the new loan which was taken by IDBG from the lender (as specified in section above), several securities were provided to the lender, including guarantees (jointly and severally), which were provided by Property & Building and by IDB Development. The guarantee is a perpetual guarantee to secure the repayment of the amounts which are owed to the lender from IDBG in connection with the loan agreement. Property & Building and IDB Development engaged in an automatic indemnification agreement which determines that in case the guarantee is forfeited in a non-equal manner (i.e., the lender collects from one of the parties an amount exceeding its relative share in IDBG), the party which paid more than its share in the forfeiture of the guarantee will have right of recourse towards the other party, and priority regarding the receipt of the balance of the consideration from the receipts of IDBG, in a manner which will compensate it for each such overpayment, such that, in the relationship between the guarantee, the liability of each party among IDB Development and Property & Building in accordance with the guarantee will be limited to its share in IDBG (50%).

108 Taxation Tax laws pertaining to activities in Israel. The provisions of tax laws in Israel which apply to the Property & Building companies which operates in Israel are similar in nature to the tax laws which apply to IDB Development, as described in Note 30 to the Financial Statements. Tax laws pertaining to activities abroad. Property & Building is obligated to pay taxes abroad with respect to taxable profits of each Property & Building company, in accordance with the local tax laws which apply in each country where that company is incorporated. The tax liability of foreign companies which hold real estate is with respect to the profit (or income) from the sale of properties, and with respect to rental income or interest income which were received, after deducting expenses which were spent directly in connection with the properties, including interest which is paid with respect to the acquisition of the properties, maintenance, renovation and property management expenses, and depreciation deductible on part of the cost of the properties (according to a rate which varies from property to property), and with respect to perishable systems, in accordance with the local tax laws in the country where the company holding the real estate is incorporated and/or in the country where the income is generated. The tax rates which are paid on the income vary from country to country. Dividend distributions between companies in Property & Building may be subject to deduction of tax at source in the country where the distributing company is incorporated and/or in the country where the income is generated, subject to the provisions of the relevant tax treaty Material agreements which are not in the ordinary course of business and strategic collaboration agreements For details regarding guarantees, jointly and severally, which were provided by Property & Building and IDB Development in favor of IDBG, see section above For details regarding an engagement by Property & Building Corporation with Rock Real Estate Partners Limited in a services agreement, which expired in December 2012 (in accordance with the provisions of Amendment 16 to the Companies Law, 3 years after the date of its initial approval), and regarding a re-evaluation of the liabilities of Property & Building towards Rock Real in accordance with a legal opinion which Property & Building adopted, see Note 15.D. to the Financial Statements In November 2006, Property & Building engaged, through PBC International Investments, with a member company of Electra Real Estate Group and a third party, in a collaboration agreement in connection with the initiation and construction of projects in India in the revenue-generating real estate segment and in the residential construction segment, as specified in section above Goals and business strategy The policy of Property & Building was to continue implementing its growth strategy - developing its revenuegenerating properties and increasing its income from such activity, which constitutes its core activity, by building on lands which it owns, and identifying new opportunities. In parallel, Property & Building will work to realize properties which have exhausted their betterment potential, and to maintain significant financial stability. Growth - Property & Building intends to expand its activity in the revenue-generating properties segment in Israel, by continued construction and marketing of new projects on lands which it owns, while emphasizing the marketing of projects whose construction is planned to conclude in Optimization of the portfolio of existing revenue-generating properties - in the revenue-generating properties segment, Property & Building will continue its policy of preserving its existing high-quality customers by providing high quality management and maintenance services, while maintaining a high occupancy rate in its properties, and increasing its rental income. In the residential construction segment - continued marketing and construction of high-quality residential neighborhoods and optimization of lands which are owned by Property & Building. Realizations - Property & Building will evaluate, from time to time, the realization of properties which do not constitute strategic properties for Property & Building, or which have exhausted their betterment potential. Financial stability over time - Property & Building will maintain financial stability and an adequate level of liquidity. The business plans of Property & Building, as specified above, constitute forward looking information, and reflect the policy of Property & Building as of proximate to the publication date of the periodic report, and are based on the current assessments of its operating segments. The plans of Property & Building may change, in whole or in part, from time to time. There is no certainty regarding the realization of the intentions or strategy of Property & Building. It is possible that the goals described above will not be achieved in the future, or that Property & Building will decide not to implement the strategy described above, in whole or in part, due, inter alia, to the following reasons: Changes in the macro-economic trends which affect the state of the economy, the state of the real estate branch in Israel, the state of the capital market in Israel and around the world, changes in economic profitability, changes in competitive market conditions, and changes in the markets themselves, regulatory changes, and due to the other risk factors which apply to the activity of Property & Building, as specified below.

109 Discussion regarding risk factors Macro factors State of the Israeli economy - A deterioration in the state of the Israeli economy, such as a decrease in the economy growth rate, an increase in unemployment and a decrease in growth per capita, particularly in light of the possibility of a resurgence of the global economic crisis and the political shocks in the Middle East, may have an adverse effect on the results of operations of Property & Building, both in the revenue-generating properties segment and in the residential segment. Risks associated with foreign operations - The state of the economy around the world in general, and in the United States in particular, has a significant impact on the markets in which Property & Building operates. The growth rates and the interest policy in the various countries affect the income of Property & Building. Significantly adverse changes in the state of the economy in a country where Property & Building holds properties, affect the operations and the ability to realize investments of Property & Building in that foreign country, as well as its business development and the receipt of financing under reasonable conditions. Concern regarding the development of a global economic crisis, and a recession in the global economy, have an adverse effect on the various markets in which Property & Building operates, primarily in the United States. For additional details regarding the state of the global economy, see sections 7 and 10.7 of this part. Characteristics of the foreign business environment - In its foreign activities, it is the practice of Property & Building to cooperate with local entities engaged in the segment. The characteristics of the foreign business environment, including local regulation, the purchasing power of citizens, financing possibilities, etc., may affect the success of the foreign operation, which is also dependent upon the choices of the local entities. Additionally, if the profitability considerations of Property & Building failed to take into account all of the relevant factors in the relevant country, the foregoing may adversely affect the results of operations of Property & Building. Security situation in Israel - A significant deterioration in the political-security situation in Israel, and in light of the political instability in the Middle East, may result in decreased demand for rental areas and residential units, an exacerbation of the manpower deficit in the construction and agriculture segment, and the increased costs of works. These factors may adversely affect the results of Property & Building. Branch-specific factors Increased construction costs - Extreme changes in the consumer price index and/or in the construction input price index may have an adverse effect on the construction price of new properties, and indirectly on the results of operations of Property & Building. Additionally, the economic situation of the executing contractors in Israel may have an effect on Property & Building, inter alia, due to the decrease in the supply of contractors, the increase in construction costs, and the extension of timetables for the construction of projects. Supply of rental areas - A significant decrease in the growth rate in the Israeli economy, and a significant increase in the surplus supply of rental areas, inter alia, due to the construction of additional office and commercial areas which may cause a decrease in the rental prices, and may affect the income of Property & Building from revenuegenerating properties. Availability of raw materials and workforce - An ongoing delay or shortage in raw materials or a skilled construction workforce may affect the ability of the prime contractors with whom Property & Building engages to meet the original timetables which were determined for the completion of the works, and the cost of the works which are paid by Property & Building. Intensification of the shortage of workforce in the construction segment in general, and of the foreign workers in the construction segment in particular, also affect wages in the construction segment, which may affect construction costs and timetables for the completion of projects in the construction segment. The cost of work salary is also affected by the operations of Property & Building, such as security and cleaning works, by changes in the minimum wage in the market, and to collective agreements which apply to the aforementioned activities. Changes in legislation and standardization - Extreme changes in permits, regulations, restrictions and government oversight as specified in section 10.7 of this part, such as changes in municipal tax laws in areas where Property & Building properties are located, may affect the operations and results of Property & Building. The activities of Property & Building in the residential segment may also be affected by regulatory changes in connection with the marketing of apartments and lands, and in taxation in connection therewith. Special factors Securities prices - Property & Building is exposed volatility in the prices of securities (primarily debentures) on the stock exchange, with respect to the investment of some of its cash surplus in such securities. Foreign currency risks - The activities of Property & Building in Israel are not directly affected by fluctuations in the USD exchange rate relative to the NIS, due to the fact that the rent charged by Property & Building from its customers, and the loans which it has raised, are linked to the consumer price index. However, Property & Building has foreign currency risk due to its foreign investing activities, the financing of those investments, and the operating

110 107 activities due to those investments. Additionally, in light of the fact that some of the customers of Property & Building Corporation in Israel are international companies, which managed their activities in USD, in case of a decrease in the exchange rate, rent becomes more expensive relative to the USD, and therefore, there is pressure on international lessees to reduce the NIS rent accordingly. Interest rate risks - Extreme changes in interest rate risks in Israel and abroad may affect the value of Property & Building s properties. The higher the interest rates increase, the higher the required return on the properties, and the lower the value of the property as a result, and vice versa. Difficulties in financing and raising capital - Developments in the financial crisis in Israel and around the world may harm the possibilities of Property & Building to raise funding for additional investments. Additionally, restrictions on the maximum scope of credit which the commercial banks in Israel are entitled to provide to each of the member companies of the IDB Group as a single borrower, including Property & Building and the other member companies of Property & Building, may affect the ability of property company to receive bank credit, or the scope thereof. Additionally, Property & Building may be affected by specific restrictions which could affect the banks ability to provide financing to the real estate branch, such as stringent requirements regarding capital adequacy and restrictions regarding branch-specific exposure. The Concentration Law - For details regarding the possible implications of the Concentration Law on Property & Building, see section of this part and Note 3.G.3. to the Financial Statements. Presented below are the estimates of Property & Building Corporation with respect to the classification and extent of impact of the aforementioned risk factors on Property & Building Corporation:

111 108 Macro factors Branch-specific factors Factors which are unique to Property & Building Corporation Extent of impact of the risk factor on Property & Building in its entirety Major impact Medium impact Minor impact State of the Israeli economy Risks associated with foreign operations Characteristics of the foreign business environment Security situation in Israel Supply of rental areas Availability of raw materials and workforce and increased construction costs Changes in legislation and standardization Interest rate risks Difficulties in financing and raising capital The Law to Promote Competition and Reduce Concentration Prices of securities Foreign currency risks

112 11. Shufersal Ltd. 109 Presented below is a description of and details regarding Shufersal, which constitutes an operating segment of IDB Development (according to the operating segment tests specified in IFRS 8, as specified in section 2 of this part): 11.1 Presented below are data regarding IDB Development s investment in Shufersal as of December 31, 2016: Name of holding company Holding rate (in percent) Investment amount (concatenated) in Shufersal recorded in the books of IDB Development (NIS millions) Rate which constitutes the investment amount in Shufersal out of the total capital attributed to the owners of IDB Development Market value of the concatenated investment in Shufersal (NIS millions) Contribution to results attributable to the owners of IDB Development in 2016 (NIS millions) Description of activity DIC % 1, Retail chain Presented below are data from Shufersal s consolidated financial statements as of December 31, 2016 (NIS millions): Income in 2016 Net profit attributable to the owners of Shufersal in 2016 Capital attributable to the owners of Shufersal as of December 31, 2016 Total assets as of December 31, , ,315 6,764 Accounting reference in the books of IDB Development Consolidated company Shufersal is a public company whose securities are listed for trading on the stock exchange. Shufersal operates both directly and through its investee corporations, and owns the largest supermarket chain in Israel in terms of sales volume. 50 In September 2016, after DIC acquired shares of Shufersal from Bronfman Fischer Partnership, and the holding rate of Bronfman Fischer in Shufersal shares fell below 10%, the shareholders agreement between DIC and the Bronfman Fischer Partnership expired, with respect to their holdings in Shufersal, and which included, inter alia, provisions regarding: Dividend distributions, appointment of directors and filling of positions including the Chairman of the Board, Vice Chairman of the Board, and Deputy Chairman of the Board, as well as transactions of Shufersal in which one of the parties to the shareholders agreement has a personal interest Shufersal operates in three operating segments: the retail segment, the real estate segment, and the credit card customer club management segment, as described below: Retail segment Retail marketing in the food and other products segment is the primary operating segment of Shufersal, which is the owner of the largest supermarket chain in Israel. As of December 31, 2016, Shufersal operated 272 branches (as compared with 277 branches at the end of 2015), within the framework of two groups of branches: the discount branches group and the neighborhood branches group, distributed throughout the entire country, including four main retail formats, as well as Shufersal Online, and activities in the health products segment (under the brands Organic Market and Green ), as specified in section of this part. 48 After deducting dormant shares of Shufersal which are held by Shufersal itself. For details regarding the approval of the Antitrust Commissioner in connection with the passing of the 50% limit with respect to DIC s holding of Shufersal and regarding acquisitions of Shufersal shares which DIC performed in 2016, see section 11.3 of this part. 49 Reflects an increase of 2.9% relative to The turnover in Shufersal branches in 2016 increased by approximately 3.8% relative to The difference between the increase in Shufersal revenues and the increase in Shufersal turnover is primarily attributed to the increase in franchisee activities. It is noted that Shufersal is engaged in agreements with several franchisees which operates various points of sale in Shufersal branches, in consideration of payment of a commission to Shufersal, out of the total sales in the points of sale operated by those franchisees. The activity of franchisees which is presented under income includes only the commissions which are received in Shufersal with respect to the aforementioned activity. 50 The information presented in this section 11, and the estimates of Shufersal, rely, inter alia, and as applicable, on the publications of the Central Bureau of Statistics (the CBS ), data from Storenext, data from the Bank of Israel, economic publications, as well as public information which was reported by several Israeli retailers and food producers, with respect to their activities.

113 110 Real estate segment. The real estate activities of Shufersal were separated, beginning on April 1, 2013, into Shufersal Real Estate Ltd. ( Shufersal Real Estate ), a wholly owned subsidiary whose assets include both branches which are rented to Shufersal (which are classified in Shufersal s consolidated financial statements as fixed assets), and real estate properties which are rented out to third parties) which are classified in Shufersal s consolidated financial statements as investment property). The aforementioned properties do not include Shufersal s logistical center in Rishon Letzion (including the attached branch), and Shufersal s new logistical center in Shoham. The real estate activity includes: (A) The development and betterment of the real estate as an additional, independent business segment generating returns for Shufersal (such as the rental of commercial areas to third parties), and unlocking value for Shufersal and its shareholders; and (B) Integrating Shufersal s primary activity in the retail segment, including: betterment and development of existing properties, acquisition of lands for the purpose of building and operating regional and local operating branches, and betterment and construction of surrounding commercial areas to increase the scope of activity in the complex Such real estate is classified in the books of Shufersal Real Estate under investment property, while in the books of Shufersal, it is classified under fixed assets.

114 111 Presented below are details regarding the real estate properties which are owned by Shufersal Real Estate as of December 31, 2016: Number of Total area (thousands properties of square meters) Fair value (NIS millions) Branches rented to Shufersal ,646* Properties under construction which will be rented to Shufersal 4 9** 76***, * and to externals Real estate properties rented to externals **** Total ,223 * The fair value is in accordance with the presentation of these properties in the books of Shufersal Real Estate. In the books of Shufersal, these properties are classified according to their amortized cost of acquisition, and not at fair value. The balance of the amortized cost in the books of Shufersal as of December 31, 2016, which includes branches which are leased to Shufersal, and branches under construction which will be leased to Shufersal, amounted to NIS 965 million. ** Not including lot areas regarding which, in 2016, a zoning plan was approved which permits construction at a scope of approximately 40 thousand built square meters *** Including branches under construction with a total fair value of NIS 34 million. **** Rent and management fees with respect to these properties in 2016 amounted to approximately NIS 44 million, and the NOI with respect to them (gross profit with respect to them in Shufersal Real Estate, in annual terms) is approximately NIS 25 million. Credit customer club management segment. This segment constitutes a reportable operating segment in Shufersal s financial statements, beginning with the financial statements as of December 31, Under this operating segment, Shufersal offers to the general public (subject to the fulfillment of the minimum conditions), the Shufersal credit card and the Yesh credit card, which provide an extra-banking credit facility and benefits to customers, in the vast majority of Shufersal branches and refueling stations of Paz Ltd., and which confer membership in Shufersal s customer club. Shufersal is engaged in an agreement with Leumi Card Ltd. ( Leumi Card ) on all matters associated with the operation of credit cards. Shufersal is also a limited partner in Shufersal Finance Limited Partnership (and a shareholder in the general partner of Shufersal Finance), together with Leumi Card and Paz Oil Company Ltd. ( Paz ), whose purpose is the operation of credit card activity and the provision of credit through the aforementioned credit cards, and the provision of financial services, the provision of agency services and the distribution of various financial products to credit card holders and to private customers (through Leumi Card). It is noted that the regulation associated with the issuance and operation of the credit cards does not apply to Shufersal, or to Shufersal Finance. See also Note 14.A.2 to the financial statements for details regarding the aforementioned activity of Shufersal Investments in capital and transactions with Shufersal shares in the last two years Except as specified below, during the years 2015, 2016 and 2017 (until proximate to the publication of the report), no investments were performed in Shufersal s capital (other than the exercise of options by corporate officers), and no material transactions were performed with Shufersal shares by interested parties in over the counter transactions: It is noted that some of the transactions specified in the table were performed as part of trading on the stock exchange. These are presented for the sake of completeness. It should also be noted that Clal Insurance Enterprises Holdings Ltd. acquired, in 2016 and 2017 (until proximate to the publication of the report), Shufersal shares in an immaterial scope. For additional details regarding the acquisitions of Shufersal shares by DIC within the framework of trading on the stock exchange, see Note 3.H.3 to the financial statements.

115 112 Date Interested party Action Matthew Bronfman * Yaakov (Sholem) Fisher * DIC 53 Isralom properties 54 Total % of issued capital Total consideration (NIS) Weighted price per ordinary Shufersal share (NIS) Acquisition ,980,248 Approximately 8.86 Sale** ,079,038 Approximately Sale** ,421,439 Approximately Acquisition* * ,137,806 Approximately Sale *** ,827,457 Approximately Acquisition DIC ,699,999 Approximately *** * To the best of Shufersal s knowledge, Matthew Bronfman and Yakov (Sholem) Fisher are the controlling shareholders of Isralom Properties Ltd. ( Isralom ), through Bronfman Fischer (B.F.) Trade, Limited Partnership (the Bronfman Fischer Partnership ), which was an interested party in Shufersal during the reporting period. ** A total of 4,828,563 ordinary Shufersal shares, for a total consideration of NIS 53,500,477, and at a weighted price of approximately NIS per share, were purchased by DIC directly from Messrs. Matthew Bronfman and Yakov (Sholem) Fisher. *** (A) A total of 2,000,000 ordinary Shufersal shares were sold by Isralom to DIC in a coordinated transaction on August 16, 2016, for a share price of NIS per share; (B) A total of 9,097,127 ordinary Shufersal shares were sold by Isralom to DIC, by virtue of the share purchase agreement between Bronfman Fischer partnership and DIC dated September 12, 2016 (the Purchase Agreement ), in which DIC acquired from Isralom the aforementioned ordinary Shufersal shares at a share price of NIS per share, and received an option to acquire the same number of shares for a limited period. On December 12, 2016, the option expired. In parallel with the signing of the acquisition agreement, the shareholders agreement between DIC and the Bronfman Fischer partnership expired, and was terminated; (C) An additional total of 5,304,102 ordinary shares were purchased by DIC from Isralom, at a price of NIS per share, on December 12, As of the reporting date, DIC holds 60.67% of Shufersal s issued share capital and voting rights (approximately 59.04% at full dilution) (after deducting dormant Shufersal shares which are held by Shufersal itself). 54 Following the sale of the aforementioned shares by Isralom, on December 7, 2016, Isralom ceased being an interested party in Shufersal.

116 Dividend distribution Presented below are details regarding dividends which Shufersal distributed over the years 2015, 2016 and 2017, until proximate to the publication of the report (Shufersal did not declare and did not distribute dividends in 2015): Distribution date** Distribution method (cash / other) Amount of distribution (NIS millions) April 2017 * Cash 160 April 2016 Cash 100 * On February 21, 2017, subsequent to the date of the statement of financial position, the Board of Directors of Shufersal announced a dividend distribution at a total scope of NIS 160 million. The effective date for the payment of the dividend was set as March 21, 2017, and the payment date was set as April 4, ** The aforementioned dividend distributions did not require court approval. The distributable earnings of Shufersal as of December 31, 2016 amount to a total of approximately NIS 502 million. For details regarding the restrictions on the dividend distributions which were included in the deeds of trust according to which Shufersal issued the debentures (Series D, E and F), see Note 14.F.4 to the financial statements Presented below is financial information regarding Shufersal s activity (NIS millions): 2016 Revenues From externals (NIS From other operating segments millions) Total Total Costs which do not constitute income in another attribute operating segment d costs Costs which constitute income in other operating (NIS segments millions) Total Fixed costs attributed to the operating segment Variable costs attributed to the operating segment Operating income attributable to the owners of Shufersal (USD millions) Share in operating income attributed to non-controlling interests (USD millions) Total assets attributable to the operating segment (NIS millions) Total liabilities attributable to the operating segment (USD millions) Retail segment 11, ,798 11, ,492 1,494 9, ,273 5,004 Real estate segment ,323* 1,037 Credit card customer club managem ent segment Adjustm ents for the consolid ation (75) (126) (201) (28) (103) (131) (70) -- (1,029) (760) Consolid ated 11, ,842 11, , ,764 5,449

117 Revenues From externals (NIS From other operating segments millions) Total Total Costs which do not constitute income in another attribute operating segment d costs Costs which constitute income in other operating (NIS segments millions) Total Fixed costs attributable to the operating segment Variable costs attributable to the operating segment Operating income attributable to the owners of Shufersal (USD millions) Share in operating income attributed to non-controlling interests (USD millions) Total assets attributed to the operating segment (NIS millions) Total liabilities attributable to the operating segment (USD millions) Retail segment 11, ,456 11, ,305 1,696 9, ,086 5,770 Real estate segment ,295* 1,099 Credit card custome r club manage ment segment Adjustm ents for the consolid ation (67) (131) (198) (23) (105) (128) (70) -- (1,314) (951) Consolida ted 11, ,505 11, , ,230 6, Revenues From externals (NIS From other operating segments millions) Total Total Costs which do not constitute income in another attribute operating segment d costs Costs which constitute income in other operating (NIS segments millions) Total Fixed costs attributable to the operating segment Variable costs attributable to the operating segment Operating income (loss) attributable to the owners of Shufersal (USD millions) Share in operating income (loss) attributed to non-controlling interests (USD millions) Total assets attributed to the operating segment (NIS millions) Total liabilities attributable to the operating segment (USD millions) Retail segment 11, ,553 11, ,724 1,759 9,965 (171) -- 6,194 5,789 Real estate segment ,287* 1,214 Credit card custome r club manage ment segment Adjustm ents for the consolid ation (63) (129) (192) (26) (105) (131) (61) -- (1,599) (1,117) Consolida ted 11, ,602 11, ,649 (48) 1 7,012 6,003 * Total assets attributed to the real estate operating segment also include branches rented to Shufersal. Shufersal s operating segments include shared costs. Adjustments to Shufersal s consolidated financial statements, with respect to data regarding income, costs, assets and liabilities, primarily include the neutralization of the income with respect to the leased branches by Shufersal Real Estate for the retail activity, the branches depreciation expenses, and debentures and loans which are used in the real estate activity, as well as the neutralization of the income, costs, assets and liabilities with respect to the credit card customer club management segment, which are

118 115 included under the retail segment. Presented below are data regarding the share of IDB Development in the profit (loss) from operating activities (operating profit (loss)) in the Shufersal operating segment (NIS millions) (these data were calculated based on the holding rates at the end of each of the aforementioned years): Attributable to the owners of IDB Development Attributed to non-controlling interests (18) (29) For an analysis of Shufersal s results of operations, see section of the board of directors report General environment and impact of external factors with respect to Shufersal General Shufersal s activities are affected by various macro-economic factors, including the growth rate in the economy and the state of the local economy, the inflation rate, the growth of the food market, private consumption per capita (including available income per capita), and more. According to the data of the Bank of Israel and macro-economic sources, 2016 was characterized by a deceleration in economic activity in the market, as well as shrinking demand and low growth rates (growth rate of approximately 3.6% in 2016). According to Storenext data, in 2016, the retail market continued its trend of deceleration, which has characterized it in the last three years. According to the forecasts of the Bank of Israel and macro-economic sources, a return to the growth trend in the retail food market is not expected in 2017, and low growth rates of 3.2% only are expected in the market in As of the reporting date, it is not possible to predict the time period during which the current atmosphere will prevail on all matters associated with trends in the retail food market which have characterized recent years. Accordingly, it is difficult to assess the total scope of direct and indirect economic consequences, in the short, medium and long term, of the aforementioned situation on Shufersal, its asset value, results, business position, equity and ability to realize its assets. Shufersal management routinely evaluates the possible developments and implications of the state of the economy on Shufersal s business operations Cost of living The issue of cost of living in Israel affects the entire political and economic discussion in Israel, as well as economic activity, including in the retail food segment, which is reflected, inter alia, in the price-directed preferences of consumers. The issue of cost of living in Israel may adversely affect Shufersal s business results, due to the considerable consumer pressure applied on Shufersal to reduce the prices of the products which it sells, and the increasing competition on the part of discount chains, which are expanding their operations Regulation For details regarding the effects of the Concentration Law on the control of Shufersal, see also section 7.3 of this part and Note 3.G.3 to the financial statements In March 2014, the Food Law was published. The Food Law includes three sets of provisions, as described below:

119 116 1) Set of provisions regulating the activities of suppliers and retailers On January 15, 2015, provisions regulating the activities of suppliers and retailers entered into effect. These provisions determine, inter alia: (1) A prohibition on suppliers against intervening, in any form whatsoever, with the retailer, regarding establishing the prices which the retailer charges consumers for the products 55 of another supplier, or the terms of such sale. (2) Prohibition on retailers against intervening in any manner whatsoever with the supplier regarding the price which another retailer charges for a product, or the terms of such sale; (3) A prohibition against the performance of arrangement of products or intervention in the arrangement of products in the stores of a large retailer 56, by a large supplier 57 On December 14, 2014, the Antitrust Commissioner (the Commissioner ) published, by virtue of his authority under the Food Law, rules which exempt shelving arrangements from the aforementioned prohibition, at large retailers, subject to the fulfillment of certain criteria (with respect to all or any of a retailer s stores, respectively, if more than half of their total sales were received from the sale of products of suppliers which are not large during the previous fiscal year). Additionally, transitional provision were also established which permitted, with respect to 2015, shelving arrangements of products between large supplier and large retailers, subject to the fulfillment of certain rules of conduct. For details regarding the implications of these provisions in connection with Shufersal s shelving arrangements, see below; (4) A prohibition against intervention of any kind by large suppliers regarding the price of a product charged by the retailer, with respect to the products of that suppliers, regarding the allocation of sales areas at any rate to the supplier s products, regarding the acquisition of any product provided by the supplier, at any scope out of the total retail purchases of the product and of alternative products; and regarding the acquisition or sale of products which another supplier provides to the retailer, including quantities and purchase targets, the sale area allocated for them in the store, and any other commercial terms. It is noted that on December 31, 2014, the Commissioner published, by virtue of his authority under the Food Law, rules which exempt certain arrangements between a large supplier and a retailer, pertaining to the price for consumers, the prohibition against intervention by a large supplier in the price, including, within the framework of discount campaigns of the price for consumers, or price benefit discounts with respect to an additional or other product, or in another package; (5) a prohibition on a large retailer and large supplier, against being party to an arrangement between them, which results in prohibited pricing (in general, this refers to a prohibition against pricing of a basket of products, in a manner whereby any of them will be priced lower than the marginal cost, or pricing of products or a basket of products in a manner which forces purchases at minimal volumes); a prohibition on a large supplier, against making the sale of its product to a retailer conditional upon the acquisition of another product offered by that large supplier; and a prohibition on a supplier against transferring payments to a large retailer other than by way of reducing the price of a product unit, excluding certain exceptions which were determined; (6) The Commissioner is entitled to issue instructions to a large retailer who sells the products of a large suppliers, regarding steps which it must take in connection with the product in question, or in connection with alternative products to the product in question, in order to prevent harm to competition, or to increase competition. On January 17, 2017, Rules for the Promotion of Competition in the Food Sector (Exemption for Activities and Arrangements Pertaining to the Shelving of Products in Stores of Large Retailer) (Transitional Provision), , were published in the Official Gazette (the Shelving Directive ), which will enter into effect beginning in April 2017, for a period of three years, which exempt a large supplier from the prohibition against engaging, dictating, recommending or intervening in the shelving of products in the stores of a large retailer, and which exempt a large retailer from the prohibition against being party to arrangements of this kind, provided that the large retailer routinely oversees and ensures that the shelving of products by the large supplier is performed in accordance with the rules which were determined by the Commissioner, within the framework of the shelving directive, provided that the conditions specified in the shelving directive have been met Product, in accordance with the draft legislation, was defined as food and any other product sold in a store, excluding electrical products, textile products, office equipment, housewares, books and newspapers. 56 A large retailer was defined as each of the following: (1) A retailer which holds at least three stores, and whose total sales turnover in its stores exceeds NIS 250 million per year; and (2) A retailer which holds an online store whose total annual sales turnover in Israel from the online store, if it also holds a non-online store (one or more) - together with its income therefrom, exceeds NIS 250 million per year (CPI-linked). In February 2016, the Israel Antitrust Authority published the updated list of large retailers, and Shufersal was included on that list. 57 A large supplier was defined as a supplier whose sales turnover to retailers, or through retailers, in Israel, exceeds NIS 300 million per year (CPI-linked), or a supplier which is a monopoly holder for a certain product regarding which it a monopoly was declared. 58 Additionally, a transitional provision was established in section 10(A) of the Food Law, which is valid until one year after the aforementioned section s entry into effect (i.e., until January 15, 2016) (extendable up to 4 years in total), with respect to the prohibition against the allocation of shelf space at a rate exceeding 50% of the shelf space by a large retailer, in each of its large stores, for products which it receives from very large suppliers. It is noted that as of the reporting date, to the best of Shufersal s knowledge, the Minister of the Economy has not extended the aforementioned transitional provision. It was further determined that in the event that the Commissioner has observed that as a result of the conduct of a large retailer, with respect to the products of the private brand sold by it, that there is a suspicion of significant harm to competition or to the public, then he is entitled to issue instructions to that large retailer regarding steps which it must take in order to prevent such harm.

120 117 It is noted that the shelving arrangements between Shufersal and its suppliers were regulated before the entry into effect of the Food Law and the rules which the Commissioner published by virtue thereof, in accordance with the provisions of the Restrictive Trade Practices Law, when Shufersal concluded the transition to selfshelving in most product categories. 59 2) Provisions regarding geographical competition of retailers (which entered into effect immediately upon the publication of the Food Law in the Official Gazette), including: A large retailer 60, whose sales turnover from its large stores in the competition group 61 of the same store (including from the same store), relative to the total sales turnover of the large stores in the competition group (including the same store) (the Calculated Rate ) exceeds 30%, which intends to open an additional large store in the demand area which is relevant to the aforementioned store, will be required to request the Commissioner s approval for the foregoing, who will not approve the opening of the aforementioned store unless he has found that there is no reasonable concern that the opening of the stores could result in harm to competition. In the event that the Commissioner has found that the calculated rate of the aforementioned retailer in the demand area exceeds 50%, the Commissioner will not approve the opening of an additional large store in the demand area which is relevant to that store, unless he has found, with near-certainty, that the opening of the store will not result in harm to competition 62 ; On this matter, a temporary order was established for six years from the publication date of the law in the records, which authorized the Antitrust Tribunal, according to the Commissioner s appeal, if it considers the matter appropriate in order to increase regional competition in food retail, to require a large retailer, whose calculated rate relative to a certain demand area exceeds 50%, who has 3 or more large stores in the same demand area, to discontinue its activity in the large store (one or more) in the same demand area, or the transfer of the retailer s rights in one or more large stores in the same demand area to another person, the sale of its rights in one or more large stores in the same demand area, or any other action deemed appropriate by the Court in light of the applicable circumstances; It was further determined that a large retailer which received notice from the Commissioner stating that its calculated rate for a certain demand area exceeds 30% will not engage in an arrangement whose matter, purpose of result is the restriction of other retailers from engaging in contracts regarding transactions with land or with respect to land, including the acquisition, sale, lease or rental of land, or regarding the construction of a large store, or regarding any competing activity in the demand area of the store to which that competition group refers, and will not extend the aforementioned arrangement. It is noted, in this regard, that in October 2016, Shufersal received an updated notice from the Antitrust Authority regarding demand areas of Shufersal s large stores (the Demand Areas Notice ), with respect to the aforementioned notice which Shufersal received on September 28, 2014 (the Previous Notice ). The demand area notice specified 132 large stores (instead of 152 stores in the previous notice), whose calculated rate (as defined below) exceeds 30% but is less than 50%, and 38 large stores (instead of 48 large stores in the previous notice), whose calculated rate exceeds 50%. Maps of the demand areas of those stores were attached to the notice. It is noted that following an evaluation of the demand area maps which were attached to the demand areas notice, the stores which may be exposed to actions in accordance with the aforementioned transitional provision are as follows: 17 stores in the Haifa region, and 3 stores in the Safed region. The provisions of this chapter may adversely affect Shufersal with respect to the opening of new branches, and may also, insofar as they will be issued, cause Shufersal to close active branches in certain demand areas, in accordance with the Commissioner s directives, and to rent them to third parties, which could, at times, also involve the recording of non-recurring expenses and the performance of provisions in Shufersal s financial statements. 59 It is noted that on December 31, 2015, a decision was reached by the Antitrust Authority, in accordance with section 7(b) of the Food Law, regarding the provision of an exemption for arrangement of products in Shufersal stores, in connection with shelving of ice cream, until December 31, 2016, in accordance with the conditions set forth in the aforementioned decision, in order to allow the implementation of the exemption in a manner which is consistent with the scope of the prohibition on shelving by suppliers, as determined in the Food Law. The Commissioner s decision from January 17, 2017 effectively gave approval for this arrangement in the future as well. 60 With respect to these provisions, it was determined that a large retailer is as defined above, or a retailer which holds at least one large store with a sales turnover exceeding NIS 100 million. 61 On November 25, 2014, the Commissioner published the methodology report regarding the implementation of the chapter regarding geographical competition between retailers in accordance with the Food Law. In this report, the Commissioner defined, in accordance with the authority which is conferred upon him by law, a competition group with respect to each large store of a large retailer. In accordance with the definition which was determined, the competition group will include stores of large retailers which feature an overlap between the population in their demand areas, and the population in the demand area of the evaluated store, at a rate exceeding 20%; The Commissioner also defined, in this report, the demand area with respect to each large store of a large retailer, in accordance with the estimated driving time to reach it, in accordance with the criterion of the store size and the population density in its environment, and in a manner which is based on the statistical region in which the evaluated store is located, and on the statistical regions surrounding that region. 62 These provisions will not apply to the opening of a store on land whose contract was signed before March 4, 2014.

121 118 It is noted that as of the reporting date, Shufersal was not required, by virtue of the transitional provision, to close any of its branches. 3) Provisions regarding price transparency by charging large retailers 63 To publish, in computer readable language, as defined in the Computers Law, , on the internet, at no cost to consumers, and in the manner which will be determined in the regulations, various data pertaining to the prices of the products which it sells in its stores, in a manner which will allow price comparison vs. other retailers. On November 20, 2014, the Regulations for Promotion of Promotion of Competition in the Food Branch (Price Transparency), , were published, which include details regarding the publication method and the required publication data, as well as provisions in connection with the frequency of updates to publications, and the method of such update, Shufersal published, on its website, the prices of the products (as defined in the Food Law) which it sells. 4) Provisions with respect to the corresponding application of the Food Law and the Restrictive Trade Practices Law In December 2015, the Commissioner published an opinion paper regarding the corresponding application of the Restrictive Trade Practices Law and the Food Law. The opinion paper specified cases to which the provisions of the Food Law only will apply, and regarding which additional regulation will not be required in accordance with the Restrictive Trade Practices Law: arrangements or actions which are exempt in accordance with section 7(B) of the Food Law, or in accordance with rules which were enacted by virtue of section 7(C) of the Food Law (Product Shelving), do not constitute a restrictive arrangement in accordance with the Restrictive Trade Practices Law, and that the arrangement prescribed in the Food Law, with respect to arrangement product, constitutes an exhaustive arrangement; Provisions regarding the lack of a requirement, under certain conditions, to submit notice regarding a merger to the Commissioner, in case of the opening of a new store, or the acquisition of an existing store. Shufersal is acting in accordance with the Food Law. As of December 31, 2016, the implementation of the Food Law had no significant impact on Shufersal s business Changes in prices of raw materials and products, and changes in exchange rates The prices of the products which are sold in Shufersal s branches are primarily affected by the increase in product prices by suppliers. Fluctuations in product prices may have an effect on Shufersal s business results. Additionally, a significant decline in the exchange rate of Israeli currency, as compared with other currencies, may result in changes in the prices of products which are imported, or which have a significant importation component, and may have an effect on Shufersal s business results Fluctuations in inflation rates Fluctuations in inflation rates in Israel may affect Shufersal s financial results, due to the fact that most of Shufersal s income is not CPI-linked, while some of its expenses are CPI-linked, and are affected by changes in the inflation rate, including loans which were received, debentures which were issued, and expenses with respect to rent and municipal taxes. In 2016, the trend of decline in the inflation rate, which took place in recent years, continued (the known index for 2016 was also negative, and amounted to approximately 0.3%) Increase in minimum wage As of the reporting date, the monthly minimum wage is NIS 5,000, further to the entry into effect of the transitional provisions of the Minimum Wage Law (Increase to Minimum Wage Amounts - Transitional Provision), , and the Amendment to the Minimum Wage Law, (jointly: the Amendment ). In accordance with the amendment, the minimum wage increased in the private sector in the total amount of approximately NIS 700 (from NIS 4,300 to NIS 5,000 per month), in three separate steps over the years 2015 to 2017 (inclusive). On July 1, 2016, the second step by virtue of the amendment entered into effect, and the minimum wage increased to NIS 4,825 per month, and on January 1, 2017, the third step by virtue of the amendment entered into effect, and the minimum wage increased to NIS 5,000 per month. in any case, beginning on April 1, 2016, the minimum wage will be no less than 47.5% of the average market salary in April of each relevant year. The amendment will be in effect until the date when the minimum wage prescribed in the Minimum Wage Law exceeds the minimum wage by virtue of the amendment. It is noted that in November 2015, the Government of Israel approved an additional amendment to the Minimum Wage Law, in a manner whereby, beginning on December 1, 2017, the minimum wage will increase by an additional amount, to NIS 5,300. The aforementioned minimum wage increases in July 2016 caused an increase of NIS 40 million in Shufersal s payroll expenses in 2016 (relative to 2015). According to Shufersal s assessment, the aforementioned minimum wage increase may adversely affect Shufersal s business results, and will 63 With respect to these provisions, it was determined that a large retailer is as defined above, provided that it holds non-online stores whose average sale areas exceeds 120 square meters.

122 119 cause an addition to Shufersal s payroll expenses (in consideration of the number of employees in Shufersal whose salary is based on the minimum wage as of the reporting date) in the coming years in the amount of approximately NIS 55 million with respect to 2017 (as compared with payroll expenses in 2016) and approximately NIS 110 million with respect to 2018 and thereafter (as compared with the payroll expenses in 2016). 64 For details regarding additional factors in the macro-economic environment which could affect Shufersal s activity, see section 11.6 of this part Retail segment General information regarding operating segments and changes therein. In 2016, in addition to Shufersal, marketing chains operated in the retail food market in Israel which operate throughout the entire country, primarily in the discount market, such as Rami Levy Hashikma Marketing, Yeinot Bitan, Victory Supermarket Chain, Yohananof, Machsanei HaShuk, Hatzi Hinam, Osher Ad, and others (the Additional Marketing Chains, and jointly with Shufersal: the Marketing Chains ); as well as urban convenience stores and gas stations which generally operate with continuous opening hours, throughout the entire week; neighborhood grocery stores; open and closed markets; and specialty stores. As of December 31, 2016 (with no significant change until proximate to the publication of the report), Shufersal operated two groups of branches throughout the entire country - the discount branches group and the neighborhood branches group. The aforementioned two groups include four main retail formats throughout the country, which are intended primarily for marketing purposes, and the positioning of the specific branch for the relevant target market, as follows: (A) The discount branches group: 113 branches according to the discount branches format, featuring low prices throughout the entire year ( Shufersal Deal ); 24 branches in the discount branches format, which are intended for the general population, and adapted to the needs of various population groups, by adjusting the variety of products to the customer group, strict adherence to Jewish dietary ( kashrut ) laws, and a simple shopping experience (under the name Yesh (which includes two sub-formats: Yesh Neighborhood and Yesh Chesed 65 )); Shufersal s discount activity also includes the marketing of products throughout the entire country through various media (Shufersal Online). In 2016, the trend of increased Shufersal sales through Shufersal Online continued. During 2016, Shufersal sales through Shufersal Online constituted approximately 9% of Shufersal s sales volume (as compared with approximately 6% in 2015). Sales through Shufersal Online contribute to an increase in sales, while retaining the high service level given to Shufersal customers, including improvement of the Shufersal Online channel for the benefit of Shufersal customers by expanding the variety of products and content worlds. This service provides a solution for the developing needs and changes in the consumption habits of Shufersal customers, and for the technological development which affect lifestyle, and therefore withdrawal continues to place an emphasis on the development and quality of the service which is given to Shufersal customers who use this channel. Shufersal Online is accessible to Shufersal customers via telephone, fax and an application for the performance of acquisitions using smartphones. Shufersal acts on a continuous basis to improve service and to maintain itself at the forefront of the relevant technology. For details regarding Shufersal s evaluation of the increased efficiency measures with respect to the distribution network of Shufersal Online, see section of this part. (B) The neighborhood branches group: 82 branches in the neighborhood branch format ( My Shufersal ), with an emphasis on providing solutions in terms of convenience, availability, freshness, and personalized service, as well as 48 branches in the very small branches format in neighborhoods and city centers, operated primarily by franchisees ( Shufersal Express ); The activity in the neighborhood branches group also includes the Organic Market activity. Shufersal operates in its branches, as of December 31, 2016, 62 health areas throughout the country, under the brand Green, and also operates 5 independent stores under the brand Organic Market. Presented below are additional details regarding the neighborhood branches group and the discount branches group as of December 31, 2016 and for 2016, as applicable: 64 The aforementioned additions to payroll expenses also refer to the increase in additional operating expenses (payments to manpower agencies), which are increasing due to the change in the minimum wage. 65 As of December 31, 2016, the subchain Yesh Neighborhood includes 10 branches, and the subchain Yesh Chesed includes 14 branches (which are included in the aforementioned Yesh format).

123 Commercial area (thousand square meters) * 120 Average store area (square meters) * Sales per square meter* (NIS in thousands) Gross profit Managerial operating profit **** Rate of Shufersal income in the retail segment As of December 31, 2016 For 2016 Discount branches group ** 405 2,955 23,790 23% 1.2% 80% Neighborhood branches group *** ,263 31% 4.1% 20% * The branch area is calculated as the gross area, including sales areas and additional operational areas. ** Including sales through Shufersal Online, which are performed through the group of discount branches. *** Including Organic Market stores. **** Owned branches include actual bills charged by the real estate segment to the retail segment. In 2016, in the discount branches group, an increase of approximately 4% occurred in identical store sales 66 relative to 2015, primarily due to the increase in its activity; In the neighborhood branches group, an increase of approximately 6.2% occurred in identical store sales relative to It is noted that the variability in sales per square meter and in the rate of operating profit, and in some of the formats, also in the rate of gross profit, between Shufersal branches, is primarily due to the location of the branch, its customer base, the complex where the branch is located, the variety of products sold in the branch, competitors in the area, and operating costs for that specific branch, and not only the format of the branch. Additionally, operating costs in the neighborhood branches group (rent, municipal tax and service level at the branch) are generally higher than the operating costs in the discount branches group. In February 2017, the Board of Directors of Shufersal approved Shufersal s commencement of negotiations vis-àvis HaMashbir Group for the acquisition of the New Pharm chain. To the best of Shufersal s knowledge, the New Pharm chain owns retail activity in the cosmetics, drugstore and pharmacy segment, operates approximately 68 branches, and has an annual sales volume of approximately NIS 700 million. as of the reporting date, understandings have not yet been formulated between the parties, and an estimated purchase price cannot be given. There is no certainty that understandings will be reached between the parties, or that an agreement will be signed between the parties. Thus, insofar as understandings will be reached between the parties, the transaction will also require, inter alia, approval from the Antitrust Commissioner. For additional details, see IDB Development s immediate report dated February 22, 2017 (reference number ) Products and services. Shufersal sells in its branches a very wide variety of products: all food products, including meat and fish products, and fruit and vegetable products; organic products; toiletries, cosmetics and pharmacy products; clothing and textile products; leisure products; electrical and communication products, housewares and computers 67. Shufersal places a special emphasis on the large variety offered in its branches, on the service department for fresh products, including the bakery, butchery and delicatessen departments. Shufersal also operates 18 pharmacies which are located in its branches. The retail segment also includes the production of pastries, frozen and baked products by Gidron Industries Ltd., a wholly owned subsidiary of Shufersal ( Gidron ), whose sales are primarily to Shufersal branches. The number of products sold in the marketing chains is characterized by significant brand loyalty among customers 68, and in light of the above, the interchangeability of these products is limited. In the event that one of these products is not sold by Shufersal, as a result a prolonged discontinuation in the provision of such products, Shufersal s results of operations may be harmed, due to customer loyalty to a specific brand, depending on the duration of their period of unavailability, if any. It is noted that some of these products are marketed by suppliers who were declared monopolies for the purpose of the aforementioned products, and therefore, their ability to stop providing their products is limited. In light of the foregoing, the impact of a discontinuation in the provision of these products by the aforementioned suppliers, due to reasons which are not under Shufersal s control, would be uniform for the entire retail market. Shufersal has two private brands in the food and toiletries segment: the Shufersal brand and the Yesh brand, as well as private brands for health products under the Green brand, and for non food products (housewares, textile and electrical products) under the names Gala and Pilot (jointly: the Private Brand ), and is working to continue the development of the private brand. The advantages of Shufersal s private brand include, inter alia, the creation of a cheap and high-quality alternative for customers of the chain, development of consumer loyalty, increasing awareness of the private brand, and improving profitability in the category. Within the framework of the private brand, Shufersal offers products which are produced by various suppliers for Shufersal, and which bear the aforementioned brand names. As of December 31, 2016, approximately 3,530 products are sold under the private 66 Branches which were active in corresponding periods of two comparison years. 67 It should be noted that the rate of sales of Non-Food products in Shufersal out of total Shufersal sales amounted to approximately 5% in 2016 (similarly for 2015). 68 Products such as Coca Cola, Huggies, Materna, Mily, Taster s Choice, HaEmek Cheese, and other leading brands.

124 121 brand in Shufersal branches, in various categories, including food, cleaning products, toiletries and non food. In 2016, Shufersal continued strengthening its private brand as part of Shufersal s strategy and business plan, and expanded the type and quantity of products sold under the private brand, and mainly launched new products in additional leading categories (chilled, pharma and baby), which led to an increase in the rate of sales of products in Shufersal s private brand in 2016 (approximately 20% of total sales in the retail food segment, as compared with approximately 15% of total sales in the retail food segment in 2015) 69. In general, the average gross profitability of products in the private brand is higher than the average gross profitability of all products which are not in the private brand. Shufersal considers the private brand products as a contributing factor to reinforcing the price approach (highquality products at lower prices than similar products sold in the same categories), to the development of consumer loyalty, to differentiation vs. competitors, to increasing awareness to Shufersal brands and to improving profitability in the category. Shufersal continues operating in accordance with its business plan to continue the expansion of products offered in the private brand, in order to offer to its customers all of the basic purchase basket products, and more, of its customers, while aiming to leverage the advantages specified above Segmentation of income and profitability of products Presented below are data regarding the distribution of Shufersal sales due to the main groups of similar products in the retail segment: 70 Group of products Sales (gross) in millions of NIS (excluding discounts and excluding VAT) Rate of total Shufersal sales (gross) in the retail segment Gross profitability rate Dry food * 3,051 2,961 3,005 25% 25% 26% 23% 22% 20% Beverages % 6% 6% 17% 15% 15% Meat and frozen 1,769 1,731 1,726 14% 15% 15% 21%** 18%** 16% Dairy products 1,594 1,531 1,546 13% 13% 13% 24% 24% 23% Fruits and vegetables 1,748 1,615 1,512 14% 14% 13% 25% 24% 26% Pharmacy 1,449 1,382 1,418 12% 12% 12% 21% 20% 18% * The dry food products group includes approximately 15 different categories, each of which constitutes less than 5% of revenues in the retail segment. ** The increase in gross profitability in the meat and frozen products group is primarily attributed to the variability of the mix in favor of fresh meat, following the launch of a private brand in the Angus meat category, and the improvement in purchase prices. 69 It is noted that around half of the increase in the rate of sales of the private brand, as stated above, is due to the classification of different product groups under the private brand. 70 It is noted that, in previous years, the gross profitability rate was presented according to the ratio between gross profit and the sales line which appears in Shufersal s financial statements ( Revenues ) with respect to those groups of products, where with respect to the activities of franchisees, the revenues line includes the commission which is received from the franchisees only. The activity of franchisees does not include cost of sales, and therefore, it increases the gross profitability rate. Due to the increase in franchisees activity, primarily in the meat, frozen, fruits and vegetables categories, and in light of the foregoing, the gross profitability rate for 2016 (as well as comparative figures for previous years) is presented relative to gross sales (turnover) after discounts (as opposed to revenues). This presentation constitutes, in the opinion of Shufersal management, a more adequate representation of the gross profitability rates from the groups of products. Additionally, comparative figures in the table were updated in order to reflect changes in the method used to load Shufersal Online costs on the product categories in Shufersal.

125 Marketing, advertising and distribution. Shufersal sometimes holds local campaigns, for limited periods, for the purpose of promoting sales in some branches of the Shufersal chain, as part of its plan for dealing with local competition. In accordance with the provisions of the Food Law, and regulations enacted pursuant thereto, Shufersal publishes on its website the prices of the products (as defined in the Food Law) which it sells. Shufersal operates the Shufersal customer club under the brand Shufersal and under the brand Yesh (jointly: the Customer Club ). Shufersal considers the customer club as a tool for increasing customer loyalty and for providing solutions to the unique requirements, and therefore invests efforts in identifying customers and their requirements. As of the reporting date, the customer club includes approximately 1.8 million households. 71 Most Shufersal sales in 2016 were single customers, most of which are members of the customer club. Shufersal s sales volume to members of the customer club (including holders of the credit card) out of Shufersal s total sales in 2016 amounted to approximately 83%. For details regarding the operating segment of management of the credit card customer club, in which Shufersal offers the credit cards to the general public, see section 11.1 of this part. As of December 31, 2016, the number of valid credit cards 72 held by Shufersal customers amounted to approximately 505 thousand credit cards (as compared with approximately 486 thousand credit cards as of December 31, 2015). Approximately 24% of households which are members of Shufersal s customer club also hold valid Shufersal credit cards. Approximately 22% of total Shufersal sales in 2016 were performed using Shufersal credit cards. Additionally, Shufersal promotes its sales, inter alia, also by selling voucher cards to consumers. Most voucher card sales take place before the Jewish High Holidays and Passover. Shufersal sales due to the exercise of voucher cards in its branches constituted approximately 6% of Shufersal s total sales in It is noted that the recognition of income in Shufersal s financial statements is done upon actual exercise of the card. 73 In 2016, the scope of Shufersal s advertising and sales promotion expenses amounted to approximately 1% of Shufersal s sales volume. As of December 31, 2016, Shufersal operated three central storage and distribution centers, with a total area of approximately 100 thousand square meters, including Shufersal s main distribution center in Rishon Letzion, which is owned by Shufersal, the distribution center in Modiin, and the distribution center in Shoham, which has operated since the first quarter of this year, as well as two additional distribution centers which are operated by an external company. As stated above, in the first quarter of 2016, the new Shufersal distribution center, located in the industrial area adjacent to the city of Shoham, with a total area of approximately 37 thousand square meters, gradually commenced operations. The center replaced two existing distribution centers of Shufersal, and allows increasing the self distribution capacity to approximately 70%. The center in Shoham, in addition to the distribution centers in Rishon Letzion and Modiin, and an additional distribution center which is externally operated, will concentrate most of Shufersal s distribution activities, and Shufersal intends to work to reach maximum efficiency in its distribution centers, Further to the full integration of the distribution center in Shoham, and to cause increased efficiency in the supply chain and in the branches, along with improvement in the availability of products and service to branches. As of December 31, 2016, approximately 60% of goods which are provided to Shufersal branches were distributed through the distribution centers (the balance of products are marketed through direct distribution to stores by the product suppliers and through an external entity). The distribution network of Shufersal Online is operated through external delivery contractors, while monitoring is performed at the Shufersal center. As of the reporting date, Shufersal has 2 designated warehouses for the distribution network of Shufersal Online, and Shufersal is evaluating various possibilities for continuing to maximize the efficiency of the Shufersal Online distribution network Competition. As of the reporting date, Shufersal competes in this market primarily against the additional marketing chains, convenience stores in the cities and in gas stations, neighborhood grocery stores, closed and open markets, specialty stores (such as grocers, butcheries and delicatessens), and other retailers. According to Shufersal s assessment, the scope of the retail food market in Israel in 2016 was approximately NIS billion (similarly to 2015). 74 According to Shufersal s assessment, its market share in 2016 constitutes approximately 20% of the total 71 A household means a household which is registered as a club member and which purchased at least once in the last twelve months. 72 In accordance with the reporting method practiced by credit card companies in Israel, which includes, inter alia, reports regarding the number of valid credit cards which are held by customers. A valid credit card means a card which was used to purchase at least once during the last twelve months. 73 In this context, it is noted that the Consumer Protection Law (Amendment No. 36), , prescribes, inter alia, that voucher cards must be valid for a minimum of five years, that the par value of the voucher cards must be standard, and that it must not be possible to exercise them in lower amounts than their par value, in other words, the amount of the voucher cards must be standard for each business. According to Shufersal s assessment, the impact of the aforementioned amendment on Shufersal s business is immaterial, due to the fact that, on the one hand, a decrease has occurred in voucher card sales, while on the other hand, the discounts with respect to the sale of vouchers have decreased. 74 Shufersal s estimates are based, inter alia, on data from the Central Bureau of Statistics regarding household consumption in Israel until 2012, in combination with Shufersal s estimates for the years , as well as data from economic publications.

126 123 retail food market in Israel, similarly to its market share in The retail food market in Israel has featured significant competition for several years, a trend which has been significantly increasing in recent years, primarily due to the rapid development of the additional marketing chains, which increase their commercial areas and market share. Additionally, to the best of Shufersal s knowledge, the additional marketing chains continue expanding the scope of their commercial areas, and as part of the above, they have also begun increasing activities to market their products in the marketing channels for shopping over the internet and telephone. Additionally, in recent years, new marketing chains have begun operating in the food retail segment. To the best of Shufersal s knowledge, in 2015, following the deterioration in the business and financial results of the Mega chain, and as part of understandings which the chain reached with its creditors, within the framework of a debt settlement between the parties, the chain sold all of its discount format branches to various marketing chains in the discount format (and several stores of Mega s urban format - Mega in the City ). Additionally, the Mega chain sold the Eden Teva Market activity, after the Eden Teva Market chain, through which Mega was operating in the health segment, commenced a process of suspension of proceedings. In July 2016, the Mega chain was sold (127 branches with national distribution, operating under the brand Mega in the City and Zol BiShefa ) as a single unit to the marketing chain Yeinot Bitan. In 2016, Shufersal continued adjusting its activity to the changes which occurred in the Mega chain, to the entry of marketing chains in the discount market into the same Mega branches which were sold to the marketing chains in the discount market, as stated above, and to the entry into those stores in the urban sphere, as a result of the sale of the Mega chain. The competition in the retail food market in 2016 was primarily influenced by the developments which occurred, as stated above, in the Mega chain, and was also affected by the continued competition against the additional marketing chains, with an emphasis on regional competition areas, and is expected to continue in 2017 as well. The aforementioned trends also affected the selling prices to consumers and the market shares of Shufersal. According to Shufersal s assessment, the aforementioned trends, including the developments in the Mega chain, affected Shufersal in 2016, and are expected to affect Shufersal in 2017 as well. The information regarding the continued competition, as stated above, constitutes forward looking information, as defined in the Securities Law. This information is based on Shufersal s assessments, in addition to the public information which was reported by several Israeli retailers, with respect to their individual activities. Actual competition may differ significantly from the forecast, as stated above, due to various factors, of which the main ones include the entry or non-entry of new competitors, the scope and expansion of activities of existing competitors, and due to the influence of the risk factors, as described in section of this part. Shufersal is dealing with the competition in the retail segment, and with the changes which are occurring therein, inter alia, as a result of the developments in the Mega chain, by various means. Shufersal is continuing with the process of implementing Shufersal s business strategy and business plan, as described in section of this part, which allows it to unlock value for customers, including through attractive prices, high-quality customer service, the rich, broad and high-quality selection of products sold in its branches (including through the private brand), attractive sales and the shopping experience in its branches. Shufersal also performs various marketing, advertising and sales promotion activities, and operates the customer club and the credit card customer club of Shufersal. Shufersal is also working to create differentiation and branding of the Shufersal chain. Shufersal s activities for dealing with competition are performed with an emphasis on strengthening the price perception and quality of the private brand on a national level, while also dealing with local competition based on a regional analysis of the competition in the retail food segment, in consideration of, inter alia the opening and closing of competing branches Critical success factors in the operating segment and changes occurring therein. In its activities in the food retail segment, several critical success factors can be indicated, which have an impact on its competitive status: (A) Price perception - fair and low shelf prices over time; (B) Stores in attractive locations throughout the country; (C) The ability to offer a wide variety of products, with a high degree of availability and quality, adapted to the different needs of consumers, at attractive prices, and while creating added value for consumers; (D) The ability to provide high-quality service in stores while creating a unique shopping experience for customers; (E) The ability to develop, market and strengthen leading and high-quality products in the private brand (for additional details, see section of this part); (F) The ability to self-distribute to Shufersal branches, which allows increasing the efficiency of processes in the supply chain and in the branches, along with advantages of flexibility and independence in the distribution of Shufersal products; (G) The ability to purchase from a large number and wide variety of suppliers, under attractive trade conditions; (H) The ability to maintain customer loyalty trough Shufersal s customer club, including through the Shufersal and Yesh credit cards (for additional details, see section of this part); (I) Financial stability; and (J) Innovation, as reflected, inter alia, in an improved shopping experience, self-service cashier stations and digital platforms (sales through digital means, which allow personal adjustment for customers 75 Shufersal s estimates are based on the proportional part of Shufersal sales from the data of the Central Bureau of Statistics regarding the household expenses survey composition of expenses for consumption of existing households until 2012, in combination with Shufersal s estimates for the years , as well as data from economic publications.

127 124 over the internet, and a smartphone app) Main barriers to entry and exit in the operating segment and changes occurring therein. It should be noted that the transition from activity through individual stores or several locally distributed stores and activity on a national level requires additional investments in infrastructure, and therefore, may constitute a barrier to entry in this segment. Additionally, it should be noted that the limited scope of the Israeli food market, and the competition in the retail segment, which cause erosion in product prices, may also constitute barriers to entry in this segment. The long term rental agreements in which Shufersal is engaged, the investments which were performed in Shufersal branches, and the impact of the entry of competitors into stores in the area of Shufersal branches, may be considered as barriers to exit from the retail segment Seasonality. The food chain segment in Israel is subject to fluctuations in quarterly sales and profits, primarily due to the shopping period during the High Holidays and Passover, which occur in different quarters in different years, and results in an increase in the scope of consumption, and also due to the increase in energy expenses in the summer months Fixed assets and facilities. As of December 31, 2016, Shufersal holds the ownership or lease rights to 67 branches, covering an area of approximately 128 thousand square meters (as compared with 68 branches, covering an area of approximately 130 square meters, as of December 31, 2015), and additionally, as of December 31, 2016, Shufersal is renting from third parties areas throughout the country, covering an area of approximately 375 thousand square meters (as compared with approximately 386 thousand square meters as of December 31, 2015), on its remaining 205 branches are located (as compared with 209 branches as of December 31, 2015). All of the aforementioned areas are used in Shufersal s retail activity Intangible assets. Shufersal has rights to trademarks which are registered under Shufersal s name, of which the most significant is the trademark Shufersal. Additional trademarks are also registered in favor of Shufersal, in connection with its private brands, and in connection with various formats which it operates Suppliers; dependence on suppliers. Shufersal acquires products, for the purpose of selling them in its branches, from various suppliers, including manufacturers, importers and distributors. In general, Shufersal avoids, as much as possible, dependence on any particular supplier, and works to create variety among its suppliers. In 2016, the products which were acquired by Shufersal from Tnuva Cooperative Center for Agricultural Product Marketing in Israel Ltd. and its subsidiaries ( Tnuva ), from Strauss Group Ltd. ( Strauss Group ), from Neto Group ( Neto ) and from Osem Food Industries Ltd. and its subsidiaries ( Osem ) constituted approximately 10.8%, approximately 7.4%, 7.2% and approximately 6.9%, respectively, of Shufersal s scope of acquisitions (as compared with approximately 12.1%, approximately 7.2%, approximately 6.0% and approximately 6.9%, respectively, in 2015). Shufersal acquires most of the dairy products from Tnuva, which holds the leading position in the market for local dairy products. Shufersal engaged with Tnuva in a commercial agreement for the routine provision of products, including, inter alia, fixed discounts which are not linked to purchase targets. Additionally, the aforementioned agreement does not include any undertakings whatsoever to purchase specific amounts. In the event that Tnuva ceases providing dairy products to Shufersal, for any reason whatsoever, Shufersal will be able to receive partial provision only of dairy products from other suppliers, and therefore, Shufersal is dependent on Tnuva with respect to dairy products. In this regard, it is noted that it is noted that as of the reporting date, Shufersal s dependence on Tnuva, with respect to the provision of dairy products, is minimal, inter alia, due to the launch of the dairy category under Shufersal s private brand. In 2016, acquisitions of dairy products from Tnuva constituted approximately 6.6% of Shufersal s total acquisitions (as compared with approximately 6.9% in 2015). The decrease was primarily due to the impact of Shufersal s private brand. In 2016, products which were acquired from the Shufersal s ten largest supplier, including Tnuva, Strauss Group, Neto and Osem, constituted approximately 49.1% of Shufersal s acquisitions (similarly to 2015). Except as specified above, Shufersal has no dependence on any particular supplier, due to the fact that alternatives can be found for all the products which are provided by Shufersal suppliers, under similar conditions. Sometimes, the discontinuation of an engagement with a particular engagement may cause temporarily adverse effects, due to the loyalty of consumers to a certain brand provided by that supplier, despite the fact that Shufersal offers in its branches alternative products to the brand. However, according to Shufersal s assessment, and based on its past experience, no substantial and ongoing harm to Shufersal s revenues and/or profitability is expected as a result of changes in suppliers, even major suppliers. Additionally, Shufersal engages with different suppliers, which manufacture for it a wide variety of branded products which are sold by it within the framework of its private brand category Restrictions and supervision of Shufersal s activity in the retail segment. Shufersal s activity in the retail segment is subject to various laws, primarily consumer laws, antitrust laws, including the Food Law and regulations enacted pursuant thereto, and labor laws. The significant laws which affect Shufersal s activity (excluding the Food Law and the Restrictive Trade Practices Law) include, inter alia, the Defective Products (Liability) Law, ,

128 125 the Consumer Protection Law, (which includes, inter alia, provisions pertaining to the prohibition against deception of consumers, provisions regarding the marking of goods and presentation of prices, and provisions regarding the cancellation of transactions), the Supervision of Prices of Products and Services Law, (in accordance with, in accordance with the provisions of the aforementioned law, a consumer or consumer organization may file, on behalf of a group of consumers, a class action with respect to damages which are caused to them due to the causes of action specified in that law. As of December 31, 2016, approximately 5.12% of Shufersal sales originate from products which are subject to supervision, as stated above), as well as various labor laws, including the Employment of Employees by Manpower Contractors Law, (as of December 31, 2016, Shufersal employs approximately 1,000 employees provided by manpower agencies), including the Extension Order Regarding contract workers in the cleaning branch of the private sector, the Minimum Wage Law, (the salary of most employees in the Shufersal Group is based on the minimum wage - in this regard, see section 11.6 of this part) and the Law for Increased enforcement of labor laws, (which is intended, inter alia, to increase efficiency and enforcement of labor laws). Shufersal is also subject to the provisions of the Pharmacists Ordinance (New Version), , in connection with the pharmacies which are operated by Shufersal in its branches. It should also be noted that the legal liability with respect to the products which are sold by Shufersal, applies to the manufacturer and/or importer. In cases where it is not possible to identify the manufacturer and/or importer of a certain product, such liability may be imposed on the marketer. On November 30, 2015, the protection of public health (Food) Law, (the Food Protection Law ) was published in the Official Gazette, which replaced the Public Health Ordinance (Food), This law is intended, inter alia, to regulate the liability of food manufacturers and food importers, to regulate the liability of a food marketer, and its obligations in each stage involving the transfer of food, from the time of its production, through its importation, to the place of direct sale to the consumer, and to establish criteria for quality, adequacy and safety of food in Israel. The Food Protection Law also includes a set of provisions which regulate the oversight and enforcement authorities provided thereby, including, inter alia, criminal enforcement and administrative enforcement (imposition of financial sanctions). The vast majority of the provisions of the Food Protection Law (excluding certain indirect amendments) entered into effect 6 months after its date of publication (i.e., May 30, 2016). Provisions of the Food Protection Law are expected to affect the activities of the manufacturers in which Shufersal is involved, the importing activities and its activities as a food marketer. Shufersal is preparing for the implementation of the provisions of the Food Protection Law, most of which are already being implemented by it. As of the reporting date, Shufersal estimates that the provisions of the Food Protection Law will not have a significant impact on Shufersal s financial results. The manufacturing activities in which Shufersal is involved, primarily in connection with Shufersal s activity in the pastry products segment (through Gidron), and Shufersal s activities in the private brand segment, require compliance with various standards with respect to manufacturing activities. Shufersal is also required to comply with various quality assurance requirements on all matters pertaining to the various products which are sold in its branches. Shufersal operates, in some of its branches, also pharmacies, and this activity is subject to the provisions of the Pharmacists Ordinance (New Version), The operation of each one of Shufersal s branches requires the receipt of a business license, as prescribed in the Business Licensing Ordinance (Businesses Requiring License), As of the reporting date, legal proceedings are being conducted regarding three Shufersal branches with respect to business licensing affairs, against Shufersal and its managers Goals and business strategy. Shufersal s strategy is based on Shufersal s strengths, including its status as the leading in retail chain Israel, a broad national distribution, both in and outsides of the cities, the ability to independently provide goods to Shufersal branches (through Shufersal s logistical centers), financial stability, Shufersal s customer club, development and penetration of the private brand, the advanced online unit, and innovation. Additionally, Shufersal s strategy is based on values of service and professionalism, quality, fairness, innovation, Israeli-ness and a commitment to employees, which assists in the creation of differentiation and uniqueness relative to Shufersal s competitor, in order to increase customer loyalty and Shufersal s competitive edge. In June 2014, the Board of Directors of Shufersal approved a business plan for Shufersal, which is intended to create a growth-oriented commercial and operational infrastructure for the years to come, to reinforce its competitive ability, to improve value offered to customers, including discounting the purchasing basket and improving service (the Business Plan ). In 2016, Shufersal continued implementing its business plan, and as part of the foregoing, Shufersal continued expanding and strengthening the private brand, including launching new products in additional leading categories (including chilled, pharma and baby products); The continued acceleration of development of Shufersal s digital platforms, which primarily include the Shufersal Online system and the mobile app, and evaluation of increasing the efficiency of the operational processes in connection with the distribution network of Shufersal Online, improving service and value offered to customers; continued promoting new/supplementary activities to Shufersal s current operating segments, including activities in the institutional market and wholesale sales ( Shufersal for Businesses ); continued increased efficiency in real estate operations, including closure and reduction of branches - in 2016, Shufersal closed 12 branches, with a total area of approximately 21 thousand square

129 126 meters (after closing 18 branches in 2015, with a total area of approximately 29 thousand square meters). In parallel, Shufersal continued with its plan to work to open new branches in relevant locations. Additionally, in 2016, Shufersal continued implementing changes to the supply chain department, further to the decision of the Board of Directors from August 2012 to implement a total investment of approximately NIS 465 million in the supply chain project (where the total investment in the project as of the reporting date amounted to approximately NIS 458 million), such that, as of the reporting date, most of the supply chain unit is concentrated in three main warehouses, as specified in section of the report. Shufersal considers the handling of the product value chain and the implementation of updated approaches to supply chain as a means for improving its efficiency and competitive edge. As part of the above, process evaluations are performed throughout all stages of the chain, from the order planning stage, through to receipt of goods, storage and distribution methods, inventory and order management, and management of availability in stores Human capital 11.9 Financing As of December 31, 2016, Shufersal employs approximately 13,900 employees (a figure which is equivalent to a total of approximately 12,400 positions). 76 The increase in the number of positions was primarily due to the increase in Shufersal s activity (primarily online) and in the supply chain, as a result of the filling of the additional logistical center. In 2016, Shufersal s payroll expenses amounted to approximately NIS 1,522 million (excluding branches through franchises and management fees) (as compared with payroll expenses of approximately NIS 1,371 million in 2015) and the average salary in Shufersal amounted to approximately NIS 10,690 per month (not including nonrecurring provisions) for a full time position (as compared with a salary of approximately NIS 9,650 per month in 2015). The increase in Shufersal s payroll expenses was primarily due to the increase of the minimum wage, as specified in section of this part. It is noted that on February 23, 2016, a collective agreement was signed between the Representation of Business Organizations and the Histadrut, regarding an increase to deposits to pension insurance in the economy. As part of the foregoing, it was determined, inter alia, that the employer s deposits to employer will be increased to 6.5% of the effective salary. The aforementioned increase will be implemented in two stages (July 2016 and January 2017). The increase in deposits, as stated above, caused an increase of NIS 1 million in Shufersal s payroll expenses in 2016, and will cause, according to Shufersal s assessment, an increase of NIS 3 million per year in 2017 and thereafter. Shufersal is party to special collective agreements with groups of its employees. Shufersal and the employees representation signed an extension to the collective agreements until December 31, For details regarding options which were allocated to employees and corporate officers in Shufersal, and which have not yet expired or been exercised, see Annex B to the financial statements. For details regarding liabilities with respect to debenture series which were issued by Shufersal, and which have not yet been fully repaid, by December 31, 2016, see Note 14.A.1 to the financial statements. All of Shufersal s debentures (Series B, D, E and F) are listed for trading on the stock exchange, are non-convertible, and not secured by any pledge. Within the framework of the issuance of the aforementioned debentures, Shufersal engaged in deeds of trust (each series independently) in which were determined, inter alia, grounds for demanding the immediate repayment of the debentures, in conventional cases. The deeds of trust (Series B) do not include any financial covenants. The deed of trust with respect to the debentures (Series B) includes a Cross Default, stipulation, under certain conditions, in case of a demand for immediate repayment with respect to another series of debentures issued by Shufersal. The deeds of trust which were signed within the framework of the issuance of debentures (Series D), (Series E) and (Series F) include, inter alia, financial covenants, restrictions on dividend distributions, a Cross Default stipulation, and an undertaking not to create a floating charge. For additional details, see Note 14.F.4. to the financial statements. As of December 31, 2016, and as of the reporting date, Shufersal meets the conditions specified in the deeds of trust, according to which all of its debenture series were issued, and no grounds for demanding the immediate repayment have been fulfilled. In September 2016, Maalot increased its rating for Shufersal, as well as the rating for Shufersal s outstanding debentures, from a rating of ila to a rating of ila+, while determining a stable rating outlook for Shufersal, due to the improvement in its financial ratios. Additionally, in November 2016, Maalot announced a rating of ila+ Stable for the series extension of the debentures (Series E), at a scope of up to NIS 625 million, within the framework of an exchange offer for the debenture holders (Series B). As of December 31, 2016, and as of the reporting date, Shufersal has non-binding bank credit facilities in the total amount of approximately NIS 300 million, including current credit facilities and a facility for on-call loans. The aforementioned facilities are subject to change by the banks at any time. Out of the aforementioned credit facilities, 76 As compared with approximately 13,500 employees as of December 31, 2015 (a figure which is equivalent to approximately 12,150 positions).

130 Taxation Shufersal used, as of December 31, 2016, and as of the reporting date, a total of approximately NIS 56 million. The aforementioned credit facilities are primarily used for Shufersal s activities in transaction rooms, for guarantees, and for documentary credit. The provisions of tax laws which apply to Shufersal are similar in nature to the provisions of tax laws which apply to IDB Development, as described in Note 30 to the financial statements Legal proceedings For details regarding material legal proceedings which are pending against Shufersal as of December 31, 2016, see Note 2.21.A to the financial statements.

131 128 For additional details regarding class actions against Shufersal in 2016, and until proximate to the publication of the report, see the reports of IDB Development: Summary description of the claim Claim amount Reference to the immediate report A motion to approve a class action, asserting that Shufersal discriminates against the Arab residents of the state, by not providing online services to Arab towns which are located close by and even on the way to Jewish towns where it does provide the service. A motion to approve a class action against Shufersal, Shamir Salads 2006 Ltd., HaNasich Tehina Manufacturing Plant Ltd., and M. Yohananof & Sons 1988 Ltd. (jointly: the Respondents ), asserting that the respondents did not properly evaluate and/or evaluated through negligence of any party on their behalf, which were marketed to the food chains and acquired by the petitioners, which contained the bacteria salmonella. On March 2, 2017, following the recommendation of the Court, the entities who files the motion decided to withdrew the motion to approve, on all matters pertaining to Shufersal. Approximately NIS 458 million Discussion regarding risk factors Macro factors The state of the economy in Israel and of the retail food market in Israel - see section 11.6 of this part. Shufersal management routinely evaluates the possible developments and implications of the state of the economy in the markets and the state of the situation retail food market on its business affairs. Developments and shocks in the Israeli economy, as well as an economic downturn or recession due to an economic crisis, if any, may have negative effects on the food retail market in Israel, and as a result, also on Shufersal s revenues and profitability rates, due, inter alia, to the intensification of competition and due to changes in the consumption habits of its customers. Cost of living in Israel - For details regarding the social protests in Israel, see section 11.6 of this part. The cost of living issue may affect Shufersal s business results, due to the considerable pressure from consumers which is being applied on Shufersal to reduce the prices of the products which it sells, and the increasing competition from the discount chains, which are expanding their operations. Dependence on the security and political situation in Israel - Shufersal and its subsidiaries operate in Israel. Additionally, all of Shufersal s income is produced in Israel, and a significant part of the products sold by it are grown, produced or processed in Israel. Therefore, the business results of Shufersal are directly affected by the political, economic and security conditions in Israel. A significant deterioration in the security situation or political situation in Israel may adversely affect Shufersal s business operations, financial position and results of operations. Capital market and finance- Shufersal holds assets and manages its business affairs in Israel. Therefore, almost all of Shufersal s assets, liabilities, income and expenses are in New Israeli Shekels. For details regarding the impact of volatility in inflation rates on Shufersal, and regarding the impact of the revaluation of the exchange rate and volatility in product prices on Shufersal, see section 11.6 of this part. Shufersal s financing income and expenses are also subject to volatility due to changes in interest rates on loans from banks and deposits which were deposited in banks. It is noted that as part of Shufersal s policy regarding the management of market risks, Shufersal used, in 2016, derivative financial instruments with the aim of adjusting, where possible, the linkage bases of its financial assets and liabilities (hedging transactions). Shufersal does not invest in entities which are primarily engaged in derivatives for short sales. Developments and shocks in the state of the economy, as stated above, may have negative effects on the business results of Shufersal, on its liquidity, the value of its assets, the state of its business affairs, its credit rating, its ability to distribute dividends, and its ability to raise financing for its operations, insofar as it will be required to do so, and also on its financing terms. Branch-specific factors Dependence on suppliers - For details regarding Shufersal s main suppliers, and regarding Shufersal s dependence on suppliers, see section of this part. There is no certainty that these large suppliers, or other large suppliers, will not significantly change their pricing policies, or encounter difficulties in the provision of products to Shufersal. In such cases, Shufersal s business affairs, financial position and results of operations could be harmed.

132 129 Approvals and licenses - The operation of branches in the Shufersal chain, acquisition of new branches, and Shufersal s operations with respect to land development, require obtaining approvals and licenses from government entities (which are not necessarily related to or coordinated with one another). Some of the branches in the Shufersal chain require licenses or approvals which have not yet been obtained, or whose validity has expired, and require renewal. If Shufersal is unsuccessful in obtaining the aforementioned approvals or licenses, including in case of failure to obtain them with respect to a number of main branches simultaneously, it may be required to close those branches, or to take corrective actions with respect to the aforementioned branches or real estate developments. Regulation - For details regarding the main regulations which apply to Shufersal, see section of this part. Legislation with respect to business and sanitation licensing, as well as new consumer legislation which confers extensive authorities upon the Israel Consumer Protection and Fair Trade Authority, consumer legislation and the increased enforcement thereof, and increased oversight of prices or increases in the minimum wage (see section 11.6 of this part), may adversely affect the business affairs of Shufersal, its financial position and its results of operations. It is noted that an increase in the minimum wage may result in harm to the financial results of Shufersal, including its profitability. For details regarding the Food Law risk factor, see below. Additionally, the Commissioner s determinations regarding the rules for conduct between the large marketing chains, of which Shufersal is one, and dominant suppliers in the good segment,. including by virtue of the provisions of the Food Law, and regarding the merger of Shufersal with Clubmarket, may adversely affect Shufersal s business affairs, financial position and results of operations. Competition - For details regarding competition in the segment, see section of this part. Shufersal closely monitors the developments in the retail branch, and adjusts its operations, if and insofar as is required, in accordance with those developments. Shufersal is dealing with the competition in the branch, inter alia, by continuing the implementation of the business plan, as specified in section of this part. Competitive pressures, including the responses of competitors and of the market to Shufersal s strategy and the manner of its implementation, may result in harm to Shufersal s ability to deal with the foregoing, and may lead to the reduction of prices and the loss of market share in a manner which may have an adverse effect on Shufersal s business affairs, financial position and results of operations. Real estate - Shufersal owns, wholly or partially, several shopping centers and commercial centers, in which its branches constitutes anchor stores, as well as additional areas which are used by Shufersal branches. These properties are exposed to risks associated with the ownership of real estate properties, including changes for the worse in the state of the local economy, excess of supply, and decreased demand, which may adversely affect the state-specific or regional real estate markets, occupancy rates, rent, and scope of revenues, and the value of the properties in Shufersal s financial statements. A failure by Shufersal to recruit or maintain renters to occupy its properties in general, and renters of large properties in particular, may have an adverse effect on Shufersal s real estate business activities. Additionally, an ongoing recession, if any, due to an economic downturn or crisis, may cause the vacation of rented areas and/or a reduction in the rent which is received from those properties. Product liability and production quality - Shufersal, through a wholly owned subsidiary, operates three production plants, and accordingly, Shufersal is subject to risks which generally apply to manufacturers, and which are associated with the manufacturing of food products. A significant problem in manufacturing may adversely affect Shufersal s business affairs, financial position and results of operations. Shufersal markets different products, including drugs, food products and hygiene products, which have a particular sensitivity with respect to the health of their users. Many laws and regulations formalize the rights of an injured party or a group of injured parties which incurred damage due to a product which is assembled, stored, marketed or sold by Shufersal. If damage is caused to a consumer and/or to a group of consumers as a result of products which were purchased in branches of the Shufersal chain, Shufersal may be liable such damage in a manner which could have an adverse effect on Shufersal s business affairs, financial position and results of operations. Shufersal is insured against risks with respect to the aforementioned product liability, as stated above. Special factors The Food Law - For details regarding the Food Law and its impact on Shufersal, see section 11.6 of this part. According to Shufersal s estimate, the various provisions of the Food Law are not expected to have a material effect Shufersal s operations and financial results. Logistical center, Shufersal headquarters and distribution pipelines - If Shufersal is unable to make use of its logistical centers, which are used by Shufersal for any reason whatsoever, its ability to distribute its products to its branches may be impaired. According to Shufersal s estimate, it will be able to prepare for direct distribution of the majority of its products to all of its branches within a reasonable period of time, and in accordance with the ability of suppliers to supply the products directly to the branches. In light of Shufersal s insurance coverage, Shufersal estimates that this matter will not significantly affect its results. For details regarding Shufersal s distribution network, see sections and of this part. Additionally, if physical damage is caused to the building of the logistical center where Shufersal management is located or to the aforementioned logistical centers, the matter

133 130 may have a significantly adverse impact on Shufersal s operations and results. Collective agreement - Most of Shufersal s employees are employed in accordance with a collective labor agreement, and Shufersal cannot be certain that this agreement will be renewed, from time to time, without the matter involving a strike on the part of the employees. If a dispute arises with employees which involves a strike or harm to the activities of Shufersal, the matter may have an adverse effect on Shufersal s business affairs, financial position and results of operations. Additionally, any re-opening of collective agreements may result in additional payroll expenses as a result of the provision of additional monetary rights to employees. Brand pollution - Shufersal has a wide variety of branded food and beverage products which enjoy many years of reputation, as well as products under the private brand. Harm to this reputation by means of various publications, or by other means, may adversely affect Shufersal s profitability, regardless of the correctness of those publications. Additionally, a defect in a certain product may harm the brand under which it is branded, as well as the entire family of products which is marketed under the same brand. Shufersal endeavors to protect its brands and reputation, inter alia, by strictly overseeing the quality of the raw materials which it uses in the manufacturing of the products, the production processes, the finished products and the advertising messages. Voucher cards - Shufersal issues vouchers and electronic voucher cards for the acquisition of commodities in its branches and at other retailers with whom Shufersal has engaged for this purpose. Shufersal is exposed to risks associated with the issuance of the aforementioned voucher cards, including as regards fraud and theft. Despite the fact that Shufersal has taken measures to reduce these risks, significant fraud may have an adverse effect on Shufersal s business affairs, financial position and results of operations. Shufersal is also subject to the provisions of the Consumer Protection Law. As of the reporting date, Shufersal estimates that its exposure is immaterial. Information processing and IT systems - Shufersal makes use of various information and IT systems. Shufersal s central information systems (and their backup systems) are located in and around the logistical center which is used to manage its distribution network. Shufersal takes various steps in order to ensure the functionality and reliability of the various information and IT systems, including by securing and backing up the information. However, a collapse of the information and IT systems may have an adverse effect on Shufersal s operating activities. Shufersal makes use of systems and computer programs, some in accordance with licenses which it has acquired. A significant part of the aforementioned licenses are not restricted by time; however, Shufersal engages with the license holders in agreements for the receipt of service and support for the aforementioned systems and programs, for periods of one year. Shufersal ensures to engage with suppliers with a solid reputation and financial stability. However, if the aforementioned suppliers are unable to continue providing Shufersal with their services, Shufersal will be forced to engage with other suppliers, which may adversely affect the support for the management of the retail processes in the short term. Restrictions of the Bank of Israel regarding a single borrower and a group of borrowers - Shufersal is considered as belonging to a group of borrowers, as part of the IDB Group. It is noted that as of the reporting date, the balance of bank credit of Shufersal and its investee companies is insignificant. See also section 7.3 of this part. Anti-trust - Shufersal achieved a significant part of its past growth by acquiring various retail operations. Future acquisitions of various operations in the food retail segment by Shufersal may require approval of the Antitrust Authority, which is not certain to be given, if any, nor under what terms. As of the reporting date, in consideration of the structure of the retail market, plus the restrictions which are imposed on Shufersal by law, and with reference to the provisions of the Food Law, the growth of Shufersal through the acquisition of a material entity in the retail segment, according to Shufersal s estimate, has low chances of materialization. For additional details, see section of this part. Termination of the operating agreement with Leumi Card Ltd. - Shufersal is engaged in a credit card operating agreement with Leumi Card in connection with the issuance of Shufersal and Yesh credit cards. In case of termination of the operating agreement, Shufersal will be required to engage in an agreement with another credit card company for the purpose of issuing the credit card which Shufersal will offer, and the associated operation thereof, and as part of the above, Shufersal will be required (through the credit card company) to re-issue the credit card to its customers, which may impose costs on Shufersal and may affect the scope of the credit card activities, and as part of the foregoing, may reduce the number of credit card holders. Legal proceedings - Due to the nature of Shufersal s activities, and its high distribution in the population, Shufersal is exposed to class actions, from time to time, in significant amounts, which it is required to defend itself against at significant cost, even if these claims were unfounded from the outset. Additionally, the Class Action Law, , establishes a general arrangement for the filing of class actions, and significantly expands the causes of action for which they can be filed, and the list of entities which are entitled to file them, and lifts procedural barriers from their path; Therefore, an increase in the filing of claims against companies such as Shufersal its taking place, along with motions to recognize them as class actions, on various grounds. Presented below are Shufersal s estimates regarding the classification and extent of impact of the aforementioned risk factors on Shufersal:

134 131 Extent of impact Major impact Medium impact Minor impact Macro factors State of the economy and of the retail food market in Israel Cost of living in Israel Dependence on the security and political situation in Israel Capital markets and finance Branch-specific Regulation Dependence on suppliers Real estate factors Competition Approvals and licenses Product liability and production quality Special factors Information processing and IT systems Anti-trust The Food Law Logistical center, Shufersal headquarters and distribution pipelines Collective agreement Brand pollution Voucher cards Legal proceedings Restriction of the Bank of Israel with respect to a single borrower and a group of borrowers Termination of the operating agreement with Leumi Card Ltd.

135 Clal Holdings Insurance Enterprises Ltd. Presented below is a description and details of Clal Insurance Enterprises Holdings, which constitutes an operating segment of IDB Development (in accordance with the operating segments tests specified in IFRS 8, as specified in section 2 of this part): 77 It is emphasized that from the date of the transfer of the control shares of Clal Holdings Insurance Enterprises to the Trustee, as specified in section 12.2 of this part, shares of Clal Holdings Insurance Enterprises are presented in the financial statements of IDB Development as a financial asset measured at fair value through profit and loss, according to the market price on the stock exchange of shares of Clal Holdings Insurance Enterprises. Accordingly, beginning with this annual report (i.e., the report for 2016), the activity description of Clal Insurance Enterprises Holdings (which is a public company whose securities are listed for trading on the stock exchange), is provided in summary format Presented below are data regarding IDB Development s investment in Clal Insurance Enterprises Holdings as of December 31, 2016: Name of holding company IDB Developmen t Holding rate (In percent) Approxima tely 55 Total investment in Clal Insurance Enterprises Holdings, as recorded in the books of IDB Development, according to market value (NIS millions) Rate which constitutes the investment amount in Clal Insurance Enterprises Holdings out of the capital attributed to the owners of IDB Development Contribution to results attributable to the owners of IDB Development in 2016 (NIS millions) 78 Description of activity 1, % 53 Insurance, pension and provident funds Presented below are main financial data regarding from the financial statements of Clal Insurance Enterprises Holdings as of December 31, 2016 (amounts in millions of NIS) after the adoption of IFRS 9 by IDB Development: (*) Revenues In 2016 Net profit attributed to the owners of Clal Holdings Insurance Enterprises In 2016 Capital attributed to the owners of Clal Holdings Insurance Enterprises As of December 31, 2016 Total assets As of December 31, , ,674 98,291 Accounting reference in the books of IDB Development Financial asset measured at fair value through profit or loss * IFRS 9 was initially adopted in the financial statements of IDB Development as of December 31, 2012, however, Clal Insurance Enterprises Holdings did not adopt, through early adoption, the provisions of IFRS 9 in its financial statements. It is noted that IDB Development ceased consolidating the financial statements of Clal Insurance Enterprises Holdings on August 21, 2013, following the transfer of the control shares to a Trustee, as specified in section 12.2 of this part. Presented below is financial information regarding the activity of Clal Insurance Enterprises Holdings (in millions 77 The activity of Clal Insurance Enterprises Holdings also includes insurers activity. Therefore, in accordance with Regulation 8C(4) of the Securities Regulations (Periodic and Immediate Reports), , the description of this activity (the insurers activity in Clal Holdings Insurance Enterprises Group) provided in section 13 of this part is adapted to the description required of insurers, as applicable. 78 Beginning from the date of the transfer of the control shares of Clal Holdings Insurance Enterprises to the Trustee, as specified in section 12.2 of this part, the shares of Clal Holdings Insurance Enterprises are presented in the financial statements as a financial asset measured at fair value through profit and loss. The contribution to results attributable to the owners of IDB Development in 2016 primarily represents the share of IDB Development in the increase in market price of shares of Clal Holdings Insurance Enterprises on the Stock Exchange.

136 133 of NIS) from its financial statements: Total revenues 11,868 12,288 13,293 Total costs 11,824 11,560 12,969 Income (loss) before tax Taxes on income (14) Profit (loss) attributed to the owners of Clal Holdings Insurance Enterprises Total assets as of December 31 98,291 95,122 91,088 Total assets for investment-linked contracts as of December 31 Total capital attributed to owners as of December 31 58,396 4,674 54,930 51,480 4,548 4,267 Total liabilities as of December 31 93,578 90,538 86,786

137 Clal Insurance Enterprises Holdings is a public company which was incorporated in 1987, in accordance with the laws of the State of Israel. The shares of Clal Insurance Enterprises Holdings have been listed for trading on the stock exchange since As of proximate to the publication of the report, IDB Development holds, primarily through a Trustee, as specified in section 12.2 of this part, and in Note 3.H.5.A to the financial statements, approximately 54.92% of the issued capital and voting rights in Clal Insurance Enterprises Holdings. An additional principal shareholder of Clal Insurance Enterprises Holdings is Bank Hapoalim Ltd. ( Bank Hapoalim ), which holds, through a subsidiary under his control, approximately 9.50% of the issued capital and voting rights in Clal Insurance Enterprises Holdings. 79 In accordance with the demand of the Commissioner of Capital Markets, IDB Development submitted, on August 21, 2013, an irrevocable power of attorney to Mr. Moshe Terry (which was updated and signed on January 6, 2015), who was appointed by the Commissioner of Capital Markets as a trustee for approximately 51% of the issued share capital and voting rights of Clal Insurance Enterprises Holdings, which are held by IDB Development (the Means Of Control and the Trustee ), and transferred the Mmeans Of Control to a trust account under the name of the Trustee. for the purpose of exercising the authorities which are available to it by virtue of the means of control, in accordance with the provisions of the deed of trust. On February 20, 2017, the Trustee transferred to IDB Development 556,482 shares, such that, as of proximate to the publication of the report, he holds 50% of the Means Of Control only. Within the framework of the Commissioner of Capital Markets s letter from December 2014, regarding the outline for the sale of IDB s control and holding of Clal Holdings Insurance Enterprises, it was clarified, inter alia, that during the Trustee s period of tenure, the appointment of directors in Clal Insurance Enterprises Holdings and in Clal Insurance will be performed by the committee for the appointment of directors in an insurer with no controlling shareholder, as defined in the Control of Financial Services (Insurance) Law, In June 2015, the Commissioner of Capital Markets announced that in May 2015, she appointed a committee for the appointment of directors in Clal Holdings Insurance Enterprises Group, which serves, from that day onwards, to recommend the appointment of directors (who are not external directors) in Clal Insurance Enterprises Holdings and in Clal Insurance. In accordance with the letter of the Commissioner of Capital Markets dated December 30, 2014, IDB Development was required to formulate an outline for the sale of the control of Clal Holdings Insurance Enterprises, to sign an agreement for the sale of control (at least 30% of Clal Insurance Enterprises Holdings) by December 31, 2015, and to receive the required permit from the Commissioner of Capital Markets for the completion of the transaction by June 30, On January 6, 2016, after receiving an extension of several days from the Commissioner of Capital Markets for the signing of an agreement for the sale of the control of Clal Holdings Insurance Enterprises, IDB Development announced that, following the announcement of one of the groups with whom it was conducting negotiations for the sale of the control of Clal Holdings Insurance Enterprises, that the said group is not continuing in the negotiation process, IDB Development is no longer conducting any negotiation processes with any entity whatsoever in connection with the sale of the control of Clal Holdings Insurance Enterprises. On January 7, 2016, the Commissioner notified IDB Development that in accordance with the letter dated December 30, 2014, and due to the fact that IDB Development has not met the deadlines specified therein, a terminating event had effectively taken place, as defined in the letter of the Commissioner of Capital Markets, and as a result, beginning on January 7, 2016, IDB Development and the Trustee will be obligated to work towards the sale of the control shares, at a rate which will not fall below 5% every 4 months. Following the exchange of letters between the Commissioner of Capital Markets, the Trustee and IDB Development, in connection with the implementation of the outline, as stated above, on July 13, 2016, the Trustee filed with the District Court of Tel Aviv-Yafo an urgent motion to issue orders (the Motion ), requesting to order the Trustee, inter alia, to sell 5% of the shares of Clal Holdings Insurance Enterprises by September 7, 2016, in accordance with the outline. In the response of the Commissioner of Capital Markets to the Motion from July 2016, she stated, inter alia, that according to her position, the Court is required to order the Trustee regarding the method of action to realize the Means Of Control on the date specified in the Commissioner s outline, and that she leaves to the Court s discretion the determination regarding the appropriate method for the sale of the shares addressed in the Motion. In August 2016, IDB Development objected to the Motion. In IDB Development s response to the Motion, the Court was requested, inter alia, to dismiss the requests specified by the Trustee in the Motion, to allow the holding of shares of Clal Holdings Insurance Enterprises at the current state of affairs, and to order the Trustee not to sell, at this time, shares of Clal Holdings Insurance Enterprises, until IDB Development has sold its holdings in Clal Insurance Enterprises Holdings to a potential buyer (while exhausting the competitive sale process which IDB Development is currently conducting), and in any case, so long as a significant difference exists between the value of the shares according to the equity of Clal Insurance Enterprises Holdings and their price on the stock exchange, and so long as it has not received another explicit instruction from 79 At full dilution, IDB Development and Bank Hapoalim hold, respectively, 53.52% and 9.25% of the issued capital and voting rights in Clal Insurance Enterprises Holdings. Proximate to the publication of the report, shares of Clal Holdings Insurance Enterprises at a rate of approximately 4.99% (approximately 4.84% at full dilution) of the issued capital of Clal Insurance Enterprises Holdings which are held by IDB Development are pledged in favor of the debenture holders (Series K) which IDB Development issued (for details, see Note 14.C.(4) to the financial statements).

138 135 the Court (and even in that case, not to sell them for a consideration which is lower than the realizable value of the shares on the stock exchange, at the relevant time). As of the date of this report, a decision has not yet been reached regarding the Motion. The Trustee announced that it will not sell shares of Clal Holdings Insurance Enterprises before a decision has been reached regarding the Motion. In its financial statements for 2016, Clal Insurance Enterprises Holdings reported that it is unable to estimate the entire effects of the results of the aforementioned events which may lead to additional changes in the holding and control of Clal Holdings Insurance Enterprises, and to the sale of the control core shares on the stock exchange (including as a result of the implementation of the mechanism for an insurer without a controlling shareholder in Clal Insurance Enterprises Holdings), and which may affect, inter alia, the reputation of Clal Insurance Enterprises Holdings and member companies of Clal Holdings Insurance Enterprises Group, including their ratings. The transfer of the Means Of Control in Clal Holdings Insurance Enterprises from the Trustee may affect the grounds for demanding immediate repayment of a loan which Clal Insurance Enterprises Holdings took out from the banking system, and sections in certain agreements of member companies of Clal Holdings Insurance Enterprises Group with third parties (including reinsurers), and may require, due to the fulfillment of circumstances involving a change in control, as stated above, negotiations with those third parties to extend the validity of the agreements. A banking corporation which provided credit to Clal Insurance Enterprises Holdings confirmed that it will not initiate proceedings against it due to the appointment of a Trustee and its actions in accordance with the provisions which were given by the Commissioner of Capital Markets. Additionally, Clal Insurance Enterprises Holdings contacted certain reinsurers and received their approval for the continued validity of the reinsurance agreements with it, despite the appointment of a Trustee, as stated above. The provisions of the Concentration Law may have implications on the holding and control of Clal Holdings Insurance Enterprises. For details, see section 7.2 of this part and Notes 3.G.3 and 3.H.5 to the financial statements. Additionally, Clalbit Finance Ltd. ( Clalbit Finance ) is considered an other (third) tier company, as this term is defined in the Concentration Law. A shareholders agreement is in place between IDB Development and Bank Hapoalim (the Shareholders Agreement ), in which it was determined, inter alia, that, that: (A) So long as IDB Development remains the controlling shareholder of Clal Holdings Insurance Enterprises, IDB Development will work to appoint director/s in Clal Insurance Enterprises Holdings on behalf of Bank Hapoalim as well as members of the Board of Directors committees on behalf of Bank Hapoalim in Clal Insurance Enterprises Holdings, according to the ratios specified in the agreement, and as derived from Bank Hapoalim s holding rate at that time; 80 (B) If IDB Development ceases being the controlling shareholder of Clal Holdings Insurance Enterprises, and subject to the provisions of the Banking Law (Licensing), (the Bank Licensing Law ), the parties will work, in any vote regarding the appointment of directors in Clal Insurance Enterprises Holdings, so that the vote will be separate regarding each candidate for tenure as a director. In a vote regarding the identity of the directors who will be proposed by Bank Hapoalim, IDB Development will vote, as stated above, and in the vote regarding the identity of the other Board members, Bank Hapoalim will refrain from voting; (C) IDB Development was given right of first refusal with respect to the sale of shares of Clal Holdings Insurance Enterprises (all or part) by Bank Hapoalim, save in case of sale to an agreed-upon strategic investor, as stated below; (D) If any of the parties wishes to offer its shares to the public, or to attach a sale offer for its shares in Clal Insurance Enterprises Holdings to a public offering of Clal Insurance Enterprises Holdings, they will invest their best efforts, subject to any applicable law, to attach one another to the aforementioned sale offer. The rights of each party will expire in accordance with the provisions of this subsection if its holdings in Clal Insurance Enterprises Holdings fall below 6.5% of the issued capital of Clal Insurance Enterprises Holdings, and its obligations will expire if it ceases being an interested party in Clal Insurance Enterprises Holdings; (E) The parties will cooperate, to the best of their ability, to add an additional shareholder, which is not a resident of Israel, to Clal Insurance Enterprises Holdings, whose qualifications, experience and capabilities can provide a strategic contribution to the status of Clal Insurance Enterprises Holdings as a leading insurance group. For this purpose, Bank Hapoalim will agree to dilute the nostro holding rate of Bank Hapoalim and of companies under its control of up to 20% of its holdings in Clal Insurance Enterprises Holdings, before the dilution. For details regarding correspondence between IDB Development and Bank Hapoalim in connection with the assertion of Bank Hapoalim, according to which it is entitled to join the sale of shares of Clal Holdings, see Note 3.H.5. to the financial statements. It should also be noted that within the framework of the allocation agreement from December 1998, between Clal Insurance Enterprises Holdings and Bank Hapoalim (the Allocation Agreement ), according to which shares in Clal Insurance Enterprises Holdings were allocated to Bank Hapoalim, Clal Insurance Enterprises Holdings undertook, inter alia, that insofar as the matter depends on it, it will refrain from taking any action involving a capital reduction which will place Bank Hapoalim in a situation opposed to provisions of the Banking Law, according to its version on the signing date of the Allocation Agreement. If due to 80 In May 2009, Bank Hapoalim announced to IDB Development (through its representatives) that it does not request to appoint any directors on its behalf to the board of directors of Clal Insurance Enterprises Holdings, so long as it has not notified IDB Development otherwise.

139 136 a future change of the Bank Licensing Law, Bank Hapoalim is in a situation involving a breach of provisions of the Bank Licensing Law in connection with its holdings in shares of Clal Holdings Insurance Enterprises, the parties will work reasonably and in good faith to find a solution for the breach situation which was created. Clal Insurance Enterprises Holdings also undertook to invest its best efforts in order to avoid being considered a real holding corporation (as defined in the Bank Licensing Law), subject to considerations in favor of its best interests, and to the condition that Bank Hapoalim will still hold a material rate of the issued share capital of Clal Insurance Enterprises Holdings; In the allocation agreement, IDB Development and Bank Hapoalim were also given preemptive rights for the acquisition of shares (and securities convertible into shares), upon the allocation of securities by Clal Insurance Enterprises Holdings, excluding several defined cases, such as: (1) An allocation in accordance with a prospectus; (2) An allocation to employees; and (3) An allocation after which which the holding rate of Bank Hapoalim will not fall below 16%, and if the bank has sold and/or transferred shares, or has not exercised the aforementioned acquisition right, the aforementioned rate of 16% will decrease by the same rate as the decrease in the holdings of Bank Hapoalim, as stated above. In the event that the non-exercise of the right is due to a restriction in the Bank Licensing Law, Bank Hapoalim will be given a corrective right with respect to the first subsequent allocation. The priority right of Bank Hapoalim or of IDB Development will expire in the event that the holding rate of the aforementioned entity falls below 6.5% of the issued capital of Clal Insurance Enterprises Holdings, as applicable. For details regarding Bank Hapoalim s request in connection with the process involving the sale of Clal Insurance Enterprises Holdings, see Note 3.H.5.C to the financial statements Material changes to the business operations of Clal Insurance Enterprises Holdings in 2016, until proximate to the publication of the report Reinforcement of insurance reserves in the low interest environment, and its effect on discount rates in nonlife insurance and life insurance. Presented below are details regarding the effects of the low interest rate environment on the results of operations: For the period of three For the year ended December 31 months ended December NIS millions Audited Unaudited Effect of low interest rate environment: Life insurance - total impact of the low interest rate environment before tax (194) (265) 311 (93) Non-life insurance* Long term care insurance in the health segment Total comprehensive income (loss) before tax with respect to low interest rate environment (194) (265) 493 (56) * In the three month period ended on the reporting date, impact of updating the best practices policy. In the corresponding period, a decrease in reserves due to an interest rate decrease Issuance of debentures and exchange of debentures In the months April and December 2016, Clalbit Finance acquired, in accordance with shelf offering reports, which were published by virtue of a shelf prospectus dated May 29, 2014, which also constitute specifications for exchange tender offers, from the debenture holders of Clalbit Finance, debentures which were held by them, in consideration of an issuance of new debentures of Clalbit Finance, as specified below: NIS 600,000,000 par value of debentures (Series F), in consideration of the issuance of NIS 628,092,000 par value of debentures (Series J), by way of a series extension NIS 114,104,494 par value of debentures (Series F), in consideration of the issuance of NIS 115,267,219 of debentures (Series H), by way of a series extension NIS 88,830,624 par value of debentures (Series A), in consideration of the issuance of NIS 117,242,211 par value of debentures (Series I), by way of a series extension NIS 41,670,688 par value of debentures (Series B), in consideration of the issuance of NIS 49,216,000 par value of debentures (Series I), by way of a series extension. The terms of the additional debentures which were issued, as stated above, are identical to the terms of the currently outstanding debentures. In December 2016, Clalbit Finance raised a total of approximately NIS 200 million, within the framework of an issuance of debentures (Series G), by way of a series extension, in accordance with a shelf offering report of Clalbit Finance from December 2016, which was published by virtue of a shelf prospectus dated May 29, The issuance consideration was deposited in Clal Insurance and recognized as Tier 2 hybrid capital of Clal Insurance.

140 Changes pertaining to the human capital and organizational structure The period of the current collective agreement in Clal Holdings Insurance Enterprises Group is until December 31, 2016, and industrial peace was determined until March 31, The parties are conducting negotiations between them towards the renewal of the collective agreement, which are being conducted against the background of significant and ongoing business and regulatory changes, which took place during the period of the collective agreement, and which have a significant impact on the operating environment of Clal Holdings Insurance Enterprises Group, and on the conditions of competition and profitability. On December 13, 2016, the Histadrut notified Clal Insurance and additional member companies in Clal Holdings Insurance Enterprises Group regarding a labor dispute. The notice includes, inter alia, claims of the worker committee regarding actions which are being performed by management without negotiations with the workers committee, as well as claims in connection with the conducting of negotiations for a new collective agreement between the Histadrut, Clal Insurance and the workers committee. During the period proximate to the publication of the report, employees of Clal Holdings Insurance Enterprises Group who are party to the collective agreement initiated organizational steps, including disruption of work processes and partial strikes in specific units of the organization, in light of differences regarding the positions of the parties to the negotiations Regulatory reforms. In recent years in general, and in 2016 in particular, significant regulatory reforms were promoted in the various insurance and savings branches, primarily including reforms which are intended to directly or indirectly reduce premiums and management fees, through the use of various regulatory tools. Noteworthy in this regard, inter alia, is the determination of a default pension fund by the Division of Capital Markets and Insurance as a means to reduce management fees, a significant change in compulsory insurance tariffs and changes in health products, through an effective reduction of the maximum limit for approved tariffs, and without predetermining the tariff update method, during the insurance period. The regulatory reforms created changes in the engagement structure and in the reciprocal relationships between institutional entities, agents, employers and customers, in a manner which could affect the ability of institutional entities to link their income to their expenses, and could impose on them significant operating expenses. The application of some of the reforms began during 2016, while others are expected to be applied in the future and/or are in various stages of regulatory processes. In light of the fact that these reforms were published recently, and are currently in various stages of the implementation process, Clal Insurance Enterprises Holdings is unable to estimate their full impact on the insurance and pension market in Israel. The entire set of applied and proposed changes, the operational load due to the pace, scope and complexity of regulatory changes, and the need to implement adjustments to the automation systems and work processes, have implications on the business model in the branch, and currently affect and will continue to affect the insurance market in Israel in the coming years, and the profitability thereof, including, inter alia, the value of new business (VNB) which will be sold, the embedded value with respect to Clal Insurance Enterprises Holdings, and the capital ratio in accordance with the Solvency II-based solvency regime, the requirements of which Clal Insurance Enterprises Holdings is preparing to meet. The information presented on all matters associated with the regulatory changes constitutes forward looking information, which is based on assumptions and estimates made by Clal Holdings Insurance Enterprises Group as of the publication date of the report. These changes, and the actual implications thereof, may differ from the forecast, including, inter alia, in light of the uncertainty involving their occurrence, and involving all of their implications, which are dependent, inter alia, on the conduct of distributing entities, distributing entities and policyholders, and on the reciprocal relationship between the various reforms Investments in the capital of Clal Insurance Enterprises Holdings and transactions with its shares 12.5 Dividends During the last two years, and until proximate to the publication of the report, investments were not performed in the capital of Clal Insurance Enterprises Holdings, and no material transactions were performed by interested parties in Clal Insurance Enterprises Holdings with shares of Clal Holdings Insurance Enterprises over the counter Beginning in 2015, and until proximate to the publication of the report, Clal Insurance Enterprises Holdings did not distribute dividends The balance of distributable earnings as of December 31, 2016, in accordance with the Companies Law and the capital requirements due to the permit for control of the institutional entities which are held by Clal Insurance Enterprises Holdings, amounted to a total of approximately NIS 1.8 billion. A dividend distribution in Clal Insurance Enterprises Holdings is also affected by the ability to distribute dividends of investee companies, in light of their capital requirements and liquidity needs, and it is expected that accordingly, the entry into effect of a new Solvency II-based solvency regime (hereinafter: New Solvency Regime ) will have a significant effect on the dividend distribution ability of Clal Insurance Enterprises Holdings (for details regarding a New Solvency Regime, see section of this part) Capital requirements of a consolidated insurance company A dividend distribution from the capital surplus of an insurance company is subject to the general requirements and the Companies Law, and also to liquidity requirements, compliance with provisions of the Investment Regulations and with additional directives published by the Commissioner of Capital Markets from time to time, including the effect of the maximum limit regarding Tier 2 and Tier 3 capital.

141 Minimum capital - The Control of Financial Services Regulations (Insurance) (Minimum Equity Required of Insurer), (the Capital Regulations ) determine the minimum capital requirement of insurance companies, and the method used to calculate it. The insurance business operations are conditional upon the existence of minimum required capital. The capital required for the purpose of the insurance activity above is comprised of a first layer which is the higher of either the minimum (floor) capital, or capital which is derived from total activities in general insurance, according to the higher of either a calculation based on premiums, or a calculation based on outstanding claims, and additional capital requirement components. Non-fulfillment of the Capital Regulations will require the insurer to increase its capital up to the amount stipulated in the Capital Regulations, or to reduce its business volume accordingly, as applicable, by proximate to the publication date of the report, except in exceptional circumstances which will be approved by the Commissioner of Capital Markets, in which case the capital supplementation will be postponed Insurer s composition of capital - Presented below are the main definitions of the components and devices which are included in the equity tiers of the insurance companies, in accordance with the Commissioner s circular from August 2011 (the Circular ). This framework will serve as the basis for the determination of an insurer s equity, upon application of a New Solvency Regime in Israel, as amended and updated (for additional details, see section of this part): 1) Tier 1 capital - Includes basic Tier 1 capital (in the amount of the components which are included in capital attributed to shareholders of Clal Insurance). The total rate of Tier 1 capital will not fall below 60% of the insurer s total capital. 2) Tier 2 capital - Includes Tier 2 hybrid capital instruments (excluding periodic accrued interest payments), Tier 2 subordinated capital instruments (as defined in the Circular), and other components or instruments approved by the Commissioner of Capital Markets. Tier 2 hybrid capital instruments are subordinate to all other instruments, excluding Tier 1 capital, and include financial instruments which are available to absorb the insurer s losses by deferring principal and interest payments. The first repayment date for Tier 2 capital instruments will be after the end of a period which reflects the weighted average of the periods for repayment of the insurance liabilities plus two years, or after 20 years, whichever is earlier, but no earlier than 8 years after the issue date. If a Tier 2 hybrid capital instrument includes an incentive for early redemption, the first date of an early redemption incentive will be no earlier than the end of 5 years after the date of the instrument s issuance. 3) Tier 3 capital - Including Tier 3 hybrid capital instruments (excluding periodic accrued interest payments) and another component or instrument approved by the Commissioner of Capital Markets. Tier 3 capital instruments are subordinate to all other instruments, excluding Tier 1 and Tier 2 capital, and includes financial instruments which are available to absorb the insurer s losses by deferring principal payments only. It can be established that Tier 3 capital will not come before Tier 2 capital, and will be equivalent to it in the order of credit. The first repayment date of Tier 3 capital instruments is no earlier than the end of 5 years after their issue date. If a Tier 3 hybrid capital instrument includes an incentive for early redemption, the first date of an early redemption incentive will be no earlier than the end of 3 years after the date of the instrument s issuance. The total rate of Tier 3 capital may not exceed 15% of an insurer s total capital. For this purpose, insurance liabilities include non-yield-linked liabilities, without the liability component which is fully backed by a HETZ debenture, and less the share of reinsurers. The inclusion of a hybrid capital instrument (Tier 1, Tier 2 or Tier 3) under equity requires approval from the Commissioner of Capital Markets. It is noted that the Circular includes transitional provisions and a temporary order regarding the composition of an insurer s equity, which will apply until the implementation of the Directive in Israel. 4) Authority to determine capital requirements - within the framework of the amendment to the Control Law, which was approved in August 2016, and which involves converting the Division of Capital Markets in the Ministry of Finance into an independent authority called the Capital Market, Insurance and Savings Authority, the authority which was conferred in the past upon the Minister of Finance was also transferred to the Commissioner of Capital Markets regarding the determination of the equity of an insurer / provident fund (excluding Tier 1 capital), and the determination of the composition of equity. The Commissioner of Capital Markets will be entitled to determine the rules regarding equity in administrative directives, and not in regulations, subject to the right to object to the directives, which is available to the Knesset Finance Committee. For details regarding the provisions regarding the implementation of a new Solvency II-based economic solvency regime for insurance companies, which were published in February 2017 in accordance with the amendment to the Control Law, see section below Details regarding a New Solvency Regime which is expected to enter into effect in ) Entry into effect of New Solvency Regime - the Commissioner of Capital Markets is working to apply in Israel an economic solvency regime which is based on the principles of the European Directive Solvency II, whose application was commenced in Europe in Beginning in 2008, Clal Insurance Enterprises Holdings performed quantitative impact studies (IQIS), in accordance with the specific instructions which

142 139 were published by the Commissioner on this matter, and which were based on the provisions of the directive which were known at the time in Europe, and included additional adjustments of the Commissioner of Capital Markets to the local market. In February 2017, the wording of provisions for the implementation of a New Solvency Regime for insurance companies was published, which was transferred to the Knesset Finance Committee (the Updated Document ). The Updated Document includes changes with respect to the details of implementation and the application date of the aforementioned solvency regime, which were known until its publication, and it was determined that the application date will be June 30, 2017 (the Application Date ). In accordance with the Updated Document, these provisions will enter into effect gradually, as specified below. Assessment of solvency ratio and transitional provisions - further to the conducting of quantitative impact studies in previous years, as part of the preparation for the implementation of a New Solvency Regime, in April 2016, a circular was published regarding instructions for the performance of IQIS for 2015 (the Circular ), according to which, the insurance companies are required to submit a quantitative impact study based on the data for December 2015 ( IQIS5 ). Clal Insurance performed an assessment of the ratio between its current capital and required capital ( Solvency ) as of December 31, 2015 (the Calculation Date ), in accordance with the provisions of the Circular. In accordance with the results of the assessment, as of the Calculation Date, Clal Insurance has current capital exceeding required capital, according to the New Solvency Regime, in consideration of the transitional provisions which pertain to the gradual increase of the capital requirements with respect to stock risk, in accordance with the letter which was sent by the Commissioner of Capital Markets on the matter in July Without taking into account the aforementioned transitional provisions, there is an immaterial capital deficit. The results of IQIS5 were submitted to the Commissioner of Capital Markets on August 23, In the Updated Document it was determined that the previous transitional provisions according to which the capital requirement with respect to shares will gradually increase until it reaches the full rate over a period of 7 years, will continue to apply. Additionally, a distribution period was determined until the full application of solvency capital requirement, in accordance with the provisions of the Updated Document ( SCR ), according to the following milestones: Calculation as of June 30, 2017 December 31, 2017 December 31, 2018 December 31, 2019 and June 30, 2020 December 31, 2020 and June 30, 2021 December 31, 2021 Solvency capital requirement 60% of SCR 65% of SCR 70% of SCR 80% of SCR 90% of SCR SCR Clal Insurance conducted a preliminary and approximate assessment of the impact of the main changes in the Updated Document, with reference to the calculation which was performed as part of IQSI5 as of the Calculation Date, without performing the calculation in its entirety, in accordance with the provisions of the Updated Document. According to the assessment of Clal Insurance, the impact of these changes would have resulted in an improvement in its solvency ratio, such that, as of the Calculation Date, its current capital would have exceeded required capital, including without taking into account the transitional provisions regarding the holding of shares, and without taking into account the distribution arrangements described above. 2) MCR and supervisory intervention hierarchy - The Updated Document defines, in addition to SCR, also a capital threshold, MCR, which will be no less than 25% of SCR, and no more than 45% of SCR. Additionally, a supervisory intervention hierarchy was determined, according to which a company which does not fulfill the required solvency ratio, or regarding which there is a real concern that its solvency ratio will be lower than required, will submit to the Commissioner of Capital Markets a plan to ensure its fulfillment of the required solvency ratio, within 6 months after the date of its submission. If the insurance company has not fulfilled the requirements of the plan, in accordance with the terms specified in the Updated Document, the Commissioner of Capital Markets will consider supervisory intervention in accordance with its authorities. A company which does not fulfill the required capital threshold, or regarding which there is real concern that it will not fulfill the required capital threshold, will submit to the Commissioner of Capital Markets a plan to ensure its fulfillment of the required capital threshold, within three months after the date of its submission. If the insurance company has not fulfilled the requirements of the plan, in accordance with the terms specified in the Updated Document, the Commissioner of Capital Markets will initiate supervisory measures in accordance with the authorities which are conferred upon it in the Control Law.

143 140 3) Composition of recognized economic capital - The Updated Document determines provisions regarding the composition of recognized capital, on an economic basis, which are based on provisions of the circular of the Commissioner of Capital Markets, as specified in subsection 2 above. In accordance with the provisions of the Updated Document, equity will be considered the sum of total Tier 1 capital and Tier 2 capital, as defined in the Updated Document, where subordinated Tier 2 capital instruments, subordinated Tier 2 capital and Tier 3 capital which were issued before the date of entry into effect will be classified as Tier 2 capital, and will be recognized in accordance with the terms of their recognition before the application date. It was further determined that the maximum scope of Tier 2 capital will amount to 40% of SCR, and a rate of 50% of SCR during the distribution period. With reference to the fulfillment of MCR, it was determined that the maximum scope of Tier 2 capital will amount to a rate of 20%. 4) Preparation and implications - It is noted that in May 2015, the Board of Directors of Clal Holdings Insurance Enterprises and the Board of Directors of Clal Insurance instructed the Risk Management Committee of the Board of Directors, which also operates as a Solvency Committee (the Committee ), to evaluate, together with management, methods whereby Clal Insurance will be able to act to improve the capital ratio, in accordance with the New Solvency Regime, and to recommend to the Board of Directors of Clal Insurance possible courses of action, including with respect to making business adjustments and/or carrying out financial operations relating to the capital of Clal Insurance, its composition and/or liabilities. The committee and management have commenced this evaluation, and as part of the evaluation, recommended to the board of directors regarding the Tier 2 capital raisings which were performed. The committee, together with management, is continuing to evaluate possible methods of action in connection with the capital and the capital requirements, within the Solvency framework, in parallel with the clarification of the regulatory guidelines on the matter, and with reference to the results of the studies which have been performed and will be performed. The implementation of the provisions of the New Solvency Regime is expected to change both recognized regulatory capital and required regulatory capital, and according to the assessment of Clal Insurance Enterprises Holdings, is expected to result, according to a full calculation, in a significant decrease in the solvency ratio of Clal Insurance, relative to the solvency ratio in accordance with the Capital Regulations. However, in general, the capital requirements in the solvency regime are intended to represent an absorption buffer for more severe events, with a lower probability, than the capital requirements under the current governance. According to the assessment of Clal Insurance Enterprises Holdings, the changes to the provisions pertaining to the composition of recognized capital, and to the terms of capital instruments of Tier 1 and Tier 2 capital, which are included in the Updated Document, may affect capital management in Clal Insurance, and future raisings. Additionally, Clal Insurance Enterprises Holdings has not yet determined an internal target for the required solvency ratio in accordance with the new regime, which is inherently more volatile. The implications of the New Solvency Regime constitute forward looking information. As of the present date, it is not possible to estimate the entire implications of the foregoing on the solvency ratio of Clal Insurance, inter alia, due to the fact that the required processes for the implementation of the aforementioned regulatory changes have not yet concluded, since the performance of calculations with respect to the solvency ratio as of the end of 2016 has not yet begun. The capital status as of the date of initial application may differ from the capital status as of the calculation date, in light of the inherent sensitivity of the capital calculation model and the capital requirements under the solvency regime, changes in market variables, demographic variables and other variables, and developments in the business operations of Clal Insurance, which may result in fluctuations in the capital ratio between periods Dividend - Save for the general requirements and the Companies Law, a dividend distribution from a capital surplus in an insurance company is also subject to liquidity requirements, compliance with provisions of the Investment Regulations and with additional directives published by the Commissioner of Capital Markets from time to time, including the effect of the maximum limit regarding Tier 2 and Tier 3 capital. In August 2016, the Commissioner of Capital Markets sent a letter to the managers of the insurance companies on the subject of dividend distributions by insurance companies (the Letter ). The Letter constitutes an update to a previous letter from December In accordance with the Letter, an insurance company is not entitled to distribute dividends unless, after the performance of the distribution, the insurer has a ratio of recognized capital to required capital ( Solvency Ratio ) of at least 115%, in accordance with the current Capital Regulations, and additionally, a solvency ratio in accordance with the updated quantitative impact study regarding the implementation of a New Solvency Regime (IQIS5), or in accordance with the guidelines regarding the implementation of Pillar 1 of the New Solvency Regime, as applicable, calculated without the transitional provisions, according to the rates specified below: up to and including the financial statements with respect to December 31, 2017 and 2018, the required ratio is 115% and 120%, respectively. Beginning with the financial statements as of March 31, 2019, the required ratio is 130%. Additionally, an insurance company is required to submit, to the Commissioner of Capital Markets, within ten business days after the distribution date, an annual profit forecast of the insurance company for the two years subsequent to the date of the dividend distribution; An updated debt service plan of the insurance company, which was approved by the Board of Directors of the insurance company, as well as an updated debt service plan of the holding company which holds the insurance company Board of Directors by the Board of Directors of the holding

144 141 company; A capital management plan which was approved by the insurance company s Board of Directors; Minutes of the discussion held by the insurance company s Board of Directors in which the dividend distribution was approved, including attachment of the background material for the discussion. In light of the capital status of Clal Insurance as of December 31, 2015, as reflected in the results of IQIS5, and also in consideration of the apparent consequences of the provisions of the Updated Document, as specified in subsection 3 above, Clal Insurance cannot distribute dividends until its solvency ratio under this regime exceeds the required rate, as specified above. The scope of the distribution which Clal Insurance will be entitled to implement after its solvency ratio has exceeded the aforementioned threshold will also be affected by the requirement to maintain the aforementioned threshold immediately after the distribution. The foregoing may have a significant impact on the ability of Clal Insurance Enterprises Holdings to distribute dividends, which primarily depends on dividend distributions from Clal Insurance to Clal Insurance Enterprises Holdings. It is noted that the discussions which the insurance companies held with the Authority also included discussions regarding the issue of the regulatory restriction on dividend distributions of insurers. In the discussions, it was noted that the Authority is considering an easement with respect to these restrictions, in a manner whereby the dividend distribution will be made conditional on the fulfillment of a solvency ratio of 100% according to the new economic solvency regime, according to a full calculation, without applying the transitional provisions for the capital requirement with respect to shares, and without distribution, instead of 130% in the Letter which was published on this matter, on fulfillment of a solvency ratio of 115%, with reference to the current capital regime, so long as it remains in effect, and on fulfillment of the capital surplus determined by the Board of Directors of the insurance company. The Authority has not yet published a revised letter on this issue, and at this stage, it is not possible to estimate if and when it will does so. The Board of Directors of Clal Insurance has not yet discussed the capital management policy under the New Solvency Regime, and has not yet determined the required capital surplus under this regime Permit given by the Commissioner of Capital Markets to the former controlling shareholders of IDB Holdings, for the holding of control of Clal Holdings Insurance Enterprises and of consolidated institutional entities As IDB Development was informed, on May 8, 2014, the representatives of the previous controlling shareholders in IDB Development (the Ganden, Manor and Livnat Groups) received notice from the Commissioner of Capital Markets stating that, further to the creditors settlement in IDB Holdings, and due to the fact that they no longer hold control of institutional entities from the Clal Holdings Insurance Enterprises Group, the permits for control of the aforementioned institutional entities, which had previously been given to them by the Commissioner of Capital Markets, were canceled, including, inter alia, regarding Clal Insurance, Clal Credit Insurance and Clal Pension and Provident Funds (the Institutional Entities ), (the Permit ), in which IDB Holdings undertook to supplement (or to cause the companies under its direct or indirect control to supplement) the capital required of the insurers according to the Capital Regulations or any other regulation or law which may replace them, provided that the maximum undertaking limit does not exceed 50% of the capital required of an insurer, and that the undertaking will be realized only when the insurer s capital is negative, and in the amount of the negative capital, provided that the supplementary amount does not exceed the aforementioned undertaking ceiling. In addition, IDB Holdings has undertaken, in accordance with the Permit, to supplement (or to cause the companies under its direct or indirect control to supplement) the equity of Clal Pension and Provident Funds, up to the amount stipulated in the Provident Fund Regulations as these will be in force from time to time, or any other regulation or law which may come in their place. The aforementioned undertaking (with respect to Institutional Entities) will remain in force so long as IDB Holdings is the controlling shareholder in the Iinstitutional Entities. It was also reported that the Permit stipulates conditions and restrictions concerning holdings and pledges in the control chain of Institutional Entities in the group, and the previous controlling shareholders were required to maintain the capital requirements of Clal Insurance Enterprises Holdings, so long as pledges exist on their holdings in the means of control of IDB Holdings, such that the equity of Clal Insurance Enterprises Holdings will be no less, at any time, than the multiple of the holding of Clal Insurance Enterprises Holdings in Clal Insurance by 140% of the minimum capital required of Clal Insurance, pursuant to the Capital Regulations, on September 30, 2005, as these existed at the time, and linked to the CPI for September As of the end of the reporting period, the minimum capital required of Clal Insurance Enterprises Holdings, as specified above, amounted to approximately NIS 2.8 billion. As of the end of the reporting period, the capital of Clal Insurance Enterprises Holdings exceeds this requirement. The capital requirements are tested in practice against the reviewed or audited financial statements of Clal Insurance Enterprises Holdings. With regard to capital management, the need to maintain an additional absorption buffer is also evaluated with attention given to negative developments that may impact capital and the capital requirements. In light of the revocation of the control Permit for the previous controlling shareholders, there is uncertainty with respect to the validity of the capital requirements which apply to Clal Insurance Enterprises Holdings by virtue thereof. For details regarding the appointment of Mr. Moshe Terry as the Trustee for the majority of IDB Development s holdings as in Clal Insurance Enterprises Holdings, regarding the letters of the Commissioner of Capital Markets dated November 27, 2013 and May 8, 2014 regarding the control of Clal Insurance Enterprises Holdings, and regarding undertakings given to the Commissioner of Capital Markets regarding the control of Clal Insurance Enterprises Holdings by the Elsztain- Extra Group, in connection with the debt settlement in IDB Holdings, see Note 3.H.5.A to the financial statements. For details regarding the completion of the separation mechanism and changes in the control structure of IDB

145 142 Development, see Note 1.A to the financial statements. Clal Insurance is obligated to supplement the capital required of Clal Credit Insurance in accordance with the Capital Regulations, up to 50% of the required capital, if and when the capital of Clal Credit Insurance is negative, so long as Clal Insurance is the controlling shareholder of Clal Credit Insurance. Clal Insurance is obligated to supplement, at any time, the equity of Clal Pension and Provident Funds Ltd., to the amount stipulated in the Income Tax Regulations (Rules for Approval and Management of Provident Funds), (the Income Tax Regulations ). The undertaking will remain in effect so long as Clal Insurance controls Clal Pension and Provident Funds, either directly or indirectly. For details regarding the capital requirements, see section of this part In February 2012, the Control of Financial Services Regulations (Provident Funds) (Minimum Equity Required of Managing Company of Provident Funds or Pension Funds), , were published, as well as the Income Tax Regulations (rules for Approval and Management of Provident Funds) (Amendment No. 2), (the New Regulations ). In accordance with the New Regulations, the managing companies for managing companies were expanded, and include capital requirements in accordance with the scope of managed assets and annual expenses, but no less than initial capital of NIS 10 million. Liquidity requirements were also established. A managing company will be entitled to distribute dividends only if its equity is at least the minimum equity required of it according to these Regulations. A managing company will also be required to provide additional capital with respect to controlled managing companies. Additionally, as of the end of the reporting period, managing companies under the control of Clal Insurance have a capital surplus relative to the minimum capital required pursuant to the Capital Regulations for Managing Companies. In light of the publication of the Capital Regulations for Managing Companies, and for the purpose of financing the operating activities and investing activities in the automation systems of Clal Pension and Provident Funds Ltd., and for the existence of future liquidity, in 2015 and in 2014, the boards of directors of Clal Insurance and Clal Pension and Provident Funds Ltd. approved an injection of approximately NIS 100 million and approximately NIS 80 million, respectively, against an allocation of the shares of Clal Pension and Provident Funds Ltd., according to its value Long term savings segment General information regarding operating segment This operating segment includes the life insurance branch, the pension funds branch, the provident funds and study funds branch. The activities in the life insurance branch were performed in 2016 through Clal Insurance. The activity in the pension and provident fund branch was performed in 2016 through the holdings of Clal Insurance in Clal Pension and Provident Funds (100%) and in Atudot Havatika (50%) Products and services. The products in the segment primarily provide solutions for the retirement period to salaried employees and selfemployed workers, private investment solutions and coverages in case of death, disability and loss of income due to loss of working capacity. Life insurance products constitute a contractual undertaking between the insurer and the policyholder, and include insurance plans which allow the accrual of savings, for different time ranges, and insurance plans and/or combinations in insurance plans which include insurance covers for death, illness, loss of working capacity and disability. A policyholder who has reached the end of the insurance period is entitled to insurance benefits (the amounts which have accrued in the savings component of the policy), in accordance with the policy terms. The policyholder may choose. subject to the provisions of the legislative arrangement, to receive these amounts in a one-time amount ( Capital Payment ), in lifetime payout installments ( Annuity ), or as a combination of the two, according to the policy terms; In some Annuity products, the policyholder benefits from an Annuity factor which is protected against extended life expectancy, and which is determined on the acquisition date of the policy, or on the commencement date of the payment of the Annuity to the policyholder, or which can be acquired once the policyholder reaches at least age 60. Pension funds constitute a mutual insurance fund, and operate in accordance with regulations which may change from time to time. A pension fund member is entitled to receive, beginning on the retirement date, lifetime Annuity payments, which are based on Annuity factors which do not guarantee life expectancy, and the Annuity may change from time to time, in accordance with the actuarial balance of the fund. Comprehensive pension funds allow pension savings for pension purposes and insurance coverage for death and disability which partially benefit from designated debentures, and to which it can be can be made subject to the limits prescribed in law; General (supplementary) pension funds which do not benefit from designated debentures, and which allow pension savings for Annuity purposes, and to which deposits cam be made beyond the limit prescribed in law. Some of the general funds including additional insurance coverages, beyond the old age Annuity; Provident funds provide savings solutions both for the long term (such as provident funds for severance pay and compensation to salaried employees) and for the medium term (study funds), without insurance coverages acquired directly from the managing company. A member is entitled to withdraw the amounts which accrued in his favor in the provident funds, excluding study funds, in a one-time amount or as an Annuity, in accordance with the period when they deposited them. Funds which accrued in favor of a member in study funds are withdrawn in a one-time payment. Beginning in June 2016, provident funds for investment were established in the branch, which are intended to allow a capital savings track for individual funds, and which will include an incentive for the withdrawal of funds accrued therein as an Annuity during the retirement period.

146 Restrictions, legislation, standardization and special constraints which apply to the operating segment. The activity in this segment is subject to the provisions of the law which apply to insurers and to pension funds and provident funds which operate in this segment, including the Insurance Law, the Control of Financial Services (Provident Funds) Law, (the Provident Funds Law ), the Income Tax Regulations (Rules for Approval and Management of Provident Funds), (the Provident Fund Regulations ), the Control of Financial Services Law (Pension Advice, Marketing and Clearing Systems), (the Pension Advice Law ), and subject to and in accordance with the directives of the Commissioner of Capital Markets, as issued from time to time General insurance segment General information regarding operating segments This segment includes the activities of Clal Holdings Insurance Enterprises Group in the general insurance branches and in the personal accidents insurance branch (up to one year), which are recorded under general insurance business operations Details regarding the primary details included in the operating segment Compulsory motor insurance - The product is insurance which the vehicle owner is required to purchase with respect to physical harm only which may be caused to the driver of the insured vehicle, or to passengers therein, or to pedestrians who were injured as a result of the damage of the insured vehicle Motor property insurance - Motor property insurance is insurance which covers property damage which was caused to the vehicle, as specified in the policy Liability insurance - (A) Third party liability insurance; (B) Employers liability insurance; (C) Product liability insurance; (D) Professional liability insurance; (E) Officers liability insurance Other property and others insurance - (A) Home insurance; (B) Other property insurance Guarantees - Policies in accordance with the Sales Law - Policies which are intended to secure the investments of residential unit buyers in accordance with the Sales Law, and which rely on its provisions Accident, illness and disability insurance - Personal accidents insurance - Provides coverage to the policyholder in case of death and/or permanent disability (full or partial) due to an accident and/or temporary loss of working capacity, as a result of an accident or illness Credit and foreign trade risks insurance - The policy is intended for companies which sell on credit, both in Israel and abroad, to other businesses (B2B). The insurance covers liabilities due to the sale of goods and/or the provision of services on credit Health insurance segment General information regarding operating segments This segment includes the Group s activities in health insurance, in the illness and hospitalization branch, and in the long term care branch. This segment includes insurance plans designed for individual policyholders, and insurance plans designed for collectives Products and services Illness and hospitalization branch - Including illness and hospitalization insurance, international travel insurance, foreign residents insurance, personal accidents insurance, dental insurance and health insurance for Israelis abroad. Some of these products are supplementary and/or extended and/or alternative to the services which are provided within the framework of the basic health basket which is provided to the citizens of the country by virtue of the Health Insurance Law and/or to the services which are provided within the framework of the additional services of the health funds, in accordance with the provisions of the National Health Insurance Law Long term care branch - Long term care insurance provides solutions for policyholders who have been defined as requiring long term care, according to the definition of the insurance event in the policy, i.e., anyone who cannot independently perform part of the activities of daily living, and therefore requires assistance or supervision. In the long term care branch, insurance coverages are sold which are paid in addition to payments or services which are provided by the state, as individual insurance and as collective insurance Restrictions, legislation, standardization and special constraints The activity in this segment is subject to the provisions of the law which apply to insurers engaged in the segment, and to the directives of the Commissioner of Capital Markets which are published from time to time, and to the provisions of the law which apply to insurers operating in the field. The activity in this segment requires a license, in accordance with the Insurance Law, and is overseen by the Division of Capital Markets Issues pertaining to the Clal Holdings Insurance Enterprises Group in its entirety Legal proceedings. The provision which is included in the financial statements of Clal Insurance Enterprises Holdings as of December 31, 2016, with respect to all legal claims which are not in the ordinary course of business, against the investee companies of Clal Holdings Insurance Enterprises specified below, amounts to a total of approximately NIS 103

147 144 million. The total amount of legal claims which are not in the ordinary course of business, against investee companies of Clal Holdings Insurance Enterprises, amounts to a total of approximately NIS 25,599 million (the Total Amount ) (this amount includes claims in which the amount claimed is attributable to investee companies of Clal Holdings Insurance Enterprises; Claims in which the amount specified is not attributed only to the investee companies of Clal Holdings Insurance Enterprises, but rather, also to additional defendants; A claim in which the amount specified is an annual amounts (and accordingly, the Total Amount is period-dependent); and claims which were filed subsequent to the date of the statement of financial position. Additionally, this amount does not include claims in which the claim amount was not specified, and does not include claims in which the claim amount was not specified which are not class actions, derivative claims or material claims. Presented below is a summary, general, description of pending claims against investee companies of Clal Holdings Insurance Enterprises: Out of the Total Amount: (1) The sum of claimed amounts which are attributed to the investee companies of Clal Holdings Insurance Enterprises, with respect to consumer claims, amounts to a total of NIS 8,340 million (of which, a total of NIS 2,644 million is claimed in claims which were approved as a class action, and a total of NIS 5,696 million is claimed in motions to approve class actions). Additionally: (2) One claim was approved as a class action which was filed in 2010, with respect to the preceding years, beginning in January 2008, in which the amount claimed amounted to a total of NIS 107 million, which is an annual amount, and accordingly, the Total Amount refers to one year only; (3) Additional consumer class actions were also filed against investee companies of Clal Holdings Insurance Enterprises, jointly with additional defendants, amounting to a total of NIS 11,790 million (of which a total of NIS 225 million which is claimed in a single claim, in which certain causes of action were approved as a class action, and a total of NIS 11,565 million which is claimed in motions to approve claims as class actions), in which the plaintiffs have not specified the amount attributed to the investee companies of Clal Holdings Insurance Enterprises, out of the Total Amount claimed from all defendants; (4) Three derivative claims were filed, in the total amount of NIS 5,276 million. (5) There is one material claim which is not a class action or a derivative claim, in which the amount claimed is NIS 86 million. There are also eight additional consumer claims against investee companies of Clal Holdings Insurance Enterprises, in which the claim amount was not specified (of which, 2 consumer claims which were approved as class actions, in one of which the plaintiff estimated the claim amount as hundreds of millions of NIS, and in the second claim the claim amount was not specified, as well as three consumer claims, in one of which the plaintiff estimated the claim amount as many millions of NIS, in the second as hundreds of millions of NIS, and in the third as tens of millions of NIS ). These claims create additional exposure for the investee companies of Clal Holdings Insurance Enterprises, beyond that stated above. In addition to the Total Amount, there are immaterial legal claims pending against investee companies of Clal Holdings Insurance Enterprises, in the total amount of NIS 78 million.

148 145 Presented below are details regarding the number of consumer class actions, distributed by claim amount: Claim amount Type of claim Number of claims Claims in which an amount referring to Clal Insurance Enterprises Holdings Group was specified Up to NIS 100 million Claim approved as class action 2 Motions to approve claims as 22 class actions NIS 100 million to NIS 500 million Claim approved as class action 2 Motions to approve claims as 6 class actions NIS 500 million to NIS 1 billion Claim approved as class action 1 Motions to approve claims as class actions 1 Over NIS 1 billion Claim approved as class action 1 Motions to approve claims as 1 class actions An annual amount has been specified (and accordingly, the Claim approved as class action 1 total amount is period-dependent). Claims in which a total amount has been specified for all defendants, without attributing a specific amount for each defendant Up to NIS 100 million Motions to approve claims as class actions 4 Motion to approve a claim as a derivative claim 1 NIS 100 million to NIS 500 million, inclusive Claim approved as class action 1 NIS 500 million to NIS 1 billion Motions to approve claims as 1 class actions Over NIS 1 billion Motions to approve claims as class actions 3 Motion to approve a claim as a derivative claim 2 Claims in which the claim amount has not been specified Claim approved as class action Discussion regarding risk factors. Motions to approve claims as class actions This section, which focuses on risk management and a discussion of the risk factors with respect to Clal Holdings Insurance Enterprises, also includes forward looking information. Forward looking information constitutes uncertain information with respect to the future, which is based on the current information in Clal Holdings Insurance Enterprises until proximate to the publication date of the report, including estimates or intentions of Clal Holdings Insurance Enterprises as of proximate to the publication date of the report. Actual results may differ significantly from the results which are forecasted or implied based on such information, due, inter alia, to the following reasons: changes in the economic environment, changes in the business environment, regulatory changes, and changes in the capital market in Israel and around the world Risk management The activities of the Clal Holdings Insurance Enterprises Group expose it to the following primary risks: market risks, liquidity risks, insurance risks, credit risks and operational risks. The boards of directors in the Clal Holdings Insurance Enterprises Group established policies with regard to risk exposure, measurement methods used in this regard, restrictions for various risks, and control and reporting methods used for these risks, while monitoring the compliance with the established restrictions by means of the reports which are submitted to them In one of the claims, the claim amount was estimated as hundreds of millions.

149 Presented in the following table are risk factors segmented by macro risks, branch-specific risks and risks which are unique to Clal Holdings Insurance Enterprises Group, as well as details regarding the risk factors: Risk factors Macro risks Economic slowdown in Israel Overall market risk Specific market risks Interest rate risk Credit margin risk Inflation risk Exchange rates risk Stock price risk Other assets price risk International economic slowdown and price declines in capital markets Credit risks Branch-specific risks Insurance risks Portfolio maintenance level Catastrophe risks (earthquake in Israel) Catastrophe risks (terrorism and/or war in Israel) Stability of reinsurers Strategic risks Changes in legislation and regulation Competition risks Legal risks Risks on the level of Clal Holdings Insurance Enterprises Compliance with regulatory requirements Liquidity risks Risks associated with pricing and estimation of insurance liabilities Operatinal risks Information system risks Reputation risk Engagements with external suppliers Realization of undertaking to indemnify Major impact X X X X X X X X X X X X X X X Extent of impact Medium impact X X X X X X X X X Minor impact X X The impact of the aforementioned risk factors is based on the judgment of the management of Clal Holdings Insurance Enterprises Group, based on the available information as of the valuation date, refers to each risk independently, and takes into account the probability that the risk will materialize, and its potential results. The estimate regarding the extent of impact of the risk factors refers to the direct implications on Clal Insurance Enterprises Holdings, and does not take into account indirect effects. See also the description of general risk factors which apply to IDB Development, and some of which also apply to Clal Holdings Insurance Enterprises, as applicable, in section 22 of this part. Macro-economic risks Economic slowdown in Israel - Deceleration in the Israeli economy may harm the scope of business of Clal Holdings Insurance Enterprises Group, particularly in the long term savings segment. Additionally, as a result of the aforementioned deceleration, the risk associated with the exposure of Clal Holdings Insurance Enterprises Group to entities in Israel through its investments may increase. Overall market risk - The prices of assets and returns in capital markets in Israel and around the world have a very significant impact on the business results of Clal Holdings Insurance Enterprises Group. The amount of management fees (fixed or variable) charged by member companies of Clal Holdings Insurance Enterprises Group from customers may be impaired as the scope of managed assets decreases, both as a result of the negative returns, and as a result of the decrease in the scope of deposits or accruals.

150 147 Specific market risks Between the assets in the nostro portfolio and the liabilities held against them there is no full correspondence in terms of cash flows, linkage basis and currency, and for this reason, and due to the asymmetry in the accounting treatment of liabilities and assets, the economic and/or reported profits of Clal Holdings Insurance Enterprises Group are exposed to changes in risk factors, of which the main ones are specified below. Interest rate risk - In economic terms, the primary exposure of Clal Holdings Insurance Enterprises Group is to an interest rate decrease, since the average lifetime of its liabilities is significantly longer than the average lifetime of the assets. In the current interest rate environment, the Clal Holdings Insurance Enterprises Group is also exposed from an accounting perspective to losses in certain scenarios involving an interest rate decrease, due to the impact of such changes on the discount rates which are used in the calculation of the reserves for pension, and in the liability adequacy test (LAT) and in a scope which may exceed the capital gains which will be created in that scenario with respect to interest-sensitive assets. However, Clal Holdings Insurance Enterprises Group may also be exposed to certain scenarios involving increases in interest rates. It is noted that, from a long term perspective, the Clal Holdings Insurance Enterprises Group is also exposed to an ongoing level of low interest rates, with an emphasis on the linked interest rate. Credit margin risk - Clal Holdings Insurance Enterprises Group is Clal Holdings Insurance Enterprises Group to risk of loss due to the impact of changes in credit margins on the market on the value of marketable debt assets. Inflation risk - Clal Holdings Insurance Enterprises Group is exposed to an increase in the inflation rate, inter alia, due to the fact that the majority of insurance liabilities of Clal Holdings Insurance Enterprises Group are adjusted on a quarterly basis in accordance with the inflation rate, while the assets held against them are not necessarily CPIlinked. Exchange rates risk - Clal Holdings Insurance Enterprises Group is exposed to this risk, primarily with respect to the foreign investment portfolio, which his not fully hedged against changes in exchange rates. Stock price risk - Clal Holdings Insurance Enterprises Group is exposed to changes in the prices of marketable stocks which are characterized by high potential volatility, both in the nostro portfolio and in portfolios managed for others. Other assets price risk - Some of the assets of Clal Holdings Insurance Enterprises Group and some of the assets managed for others are invested in alternative investments, which include investments in real estate and in real estate funds, investment funds, non-marketable stocks and additional investment instruments which are exposed changes in their value. International economic slowdown and price declines in capital markets - Clal Holdings Insurance Enterprises Group has direct exposure to this risk factor, primarily through its investments in financial assets in international capital markets, and in other foreign assets, with respect to the stability of the reinsurers. Credit risks - Clal Holdings Insurance Enterprises Group is exposed to the possibility of financial loss as a result of the insolvency of borrowers and other debtors (through financial assets in the assets portfolio, through activities involving policies in accordance with the Sales Law, and credit insurance) with respect to its holdings in debt assets. Additionally, an increase in insolvency cases of businesses in Israel may also affect the scope of claims in the directors and officers liability insurance branch in which Clal Holdings Insurance Enterprises Group operates, and the scope of employers debts with respect to the non-transfer of payments for pension insurance with respect to their employees. In its portfolio of assets, Clal Holdings Insurance Enterprises is exposed to the various market branches, of which the main ones are the banking and financial branch, the real estate in Israel branch, and the infrastructure and energy branch. Branch-specific risks Insurance risks - In the insurance activity, Clal Holdings Insurance Enterprises is primarily exposed to risks associated with changes in the risk factors which affect the prevalence and severity of events, as compared with the actuarial assumptions and the risk of a single large damage event, or an accumulation of damages due to a catastrophic event, which may significantly affect the business results of Clal Holdings Insurance Enterprises Group. Portfolio maintenance level - The dependence on the rates of cancellation, freezing and transfers constitutes a significant insurance risk in the life and health insurance businesses, due to the fact that the profitability in this segment is based on a margin in premiums, and on the collection of management fees throughout the lifetime of the policy. The cancellation of policies also leads to the write-off of deferred acquisition costs with respect to those policies. Catastrophe risks - Clal Holdings Insurance Enterprises Group is exposed to the risk that a single large impact event (catastrophe) will result in the accumulation of a large scope of damages. The significant catastrophic event to which Clal Holdings Insurance Enterprises Group is exposed is an earthquake. Clal Holdings Insurance Enterprises is exposed to war and terrorism risks in Israel, primarily in life and health insurance.

151 148 Stability of reinsurers - The insurance companies in Clal Holdings Insurance Enterprises Group insure some of their business operations in reinsurance, mostly through foreign reinsurers. However, the reinsurance does not release the direct insurers from their obligation towards their policyholders according to the insurance policies. Strategic risks Changes in legislation and regulation - Clal Holdings Insurance Enterprises Group is exposed to changes in legislation and regulation pertaining to its operating segments. In particular, some of the regulatory changes which were recently performed and which are proposed, some as non-final drafts, may constitute a threat on components in the branch s business model. Additionally, changes in legislation and regulation, including circulars, determinations in principle, position papers and provisions which the Commissioner of Capital Markets is authorized to impose in connection with changes to policy terms, including tariffs which may affect Clal Holdings Insurance Enterprises, including with reference to products which were sold in the past, both by way of retroactive application and due to their effect on the interpretation of agreements which were signed in the past. Competition risks - Clal Holdings Insurance Enterprises Group is exposed to a significant level of competition in all of its operating segments, inter alia, due to changes in regulation, as specified above. Legal risks - The complexity and scope of the activities of Clal Holdings Insurance Enterprises Group, and particularly the long period of the insurance agreements, create significant exposure, inter alia, to legal risks which may arise due to deficiencies in legal documents, including policies and reinsurance contracts, due to operational deficiencies in the application of agreements, and due to changes which apply over time with respect to interpretation, including with respect to products which were sold many years ago. For details regarding the aforementioned legal proceedings, and regarding the exposure of Clal Holdings Insurance Enterprises Group to class actions and derivative claims, see section Risks on the level of Clal Holdings Insurance Enterprises Compliance with regulatory requirements - Significant operations in Clal Holdings Insurance Enterprises Group are subject to detailed and complex regulation. In particular, the insurance and long term savings activities are subject to regulatory directives which change from time to time, with respect to products which were sold over many years, and which have long insurance coverage periods and/or savings periods. The institutional entities in Clal Holdings Insurance Enterprises Group are exposed to the risk of decline below the minimum capital required, which may result in the initiation of regulatory steps against them. Clal Holdings Insurance Enterprises is subject to restrictions and conditions by virtue of control permits for the institutional entities which are under its control, including the capital maintenance requirement. Liquidity risks - Clal Insurance Group is exposed to risks arising from uncertainty associated with the date when member companies of Clal Group will be required to pay financial liabilities, claims and other benefits to policyholders and to other beneficiaries, relative to the total amount of funds which are available for this purpose at that time. Liquidity risk may increase upon the materialization of a significant catastrophic event. Model, risk and underwriting risk - Clal Holdings Insurance Enterprises Group is exposed, in its insurance activities, to the risk of the selection of a wrong model for pricing and/or for the estimation of insurance liabilities, to risk of the use of incorrect parameters in models, and to risk of the use of incorrect pricing as a result of deficiencies in the underwriting process. Operational risks - Risk of loss due to inadequacy or failure of internal processes, people and systems, or due to external events. In light of the scope of activities of Clal Holdings Insurance Enterprises Group, which manages, as of December 31, 2016, assets totaling approximately NIS 177 billion (of which, a total of approximately NIS 146 million involves assets managed for others), and despite the actions taken by it to identify the risks and to establish appropriate controls, the scope of its exposure to the operational risks of the type specified above is significant. Information system risks - A significant part of the activities of Clal Holdings Insurance Enterprises Group relies on different information systems. The absence of sufficient infrastructure and/or deficiencies and/or failures in the computerized information systems may cause significant damage to the activities of Clal Holdings Insurance Enterprises Group. Reputation risk - The reputation of Clal Holdings Insurance Enterprises Group constitutes a critical component of its ability to operate in all of its operating segments. Engagements with external suppliers - As part of its activities, Clal Holdings Insurance Enterprises Group engages in agreements with various suppliers and service providers. Clal Holdings Insurance Enterprises Group is exposed to the risk of harm to its reputation and profitability as a result of harm to the service quality which is provided to it and to its customers, as well as risks associated with difficulty in finding an alternative provider, if necessary. Realization of undertaking to indemnify - Within the framework of transactions involving the sale of assets and/or activities, various representations were given with respect to the sold assets and/or activities, as well as an undertaking to indemnify the buyers in certain cases.

152 Adama Agricultural Solutions Ltd. (discontinued operation) Until November 22, 2016, DIC operated through Adama in the segment involving the development, manufacturing and marketing of crop protection products. In light of the completion of the sale of the holdings of Koor, a wholly owned subsidiary of DIC, in Adama, on November 22, 2016, the Adama operating segment is presented in the financial statements of DIC as of December 31, 2016 as a discontinued operation. To the best of IDB Development s knowledge, Adama (and its investee companies) specializes in the crop protection segment. As part of the above, Adama operates in a primary segment which is the crop protection products segment, which constituted, in 2016, approximately 93.7% of Adama sales, and which includes development, manufacturing and marketing of products, primarily crop protection products which are not patentprotected. 81 Additionally, Adama manufactures and markets other crop protection products, which primarily include materials which are applied to crops (and which are not herbicides, pesticides or fungicides) and intermediate materials which are manufacturing produce active crop protection materials; develops and markets agrochemistry materials for the treatment of seeds; and develops and adjusts similar products for uses in non-agricultural segments (consumer and professional solutions). Adama is also engaged in additional activities, which are based on its core ability (in the fields of agriculture and chemistry), which are not intended for the agriculture branch, and which, in 2016, constituted cumulatively approximately 6.3% of Adama sales. On November 22, 2016, the agreement between Koor and a wholly owned subsidiary of China National Agrochemical Corporation was completed, which involved the sale of Koor s entire stake (40%) in Adama (the Sale Transaction ). After the completion of the transaction, IDB Development recorded, in 2016, capital gains in the amount of NIS 524 million, and an increase in capital attributed to the owners of IDB Development, in the amount of NIS 778 million; the sale transaction had a significant impact on IDB Development s balances of liquid resources. For details regarding the sale transaction, see Note 3.H.4 to the financial statements. For details regarding material legal proceedings in connection with Adama which concluded until the publication date of the report, see Note 21.C.2.B to the financial statements. For details regarding the financial results of Adama as of September 30, 2016, see Note 32.B to the financial statements. 81 Generic products are products which are similar in terms of their active components to patent protected products (after the applicable patents have expired).

153 Oil and gas assets 14.1 IDB Development is active in the oil and gas assets segment through Modiin Energy Limited Partnership ( Modiin ). 82 The oil and gas asset exploration and development segment is an operation which involves significant financial expenditure, and a very high rate of financial risk, up to the real possibility of the loss of all investment funds. As of December 31, 2016, IDB Development held 9.20% (at full dilution) of Modiin s participation units. IDB Development and Mr. Yitzhak Sultan 83 are the controlling shareholders (95%) of Noia 84, which is the controlling shareholder (75%) in the general partner of Modiin (the General Partner ). Additionally, the general partner holds 5.0% (at full dilution) of the participation units of Modiin, and 0.01% of the rights in Modiin. The aforementioned holding rates, as well as all data presented in section 14.2 of this part, in connection with the oil assets, are correct as of December 31, A shareholders agreement exists between IDB Development and Mr. Yitzhak Sultan and a company owned by him, according to which, inter alia, the parties will have equal representation on the Board of Directors of Noia and on the Board of Directors of the general partner, and in case of disagreement the issue will be presented to a mediator who will be chosen with the consent of the parties, and this agreement includes certain provisions regarding transactions with the securities of Noia (including the right of first refusal and the right to join the sale), the general partner and Modiin Holding of oil assets Presented below are data regarding the oil assets which are held by IDB Development (through Modiin, as stated above). In addition to the oil assets whose details are described in this section, Modiin held, until July 2015, approximately % of the participation rights in licenses 348 / Sarah and 347 / Mira (the Sarah and Mira Licenses ), and additionally, IDB Development held, until July 2015, approximately 2.655% of the participation rights in the Sarah and Mira licenses. In July 2015, the period of the Sarah and Mira licenses concluded, including the 7 year period from their original date of allocation. Additionally, in May 2015, some of the partners in the Sarah and Mira licenses, including Modiin, submitted a request to the Commissioner, requesting the granting of a marine oil exploration license, under the name of the Guy license, in some of the areas covered under the Sarah and Mira licenses, where the share of Modiin in the participation rights (according to the request) is %. In December 2015, Modiin announced that intelligence had decided not to grant the Guy license, by virtue of the Sarah and Mira licenses, and in January 2016, some of the partners in the Sarah and Mira licenses, including Modiin, filed an appeal to the Minister of National Infrastructures, Energy and Water (the Minister ), against the Commissioner s decision. On June 30, 2016, Modiin received the Commissioner s response (hereinafter: the Commissioner s Response ), according to which a decision was reached to give the possibility to request the Guy license for the purpose of presenting the request to the oil committee, subject to the certain conditions. After meeting with the Commissioner, and the receipt of a memorandum from the Commissioner, including several clarifications with respect to the Commissioner s response, as well as several postponements of the deadline for submission of the aforementioned request (by September 25, 2016), some of the partners in the Sarah and Mira licenses, including Modiin (hereinafter: the Appellants ) filed, on October 10, 2016, an appeal to the Minister regarding the Commissioner s decision, in which they asked the Minister to cancel several conditions associated with the Commissioner s response (including the clarifications) - conditions pertaining to the identity of the group members, 82 In February 2015, an amendment to the Partnerships Ordinance (No. 5), , was approved (the Amendment ), whose main subject is the application of corporate governance rules to public partnerships, and the regulation of corporate governance in a manner similar to the rules which apply to public companies. 83 As of the reporting date, Mr. Sultan holds 2.15% of the participation units in Modiin. 84 In 2010, a statement of claim was filed with the District Court by Alpha Capital Anstalt ( Alpha ) and Ness Energy of Israel, Inc. ( Ness Israel ) (Alpha and Ness Israel, hereinafter: the Plaintiffs ), against Noia, Do-Tzach Ltd., a company under the control of Yitzhak Sultan ( Do-Tzach ), IDB Holdings, and against Viceroy, LLC (hereinafter, jointly: the Defendants ). In the statement of claim, the plaintiffs assert, inter alia, that the allocation of Noia shares to Do-Tzach on September 29, 2009 was performed unlawfully, in breach of various duties applicable to the defendants towards the plaintiffs. In the statement of claim, the plaintiffs request, inter alia, the issuance of the following declaratory orders: that the allocation of shares by Noia to Do-Tzach constitutes an invalid allocation; that any disposition which was performed with Noia shares after the aforementioned allocation, including the sale of half of the holdings of Do-Tzach to IDB Holdings in January 2010, constitute invalid activities; and that Ness Israel is the full and exclusive owner of 100% of Noia shares. The District Court dismissed the claim, and on September 18, 2016, an appeal was filed with the Supreme Court against the ruling. At this stage, it is not possible to estimate the chances of the appeal. 85 As of the reporting date, IDB Development holds 10.77% of the participation units of Modiin, and the general partner holds 5.94% of the participation units of Modiin, and 0.01% of the rights in Modiin. It is noted that the holding rates specified above do not include options. In the months February and March 2016, Modiin performed a public offering and a rights issue, in which it raised approximately NIS 26 million. IDB Development and the general partner exercised the rights which they received in the rights issue, and invested a total of NIS 2.1 million and NIS 1.2 million, respectively. In December 2016, IDB Development and the general partner exercised options from Series 14, which they held, in consideration of NIS 0.5 million and NIS 0.3 million, respectively. In October 2014, IDB Development, Modiin and the general partner contacted the Commissioner of Oil Affairs at the Ministry of National Infrastructures, Energy and Water (the Commissioner and the Ministry of Infrastructures, respectively). with a request pursuant to section 76 of the Oil Law, (the Oil Law ), for the receipt of the Commissioner s approval to changes in the control group of the entities which filed the aforementioned request, in connection with their holdings in the licenses specified in this part, which occurred following the completion of the creditors settlement in IDB Holdings. As of the reporting date, the Commissioner s response to the request has not yet been received.

154 151 and conditions determining the timetable. The Minister was requested to order that the appellants will be entitled to submit a request for a Guy license within a reasonable period of time of several months, and in the aforementioned request, the appellants will be entitled to present a new operator, to remain in the composition which submitted the previous request, in the discretion of the appellants. As of the reporting date, a decision has not yet been reached regarding the aforementioned appeal.

155 152 Oil assets Shimshon Daniel Mountain View Grapevine Name of oil asset: I/18 Shimshon 391/Daniel East 392/Daniel East Mountain View Grapevine Location: Marine asset located approximately 92 km. west of the Ashkelon coast 85 km. northwest of Ashdod 115 km. northwest of Ashdod Land property located in Kern County, California, USA Land property located in Kern County, California, USA Modiin s holding rate: 10% 15% 24.75% 86 25% Type of oil asset: Holding 87 License Lease of mineral rights. 88 Lease of mineral rights 89 Original allocation date of the oil asset: Current expiration date of the oil asset: June 14, 2015 April 13, 2011 In light of the foregoing in footnote 117, the allocation date has no significance. The lease agreements which were signed on the reporting date were signed in 2015 and June 13, 2045 April 12, 2014 The lease agreements which were signed as of the reporting date were signed in 2015 and 2016, and are in effect for a period of 5 years, with an option to extend by an additional 5 years. The exercise of the option is not contingent upon the payment of an exercise price, but rather on the continued payment of rent. The In light of the foregoing in footnote 117, the allocation date has no significance. Most of the lease agreements which were signed in connection with the project were signed in February The lease agreements which were signed as of the reporting date were mostly signed in February 2016, for a period of 3 years, with an option to extend by an additional 3 years. The exercise of the option is not contingent upon the payment of an exercise price, but rather on the continued payment of rent. The entrepreneurs may 86 The investment was performed through a wholly owned corporation of Modiin which was created in the United States. 87 In December 2014, the partners in the 332/Shimshon license (the Shimshon License and the Shimshon Partners, respectively) submitted a request to the Commissioner to convert the Shimshon license with a holding to be called the Shimshon holding. In June 2015, the Commissioner announced that in accordance with the provisions of the Oil Law, he intends to grant to the Shimshon partners a purchase deed, and that the draft purchase deed will be transferred by him to the Shimshon partners. As of the reporting date, the Shimshon partners were recorded in the oil registry (as defined in the Oil Law) as the holders of the rights to the Shimshon holding, in whose area the Shimshon reservoir is located. Additionally, as of the date of this report, the purchase deed has not yet been received, and the Shimshon partners are in negotiations with the Commissioner regarding the terms of the purchase deed. 88 According to the method practiced in the United States, the state does not grant mineral rights, but rather the rights to the land areas are divided into land rights and mineral rights which are not necessarily held by the same people / entities. For the purpose of oil and gas explorations, the entrepreneurs engage in lease agreements with the mineral rights holders in the area intended for exploration, in consideration of payment of annual lease fees, and the payment of royalties from the oil produced from the exploration area. 89 See footnote 117 above.

156 153 entrepreneurs may terminate the agreements at any time, and in such case, they are required to pay the lease fees until the end of the year when the agreement was terminated. The average annual lease fees are USD 25 per acre. terminate the agreements at any time, and in such case, they are required to pay the lease fees until the end of the year when the agreement was terminated. Approximately 5,500 acres of the area are leased in consideration of annual lease fees of USD 1 per acre, while the remaining area is leased in consideration of annual lease fees ranging from USD 25 per acre to USD 150 per acre. Specification of whether an additional possibility is available to extend the period of the oil asset: In accordance with the Oil Law, a holding is provided for 30 years, with a possibility to extend by an additional 20 years. In accordance with the Oil Law, extension is possible for up to seven years after the allocation date, with an option to extend by two additional years, in case of a discovery. If a well which has been drilled in a leased area produces oil, the lessee may hold the area until the end of production. If a well which has been drilled in a leased area produces oil, the lessee may hold the area until the end of production.

157 Oil exploration activity with additional participants In oil exploration activity with other participants, in case of non-payment by one of the partners, the operator is generally entitled, in accordance with the joint operating agreement, to demand that the other partners, who are not delaying payments, proportionately pay, each according to its own share, the aforementioned amounts, in order to ensure that the approved work plan, according to its version at the time, is not adversely affected due to the delay. Furthermore, it is possible that an exit by one of the participants, while the other participants have not accepted upon themselves to bear its share (of expenses which have not yet been approved) in the exploration activities, will result in discontinuation of the exploration activities before the completion of the plan which was determined in the transaction, and to the return of the oil assets in which the exploration activities are performed General environment and impact of external factors The main macro-economic factors affecting the operating segment include: (A) Fluctuations in the prices of oil and alternative fuels; (B) An increase in operating costs in the branch (feasibility evaluation costs and drilling costs, etc.), and a decrease in the availability of such service providers; (C) Fluctuations in the USD/NIS exchange rate; (D) Receipt of the relevant regulatory approvals; (E) Regulation of the exploration areas, development and production of oil and natural gas (the Oil Law; the Oil Regulations, ; the Oil Regulations (Principles of Action Regarding Oil Exploration and Extraction at Sea), ; the Oil Regulations (Permission to Deviate from Provisions of the Planning and Construction Law), ; the Natural Gas Market Law, ; and the Commissioner s directives Difficulties in identifying buyers for natural gas and restrictions on exportation The ability to market natural gas (including LNG) and to provide it to the various consumers depends, inter alia, on the quality, the extracted quantities, and the profitability of extraction. Additionally, marketing and supply also involve the scope of the existing facilities which are intended for the use of natural gas, and the construction and/or conversion of production facilities. Therefore, the provision of gas is conditional, in addition to quality, also on the ability to provide a continuous supply in accordance with the requirements of consumers over time. The price of gas is determined in negotiations with the gas consumers, and is also primarily affected, in addition to the foregoing, by other sources for the supply of natural gas, and as well as alternative energy sources, such as oil or fuel oil. A decrease in the prices of the foregoing would also lead to a decrease in the price of gas. The size of the local market with respect to the consumption of gas is limited. The gas reservoir which were identified in the Tamar 1, Dalit 1, Leviathan, Tanin, and Dolphin drillings have a scope which is significantly larger than the potential market in Israel. In light of the current competition due to the significant discoveries in the aforementioned drillings, and the engagements which have already been made, or will be made, with large consumers, there is no certainty that the partners in the oil assets, including Modiin, will succeed in finding suitable buyers on the local market for the natural gas which it finds, if any. Such competition may also cause a decline in prices, and may harm the ability of Modiin to market the gas reserves which it will discover, if any, in the future.

158 15. Human capital 16. Financing 155 Chapter D - Description of IDB Development s Business Affairs - Additional Details As of December 31, 2015 and 2016, and proximate to the publication of the report, IDB Development employed 29, 28 and 28 employees, respectively (some in part-time positions), all in the headquarters and administration departments (including the operations staff which serves all of the companies which are party to the expense distribution agreement, as stated in Note 31.B.(1) to the financial statements). All employees of IDB Development are employed through personal contracts. In January 2016, Mr. Haim Gavrieli ceased serving as the General Manager of IDB Development, and Mr. Sholem Lapidot was appointed as the General Manager of IDB Development. On March 29, 2016, the Board of Directors of IDB Development approved (after approval has been received from the compensation committee), and on May 25, 2016, The general meeting of IDB Development approved the terms of tenure and employment of Mr. Sholem Lapidot as the General Manager of IDB Development, and as the Acting General Manager of DIC (after approval was received from the compensation committee, Board of Directors and shareholders meeting of DIC). At the end of March 2016, the CFO of IDB Development concluded his position, and Mr. Gil Kotler was appointed as the CFO of IDB Development. For details regarding additional changes which have occurred in the composition of the Board of Directors of IDB Development, see regulation 26 of Part D of the periodic report. Following the decision of the Board of Directors of IDB Development from November 2014, IDB Development and DIC performed a consolidation of functions in IDB Development and DIC, in order to achieve cost savings, and to appoint joint General Manager s, including, as of the publication date of the report, the joint General Manager, CFO, VP Legal Counsel, VP Accounting and Company Secretary. Additionally, during the first quarter of 2017, understandings were formulated between IDB Development and DIC as part of a services agreement, according to which DIC will provide to IDB Development services which are shared by DIC and IDB Development, including, inter alia, services of the CFO, VP and Internal Legal Advisor, VP Accounting, and assistance and consulting services on various subjects (the Services Agreement ). The Services Agreement is subject, inter alia, to the approval of the shareholders meeting of DIC, as a controlling shareholder transaction. For details regarding an agreement for the distribution of uses and rental expenses and additional office expenses, see Note 31.B.(1) to the financial statements. For details regarding the corporate officers liability insurance of IDB Development and the issuance of letters of indemnity and letters of exemption from liability for the corporate officers of IDB Development, see Notes 31.B.(3)(A) to 31.B.(3)(D) to the financial statements See details in Notes 14, 19 and 20 to the financial statements, as well as sections and Annexes B and C of the board of directors report.

159 Presented below are the credit balances of IDB Development as of December 31, 2016: (*) Short term loans Long term loans 90 Credit from banking corporations Credit from other sources (institutional and debentures (***) ) Current maturities Long term balances NIS millions CPI-linked balances % Average interest rate (% Effective interest rate) (**) NIS millions Unlinked balances % Average interest rate (% Effective interest rate) (**) Current maturities 4.92% Long term (5.69%) balances 1, (*) Not including accrued interest. 2.84% (2.84%) 6.48% (6.96%) (**) % average interest rate - the weighted average of the stated interest rate, in accordance with the relevant credit amounts; % Effective interest rate - the weighted average of the effective interest rate, in accordance with the relevant credit amounts, according to their values in the financial statements of IDB Development. (***) After deducting debentures in the amount of approximately NIS 138 million, which were acquired by a wholly owned subsidiary of IDB Development. With reference to the balances mentioned in the table: unlinked long term balances, at a scope of NIS 161 million, are at variable interest linked to the prime interest rate, and the interest rates with respect to them ranged, in 2016, from 2.3% to 2.9%. The weighted interest rate with respect to these loans, as of the publication date of the report, is 2.67%. In connection with loans of IDB Development from banks and a financial corporation, whose principal balance as of the reporting date amounted to a total of approximately NIS 367 million (the Relevant Lending Corporations ), IDB Development undertook, inter alia, to fulfill financial covenants. Over the years, understandings and updates to previous financial covenants were reached, and in February and March 2017, in light of the performance of a partial early repayment of the principal of IDB Development s loans, in the amount of NIS 143 million, in the first quarter of 2017, most of the restrictions and financial covenants were canceled, and other liabilities towards those relevant lending corporation were canceled, including, inter alia, restrictions on activities involving the sale of primary holdings, restrictions on permitted investments in investee companies, restrictions on pledges, which required the receipt of consent from those entities, and instead of which, IDB Development will be required to fulfill the following covenants and undertakings: (1) The balance of cash and marketable securities will be no less, at all times, than the total expected repayments for IDB Development until the end of 2017, to its financial creditors (not including series of marketable debentures which it issued); (2) Until the repayment of the entire unpaid balance of the loans, IDB Development will not perform a distribution, as defined in the Companies Law, ; and (3) Mr. Eduardo Elsztain and/or corporations under his control will hold, directly and/or indirectly, at least 51% of the issued and paid-up share capital (at full dilution) of IDB Development. For additional details, see Note 14.E. to the financial statements. Additionally, for details regarding the consent of the relevant lending corporations to the creation of a pledge or lien in favor of any third party whatsoever (in favor of new credit which will be provided the Company) on the holdings of IDB Development in DIC and/or in Clal Insurance Enterprises Holdings, within the framework of debt raisings, in accordance with the relevant terms of the deeds of trust (Series K) and the debentures (Series L) of IDB Development, see Notes 14.C.(4)-(5) to the financial statements. For details regarding loans which were received by IDB Development, restrictions which are included in loan agreements, financial covenants, results of calculation and changes thereto, see Notes 14.C. and E. to the financial statements, and section and Annex C of the board of directors report. For details regarding the debentures of IDB Development, including provisions with respect to grounds for demanding immediate repayment which are included therein, see Annex B of the board of directors report. For details regarding a pledge on shares of DIC and of Clal Insurance Enterprises Holdings, which are held by IDB 90 The data presented in the table are in accordance with the contractual amortization schedules. For details regarding the classification of debentures and loans of IDB Development under its current liabilities, see Note 14.E to the financial statements.

160 157 Development, in favor of the debenture holders (Series K) and the debenture holders (Series L) of IDB Development, and the release of DIC shares from a pledge in July 2016, January 2017 and March 2017, from a secured lender, and regarding guarantees and convenience letters which were given by IDB Development in connection with debts of the IDB Tourism Group, see Notes 14.C and 19 to the financial statements For details regarding the rating of the debentures of IDB Development, including regarding changes which have occurred in the rating of the debentures over the years 2015 and 2016, and regarding meetings of debenture holders of IDB Development, which were convened during the years 2015, 2016 and 2017 (until proximate to the publication of the report), see Annex B and Annex E of the board of directors report, and Note 14.D to the financial statements For details regarding the shelf prospectus which was published by IDB Development on May 29, 2014, and regarding debt raisings by IDB Development in 2016, and until proximate to the publication of the report, see section 4.2 of this part and Notes 14C(4)-(6) to the financial statements. For details regarding the amendment to the Debt Settlement in IDB Holdings, in which funds were injected into IDB Development instead of the undertaking to perform tender offers for shares of IDB Development, including through an issuance of debentures by IDB Development, see Note 14.G to the financial statements For details regarding the debentures (Series K), debentures (Series L) and debentures (Series M), which were issued by IDB Development in August 2016, November 2016 and February 2017 (subsequent to the reporting date), respectively, see Annex B of the board of directors report and Notes 14C(4)-(6) to the financial statements. For details regarding a decision of the Board of Directors of IDB Development to perform a partial early redemption of debentures (Series K) of IDB Development, which was performed on November 1, 2016, see Note 14C(4) to the financial statements For details regarding financing sources which are required by IDB Development during the years 2017 and 2018, and regarding its debt service plans, see the cash flow forecast report in section of the board of directors report Working capital, in consolidated terms - IDB Development and its consolidated companies have two operating cycles. With respect to the activity of Property & Building in connection with the construction of buildings for sale, the operating cycle may continue for up to three years. With respect to the other operations of IDB Development and its consolidated companies, the operating cycle is one year. Due to the foregoing, current assets and current liabilities in the consolidated financial statements of IDB Development includes items which are designated and intended for realization within the aforementioned operating cycle. Accordingly, as of December 31, 2016, there is a difference between the working capital of IDB Development and its working capital for a twelve month period (as these terms are defined in generally accepted accounting principles). Presented below are details regarding the difference between the consolidated working capital pf IDB Development and its consolidated working capital for a twelve month period (NIS millions): Amount included in the financial statements Adjustments (for a twelve month period) Total (for a twelve month period) Current assets 12,176 (558) 11,618 Current liabilities 9,748 (365) 9,383 Surplus of current assets over current liabilities (surplus of current liabilities over current assets) 2,428 (193) 2,235 For details regarding the working capital of Property & Building Corporation, see section of this part.

161 Taxation See details in Note 30 to the financial statements. 18. Environmental risks and methods for the management thereof For details regarding environmental risks and methods for the management thereof in the investee companies of IDB Development, see the reference under the description of the operating segments in Chapter C of this part, and particularly, in section 9.16 of this part. 19. Legal proceedings 19.1 For details regarding material legal proceedings which are pending against IDB Development and/or its investee companies (including companies which do not reportable operating segments), regarding legal proceedings to which IDB Development and/or investee companies its investee companies are party, and regarding material legal proceedings, as stated above, which concluded during the reporting period, or until proximate to the publication of the report, see the details provided in Note 21.C to the financial statements (legal proceedings against IDB Development itself are described in Note 21.C.(1) to the financial statements) For details regarding legal proceedings against the investee companies of IDB Development which constitute reportable operating segments, which concluded during the reporting period, see the descriptions of the aforementioned companies in Chapter C of this part. For additional details regarding main claims against IDB Development in 2016 and until proximate to the publication of the report, see the reports of IDB Development: Summary description of the claim Claim amount Reference to the immediate report A motion to approve a derivative claim on behalf of DIC, against directors and corporate officers who served in DIC, IDB Development, certain shareholders of DIC and its auditors, with respect to a tender offer which DIC performed for Shufersal shares, which increased DIC s holding in Shufersal shares and regarding dividend distributions which it subsequently announced, due to their status as prohibited distributions, since they did not fulfill the profit test. The Court ordered that the claim be struck out. An appeal and a counter-appeal to the Supreme Court regarding the dismissal of a claim and expenses which were ordered in the claim, in which declaratory orders were requested against an allocation of shares which Noia Oil and Gas Exploration Ltd. performed to Do-Tzach Ltd. ( Do-Tzach ), after which Do-Tzach became the owner of 95% of the issued share capital of Noia, and against the sale of half of the Do- Tzach s holdings in Noia to IDB Development. For additional details, see footnote 106 of this part. A motion for an additional hearing regarding the motion to approve a class action, and a claim which was filed against IDB Development to cancel the full (self) tender offer which was published in January 2009, or alternatively, for an assessment remedy. The Court dismissed the motion. A motion to approve a class action, inter alia, against IDB Development, including assertions with respect to the conduct of the controlling shareholders and the Board of Directors of IDB Development, in connection with the expiration of the transaction for the sale of IDB Development s holdings in Clal Insurance NIS billion Declaratory orders Approximately NIS 1 billion

162 159 Summary description of the claim Claim amount Reference to the immediate report Enterprises Holdings, and in connection with a rights issue which was performed by IDB Development. An appeal and a motion for leave to appeal a decision which was given a motion to summarily dismiss which was filed. A motion for an injunction and an urgent motion for a temporary injunction, inter alia, against IDB Development, its Board members and the trustee, Mr. Moshe Terry, in which the plaintiff requested to order a stay of the process involving the sale of shares of Clal Holdings Insurance Enterprises which are held by the Company, through the trustee. The Court ordered that the motion be struck out. A claim against Bank of Jerusalem Ltd. 91 ( Bank of Jerusalem ) by plaintiffs who managed their investment portfolios through Clal Finance companies (the Plaintiffs ). IDB Development and DIC, which in the past sold their holdings (50% each) in Clal Finance to Clal Holdings Insurance Enterprises, have an undertaking to indemnify, in equal parts between them, Clal Holdings Insurance Enterprises with respect to the amount which will be deducted from the capital of Clal Finance due to the legal proceedings against Clal Finance, which pertain to a period preceding the sale date. Legal proceedings are pending in court with respect to the aforementioned period. Injunction NIS 43 million Goals and business strategy IDB Development is a holding company which invests (directly and indirectly) in companies which operate in several different fields, primarily in the communication, real estate, commerce, services and insurance branches. IDB Development strives to promote and maximize the value of its existing investments, and to improve them, and also to sell them in suitable cases, through influence and involvement in the majority of its investee companies. This effect is realized, whether through the appointment of directors on its behalf and the provision of candidates on its behalf for corporate officer positions, or through involvement in the business strategic processes of the investee companies. In parallel with substantiating the control of the control group in IDB Development and DIC, as specified in section 3.2 of this part, in early 2016, the managerial backbone of IDB Development was replaced, and as part of the above, a new General Manager and CFO were appointed, and an emphasis was placed on active management of the group. Most of the investee companies of IDB Development are public companies and leaders in their fields, with strong access to capital markets and to the banking system. The Board of Directors of IDB Development is focusing, as of the publication date of the report, also on the steps which are required in order to create liquidity sources over the long term which will allow it to deal with the implications of the Concentration Law, and to fulfill the restrictions specified therein, including an evaluation of the realization of the private holdings of IDB Development. For details regarding the targets and business strategy of DIC, see section 8.11 of this part. 91 The Court determined that in light of the fact that Respondent No. 1 (Clal Finance Management Ltd.) was voluntarily liquidated, and in light of the merger of Respondent 2 (Clal Finance Batucha Investment Management Ltd.) (companies which were formerly controlled by Clal Insurance Enterprises) (the Clal Finance Companies ) with Bank of Jerusalem, instead of the names of the Clal Finance companies, as presented in the pleadings, Bank of Jerusalem will be presented.

163 Information regarding exceptional changes to the business affairs of IDB Development For details regarding events subsequent to the date of the statement of financial position, see note 33 to the financial statements. 22. Discussion regarding risk factors Macro factors Implications of the implementation of the provisions of the Concentration Law on IDB Development and its investee companies - for details regarding the primary provisions of the Concentration Law and the possible implications of its provisions on IDB Development and its investee companies, see section 7.2 in Part A of the Periodic Report for 2013, and 7.2 of this part. The implementation of the provisions of the Concentration Law (in the transition periods specified therein), and particularly, provisions which pertain to companies incorporated according to a pyramid structure, and provisions which pertain to the separation between significant real corporations and significant financial entities, affect, and may have a significantly adverse affect on IDB Development and on its investee companies, which hold reporting corporations whose securities are held by the public, inter alia, in consideration of the restrictions on its holding structure, on the control of reporting corporations, on its ability to acquire or to realize holdings in public companies and in reporting corporations (with respect to the realization of holdings, including the holding of Clal Holdings Insurance Enterprises) and on the value of its holdings in such companies, on the market branches in which it operates, etc. State of the global economy and changes in capital markets in Israel and around the world - A recession or deterioration in the state of capital markets around the world and in Israel (including volatility in securities prices, exchange rates and interest rates), whether those which affect the entire economy, or those which affect specific market branches, are affecting and may affect IDB Development and its investee companies, inter alia, as follows: (A) Negative effects on the state of their business affairs (including the demand for products of the investee companies of IDB Development); (B) Negative effects on the value of the marketable securities and on the value of non-marketable assets which are held by them; (C) Negative effects on their ability to generate profits or an increase in capital attributed to shareholders of the companies, and realization of their holdings; (D) Negative effects on their liquidity and equity; (E) Harm to their ability to perform issuances on stock exchanges, in Israel and abroad; (F) Harm to the financial ratios of those companies, in a manner which could impose difficulties on capital raisings and/or affect their terms, or harm the fulfillment of financial covenants, insofar as any have been determined, in connection with the provision of loans by financing entities, or require them to provide additional securities to financing entities, and even to repay the foregoing credit, or constitute grounds for demanding the realization of securities which were given to secure the foregoing credit; (G) Harm to their debt ratings, as given by rating entities and their debt repayment ability; (H) Effects on their ability to distribute dividends; (I) Effects on the need for recording of impairment and on the data reported in their financial statements, due to the accounting standards which apply to them; and (J) Difficulties imposed on the identification of financing sources and on the raising or refinancing of debt funds, if these are required by them in order to finance their operating activities and long term activities, as well as on the terms of financing from financial entities and from banks. Certain investee companies import or buy raw materials which are required for their activities, and therefore, their business results may also be affected by changes in the prices of raw materials around the world. For additional details, see also section 1.1 of the board of directors report. Legislation, standardization and regulation - In recent years, a trend of increased legislation, standardization and regulation has taken place, horizontally and in various operating segments in the Israeli economy. This trend has an effect, including a significant effect, on the operations of certain material investee companies of IDB Development, on their financial results, and on the prices of their securities, as well as on the activities of IDB Development. Legislative amendments in various areas in Israel and abroad, such as legislation regarding concentration, promotion of competition and antitrust laws, tax laws, regulation over the communication market, supervision of insurance business operations, legislation in the field of encouragement of capital investments, companies and securities laws, laws pertaining to the supervision of prices of products and services, increased competition in the food market, consumer protection laws, environmental laws, planning and construction laws, etc. (see also section 7 of this part and the description of each of the operating segments in Chapter C of this part), may have an effect on the business operations and results of IDB Development and of its investee companies. Additionally, there may be such effects due to changes in the policy which is adopted by the various authorities by virtue of these laws. Changes in the quota rates on goods and in the policy regarding protection of local products may affect the results of some of the investee companies which are held by IDB Development. Some of the investee companies which are held by IDB Development operate abroad, or have securities which are traded on foreign stock exchanges. Changes in legislation and in the regulatory policies of the relevant foreign countries, as well as the characteristics of the business environment in the country of operation, may affect the financial results and the business position of those companies. Changes in International Financial Reporting Standards or in the accounting principles which apply to IDB

164 161 Development and its investee companies may have an impact, and even a significant impact, on their financial results, on various figures (including capital attributable to shareholders and profit) which are reported in the financial statements of IDB Development and its investee companies, on their fulfillment of financial covenants, insofar as any have been determined for them, on their fulfillment of the conditions of permits and licenses which were given to them, and on their ability to distribute dividends. Financial risks - IDB Development and its investee companies are exposed to changes in interest rates and price indices, and to changes in exchange rates which affect, directly or indirectly, their business results and the value of their assets and liabilities (inter alia, due to the scope of their CPI-linked liabilities and due to their investments in real estate properties abroad). There is also an effect on capital attributable to shareholders of IDB Development, with respect to the reserve for adjustments to capital due to the translation of financial statements of investee companies in foreign currency (primarily Real Estate Corporations in Las Vegas and foreign investee companies of Property & Building). For details regarding the exposure to and management of market risks, and regarding restrictions on the management of financial risks (including the inability of IDB Development, as of proximate to the publication of the report, to implement hedging transactions), see section 2 of the board of directors report and Note 19 to the financial statements. Risks associated with foreign operations - IDB Development and its investee companies operate in the real estate segment abroad, and primarily in the United States, both in the revenue-generating properties segment and in the residential construction segment. Material changes for the worse in the state of the economy in a country in which such properties are held affect the ability to operate and realize the investments, and the receipt of financing under reasonable conditions. A global economic crisis and a recession in the global economy may adversely affect the various markets in which IDB Development and its investee companies operate, and primarily in the United States. The characteristics of the business environment abroad, including the local regulation, the purchasing power of consumers, financing possibilities (under reasonable conditions, if at all), and the selection of entities (including local entities) which are engaged in the field with whom the collaboration is implemented, and their business position, may affect the possibilities for financing, their terms, and the success of the foreign operation, and accordingly, may have an adverse effect on their business operations and the results of operations of IDB Development and its investee companies. Government grants and benefits; Budgetary policy - Some of the investee companies of IDB Development receive budgets from government entities, such as bonuses for research and development activities, which are provided in accordance with the Encouragement of Industrial Research and Development Law, , and regulations enacted pursuant thereto, as well as bonuses and/or various tax benefits which are provided in accordance with the Encouragement of Capital Investments Law. These bonuses and benefits restrict the activities of the companies which receive them. Breach of the restrictions which apply to those companies in accordance with the letters of approval and the relevant laws may lead to the imposition of various sanctions on them, including financial sanctions and criminal sanctions. Additionally, changes in the budgets of the aforementioned government entities, in a manner which prevents or reduces the bonuses and/or benefits which the investee companies of IDB Development receivable may receive in the future, may adversely affect the operations and results of those companies. Additionally, investments of foreign entities, and particularly the technology and communication branches, are affected, inter alia, by the continued encouragement of foreign investments by regulatory entities in Israel, including in the field of taxation. In the event that the aforementioned encouragement of foreign investments is stopped and/or restricted, the foregoing may harm investments of foreign entities in investee companies which are held by IDB Development, or the marketability of their securities, and may harm their business results, and all of the foregoing may adversely affect the business results of IDB Development. Branch-specific factors Permits and licenses - IDB Development and some of its investee companies operate in accordance with approvals, permits or licenses which were given to them in accordance with the law by various authorities (such as the Commissioner of Capital Markets, the Ministry of Communication, the Ministry of Environmental Protection, and the Commissioner of Oil Affairs in the Ministry of National Infrastructures, Energy and Water). Non-fulfillment of the terms of these approvals, permits or licenses may lead to the imposition of sanctions (including criminal) against the breaching companies, including fines and/or revocation of the relevant approvals, licenses or permits. Revocation of such approvals, permits or licenses may significantly harm the investee companies, whose operations are dependent upon them (such as companies in the insurance and communication segments). Some of the aforementioned licenses are time-restricted, and are renewable from time to time, in accordance with their terms and the provisions of the law. There is no certainty that the aforementioned licenses will be renewed in the future and/or under which conditions (for details regarding the provisions of the Concentration Law which impose on regulator the obligation to take into account horizontal concentration considerations and branch-specific competition considerations in an allocation of rights, including upon the issuance of licenses and permits, as stated above, and upon extension or renewal thereof, see section 7.2(C) of Part A of the Periodic Report for 2013, and section 7.2 of this part). Non-renewal of a permit or license, as stated above, and/or the directives of regulators in segments in which investee companies of IDB Development operate, may have an adverse effect on the business

165 162 position, capital, cash flows and profitability of the relevant company which holds the aforementioned permit or license, and accordingly, also on the business affairs and reports of IDB Development. For details regarding the revocation of a permit which was given by the Commissioner of Capital Markets in connection with the holding of the means of control of insurers from Clal Holdings Insurance Enterprises Group, see section of this part and Note 3.H.5.B to the financial statements. See also Notes 3.H.5.B. and C. to the financial statements, regarding the outline which was determined by the Commissioner of Capital Markets for the sale of IDB Development s holdings in Clal Insurance Enterprises Holdings. For details regarding licenses in the communications segment, regarding the approval of the Ministry of Communication for changes to the control structure (indirectly) of Cellcom, which also includes changes to the provisions which are included in Cellcom s communication licenses, including in connection with a requirement for holdings of Israeli entities, see sections and of this part. For details regarding licenses in oil and gas assets, see section 14.2 of this part. Class actions on consumer issues and environmental protection issues - Investee companies of IDB Development, primarily including Cellcom, Shufersal and Clal Insurance Enterprises Holdings, are exposed, from time to time, to class actions on consumer issues and on issues associated with the environment (including in connection with nonionizing radiation from mobile devices, air emissions, and water, noise and odor pollution), in material amounts, which are sometimes even higher than their equity, and must defend themselves against them at significant cost, even if such claims are unfounded from the outset. For details regarding class actions and material motions to approve claims as class actions against investee companies of IDB Development, see Note 21.C to the financial statements. Salary and working relationships - For details regarding the possible impact of the labor laws (including the association of employees in employee organizations, and signing of collective agreements) on the results of investee companies of IDB Development, and as a result, also on the business results of IDB Development, see section 7.4 of this part. Antitrust - IDB Development is subject to, inter alia, the provisions of the Restrictive Trade Practices Law, with respect to its transactions or transactions of its investee companies, which constitute a merger and/or which include restrictive arrangements, as these terms are defined in the aforementioned law. For additional details, see section 7.5 of this part. Environmental risks - Some of the investee companies which are held by IDB Development are exposed to various requirements from authorities which oversee environmental protection. In recent years, an ongoing trend of increased stringency has occurred in the regulatory requirements with respect to the environment, health and agriculture, in Israel and around the world, which caused an increase in the scope of investments and current costs of the companies in the aforementioned segments. Changes in the policy of those supervising authorities may affect the profitability of those investee companies, and accordingly, also the profitability of IDB Development. See also sections 9.16 and of this part. Special factors Liquidity challenges, restrictions by virtue of agreements with financing entities - The provisions of existing financing agreements of IDB Development and the scope of debt of IDB Development and its repayment dates have a significant impact on IDB Development and its business affairs. For details, see section and annex C of the board of directors report and notes 14.C. and E. to the financial statements. For details regarding financing sources which are required by IDB Development in 2017 until the end of 2018, see the cash flow forecast report in section of the board of directors report. Initiation of actions by debenture holders - The trustee for the debenture holders (Series I) of IDB Development (the Trustee ) raised, in early 2016 (including within the framework of legal proceedings in amendment of the debt settlement in IDB Holdings) assertions regarding IDB Development being in an insolvency environment, and the debenture holders (Series I) also decided to appoint a representation for that series. In June 2016, the trustee filed with the District Court of Tel Aviv-Yafo (the Court ) a motion to order the liquidation of IDB Development, and a motion to order the appointment of a provisional liquidator (the Motion To Appoint A Provisional Liquidator ). On July 18, 2016, the Court gave its ruling, in which the Court accepted the consensus motion which was filed by the trustee to strike the motion to liquidate. For details regarding correspondence with the trustees for the debenture holders of IDB Development and actions taken by the trustees for the debenture holders, including regarding actions taken by the trustee for the debenture holders (Series I) of IDB Development in connection with the amendment to the debt settlement in IDB Holdings, see Notes 14.G and 14.H to the financial statements. The initiation of legal actions against IDB Development by its debenture holders may harm the ability of IDB Development to continue repaying its debts in accordance with their amortization schedules, and may also lead to a demand for the immediate repayment of future liabilities (primarily to lending corporations). Impact of cash flows from investee companies - In recent years, the cash flows of IDB Development have primarily been used to repay debt (principal and interest payments). In the past, one of the main sources for the current cash flows of IDB Development was dividends distributed by its investee companies. See the data regarding cash flows and financial movements of IDB Development in Regulation 9C (separate financial information) of Part D of this

166 163 periodic report, and section of the board of directors report (including the cash flow forecast report in section of the board of directors report). In recent years, the scopes of dividend distributions performed by the investee companies of IDB Development (directly or indirectly) have decreased significantly (see Note 3.H.7 to the financial statements and section 5 of this part, regarding a dividend distribution in DIC), as a result of changes in the state of business, in regulation, in profitability (including a decrease in the balance of distributable earnings, or the existence of negative balances of profits) and the cash flows of the investee companies, which may adversely affect the cash flows of IDB Development, and its business activities. Changes which have occurred in connection with Clal Insurance Enterprises Holdings, including capital requirements from insurers which are held by it, and the appointment of a trustee for most of IDB Development s holdings therein (see Notes 3.H.5.A., B. and C. to the financial statements), have affected, and may continue to adversely affect the dividend flows from Clal Insurance Enterprises Holdings. See also section 5 of this part with respect to entities which may affect dividend distributions from investee companies. For details regarding significant restrictions on the transfer of resources by material investee companies of IDB Development, see Note 3.J to the financial statements. Regulatory restrictions on bank credit and credit from institutional entities - For details regarding restrictions by virtue of the provisions of Proper Banking Management Directives issued by the Commissioner of Banks, regarding the scope of the loans which a banking corporation in Israel may provide to a single borrower, to a single group of borrowers, and to the largest borrowers and groups of borrowers in a banking corporation, banking corporation the provisions of the Concentration Law with respect to the determination of restrictions on the provision of credit by financial entities to a business group, see section 7.3 of this part. Changes to Proper Banking Management Directives, changes to the list of entities and corporations which are associated, jointly with IDB Development, under the same group of borrowers, and the balance of their debt to banks in Israel, as well as changes in equity of the banks themselves, may restrict the ability of the banking system in Israel to provide credit to IDB Development and its investee companies. However, since 2013 and until the publication date of the report, a decrease has occurred in the scope of credit used from the banking system in Israel for the group of borrowers which includes IDB Development, including due to changes of its control (see sections 3.2 and 4 of this part). The legislation and regulation which apply to the investments of institutional entities, including the implementation of the provision of credit to business groups, may have an impact on the possibilities to raise capital from institutional entities, and on the conditions of its raising. Restrictions on the realization of holdings and on pledges - IDB Development and some of its investee companies are subject to legal and contractual restrictions (including those which are included in permits and licenses) which may restrict the possibility of realizing holdings in securities, or the possibility of pledging them (including due to restrictions on the realization of such pledges) by IDB Development or by its investee companies. For details regarding the relevant permits and licenses, see section of this part. For details regarding contractual restrictions in agreements with lenders, see Notes 14.C. and E. to the financial statements. Restrictions on the performance of investments and continued investment in existing companies - IDB Development and some of its investee companies are subject to legal restrictions with respect to the performance of new investments or the increase of new investments in investee companies, in certain cases. IDB Development and some of its investee companies are also subject to restrictions in accordance with the law or in accordance with the provisions of various regulatory entities with respect to their business activities, in Israel and abroad. The aforementioned restrictions by virtue of the law, by virtue of the directives of various regulatory authorities, and various contractual restrictions, including by virtue of financing agreements (see Note 14.E to the financial statements), may restrict the possibility of IDB Development to take advantage of business opportunities for new investments, or to increase or realize existing investments. For details regarding the main provisions of the Concentration Law, which may, inter alia, restrict the ability of IDB Development and its investee companies to acquire holdings in reporting corporations and/or to continue holding control of existing reporting corporations, and regarding provisions which impose the obligation on regulators to take into account industry-wide concentration considerations and branch-specific competition considerations in the allocation of rights (including the issuance of licenses and permits) in various market branches, see section 7.2 of Part A of the Periodic Report for 2013, and section 7.2 of this part. Legal proceedings in the field of companies laws and securities laws - In recent years, an increasing trend has taken place in the filing of class actions and derivative claims in the field of companies laws and securities laws. In consideration of the above, and of the financial position of IDB Development and the Group s holding structure, claims in material amounts may be filed against IDB Development, including in connection with its financial position and cash flows, issuances which it performs, and transactions which were performed or which were not completed, including in connection with assertions and claims by the Company s controlling shareholders. For details regarding legal proceedings, see Note 21.C to the financial statements. Presented below are the assessments of IDB Development with respect to the types and effects of the aforementioned risk factors (excluding environmental risks, insofar as they pertain to radiation risks) on IDB Development:

167 164 Risk factors Extent of impact Major impact Medium impact Minor impact Macro factors State of the global economy and changes in capital markets in Israel and around the world Implications of the application of provisions of the Concentration Law on IDB Development and its investee companies Legislation, standardization and regulation Financial risks Risks associated with foreign operations Government grants and benefits; Budgetary policy Branchspecific factors Permits and licenses Work salary and working relationships Anti-trust Class actions regarding consumer and environmental issues Environmental risks Special factors Liquidity challenges Effect of cash flows from investees Legal proceedings in the field of companies laws and securities laws Regulatory restrictions on bank credit and on credit from institutional entities Initiation of actions by debenture holders See also the reference to additional risk factors which are included in the description of IDB Development s operating segments, as specified in Chapter C of this part.

168 Report of the Board of Directors regarding the State of the Company s Affairs Contents 1. Explanations of the Board of Directors regarding the state of the Company s Affairs 1.1 General 1.2 Results for The results of the Company s direct investees and their contribution to the Company s results 1.4 Weight of sectors and their contribution to the Company s results, by sectors of operations 1.5 Main figures regarding the Company s main holdings (direct and indirect) 1.6 Summary of main operational holdings 1.7 Selected figures from the Financial Statements 1.8 Changes in capital and profit (loss) quality 1.9 Summary of the Company s results (consolidated) 1.10 Details regarding main non-recurring events 1.11 Contribution to the business results of the Company and of investee companies, by operating sectors 1.12 Administrative, financing and other expenses, net 1.13 Analysis of business results on a quarterly basis 2. Exposure to and Management of Market Risks 3. Corporate Governance Aspects 3.1 Contributions and Assistance to the community 3.2 Directors with accounting and financial expertise 3.3 Independent directors 3.4 Details regarding the Company s Internal Audit 3.5 Code of ethics 3.6 Disclosure regarding the approval process of the company's financial statements 4. Disclosure requirements regarding the Company s financial reporting 4.1 Major events subsequent to the date of the Statement of Financial Position 4.2 Critical accounting estimates 4.3 Reference in the opinion of the Company s auditors 4.4 Specific disclosure for the bondholders Annex A Qualitative Report regarding Exposure to and Management of Market Risks Annex B Financial Position and Financing Sources Annex C The Company s Financing Annex D Annex E Disclosure concerning Independent Auditor's Fees Details regarding Economic Papers and Valuations pursuant to Regulation of the Securities Regulations

169 Board of Directors Report Regarding the State of the Company s Affairs For the year ended December 31, 2016 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 December 31, 2016, which reviews the Company s position and principal operations in 2016 (the Reporting Period ). The report was prepared in accordance with the Securities Regulations (Periodic and Immediate Reports), The board of directors report constitutes an inseparable part of the periodic report for 2016 (the Periodic Report ), including all of its constituent parts, and the periodic report should be read in its entirety, as a single unit. The Company is a holding company which invests - (independently and through consolidated companies 1, associates 2, and through other investee companies of which the Company does not have significant influence(. in companies which are primarily engaged in the various branches of the Israeli economy and abroad. 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.H.5.B to the financial statements) and private assets; On evaluating alternatives for dealing with the provisions of the Law to Promote Competition and Reduce Concentration, (the Concentration Law ); And on dedicating managerial efforts in Discount Investment Corporation Ltd. ( DIC ) - on this matter, see the completion of the transaction involving the sale of Adama (Note 3.H.4.B to the financial statements), and in private companies which are directly held by the Company. Within the framework of an amendment to the debt settlement in IDB Holdings between the trustees for the debt settlement in IDB Holdings and Dolphin Netherlands and the Company, which was approved in the District Court of Tel Aviv and which was completed on April 3, 2016, funds were injected into the Company in place of an undertaking to perform tender offers for the Company s shares, including a total of NIS 167 million through an issuance of bonds (Series I) by the Company, and in accordance with its provisions, the Company became, on April 3, 2016, a private company which constitutes a bond company (as defined in the Companies Law, (the Companies Law ). For additional details, see Note 14.G.(3) to the financial statements. 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 Holland and Inversiones Financieras Del Sur S.A. ("Dolphin Group"). In November 2016, the transaction for the sale of the entire stake of Koor Industries Ltd. ( Koor ) in Adama Agricultural Solutions Ltd. ( Adama ) was completed, in which Koor received a total of USD 230 million (see also Note 3.H.4.B to the financial statements). 1 Companies of which the Group holds therein, directly or indirectly, more than 50% of the voting rights and companies that are effectively controlled. 2 Companies of which the Group has significant control therein, including entities under joint control and which are included in the financial statements, under the equity method. 1

170 Board of Directors Report Regarding the State of the Company s Affairs (Cont.) In August 2016, the Company issued to the public bonds (Series K), secured by a pledge on some of the shares of Clal Holdings Insurance Enterprises, which is owned by the Company, for a total gross consideration of NIS 325 million. The issuance consideration was deposited in a trust account and was pledged in favor of the bondholders. Because of Regulator's demands, the Company early-repaid NIS 240 million of its bonds (Series K). The balance of the deposit funds of NIS 85 million was transferred to the Company in March 2017.subsequent to the date of the statement of financial position. For details see note 14.C. to the financial statements. In November 2016, the Company issued to the public bonds (Series L), secured by a pledge on some DIC shares which is owned by the Company, for a total gross consideration of NIS 383 million. For details, see Note14.C.(5) to the financial statements. In February 2017, subsequent to the date of the statement of financial position, the Company issued to the public bonds (Series J), secured by a pledge on future considerations from the sale of some of the shares of Clal Holdings Insurance Enterprises, which is owned by the Company, for a total gross consideration of NIS 1,060 million. For details, see Note 14.C.(6) to the financial statements. In the first quarter of 2017, and in light of the Company s intention to implement a partial early repayment of its liabilities to its financing entities, the Company reached understandings with the aforementioned financing entities to cancel most of the restrictions and financial covenants, and to cancel other liabilities, including, inter alia, restrictions on activities involving the sale of primary holdings, restrictions on permitted investments in investee companies, and restrictions on pledges of holdings in investee companies, which requires the receipt of understandings from those entities. For details, see Note 14.E. below; 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 a outline over time was established for the sale of the Company s control of Clal Holdings Insurance Enterprises. For additional details, including regarding the non-success of the negotiations for the sale of the Company s holding in Clal Holdings Insurance Enterprises, and the passage of the period specified by the Commissioner for the signing of an agreement for the sale of the control of Clal Holdings Insurance Enterprises; For details regarding the Commissioner s notice to the trustee stating that, since the Company has not fulfilled its obligation to sell 5% of the shares of Clal Holdings Insurance Enterprises in accordance with the outline, it must work to sell them instead of the Company, and in accordance with all of the authorities which were vested in it, and the trustee s request to receive instructions from the Court, see sections A-C in Note 3.H.5. to the financial statements. 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 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.G.3 to the financial statements. The Company s financial statements as of December 31, 2016 were prepared based on the assumption that the Company will continue operating as a going concern. Company management estimates that there are no longer any significant doubts regarding the Company s ability to service its debts, regarding its ability to execute its business plans, as noted in the Company s financial statements for previous reporting periods, due to the Company s financial position and its cash requirements, as stated above, such that the Company is able to repay its liabilities in an orderly and/or timely manner. However, at the end of November 2019, the Company is expected to repay liabilities in the amount of NIS 1,551 million, the repayment of which will be affected by factors which are not entirely under the Company s control, inter alia, with respect to the Company s ability to execute its plans to dispose of the Company s holding in Clal Holdings Insurance Enterprises, said, in consideration, inter alia, of the outline which was determined by the Commissioner for the sale of the control of Clal Holdings Insurance Enterprises, requirements of the Law to Promote Competition and Reduce Concentration and the ability of the Company to deal with the implications of the Concentration Law. The Company has additional cash flow sources to raise funds for the purpose of repaying its liabilities in November 2019, including by way of an extension of bonds (Series L), the receipt of additional dividends and the realization or pledge of additional holdings in DIC, and Company management believes that it will be able to repay its liabilities on time and continue its operations. For additional details, see Note 1.B. to the financial statements. 2

171 Board of Directors Report Regarding the State of the Company s Affairs (Cont.) The terms and ratings of the Company s bonds, as specified in Annex B below and in Note 14.D. to the financial statements. The terms of the loans which the Company received from banks and financial institutions are specified in Annex C below and in Notes 14.C. and E. to the financial statements. For the cash flow forecast report of the Company and its wholly-owned headquarter companies (excluding IDB Tourism), see section below. As at December 31, 2016, the Company s primary directly consolidated company is DIC (68%). Presented hereunder is a diagram specifying the primary companies, for the purpose of this report, which are held by the Company as at December 31, אי די בי Development פתוח IDB DIC דסק"ש כלל Clal Insurance החזקות )1( Enterprises (1) Holdings עסקי ביטוח Clal Insurance נכסים ובניין אלרון שופרסל סלקום כלל ביטוח Cellcom Shufersal Elron Property & Building Gav גב-ים -Yam IDBG (1) The control core (51%) is deposited in trust on behalf of the Company (see Note 3.H.5.a. to the annual financial )1( גרעין השליטה )50%( מופקד בנאמנות עבור החברה )ראה באור 3.ח. 5. לדוחות הכספיים( statements) 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 3

172 1. Board of Directors Remarks Regarding the State of the Company s Affairs 1.1 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 headquarter activities, which include financing expenses and financing income, general and administrative expenses, and income from management fees (when these exist). The Company is affected, inter alia, by the fact that the Company diversifies its investments. The Company s direct and indirect investments are partly investments in companies with significant cash flows, which were previously characterized by routine dividend distributions (see also section below regarding the balances of distributable profits in investee companies directly held by the Company, and restrictions also arising therefrom), and partly investments in companies with growth and optimization potential. The Company s cash flow was affected and may continue being affected also by new raisings of capital and debt. In accordance with the above, the net profit (loss) and the comprehensive profit (loss) of the Company include, and are primarily affected by, the following components: Transactions involving the realization and amortization of investments, net, or updates to the value of investments, and other non-recurring effects of the Company and its investee companies. The Group s share in the profits of investee companies, net. The Company s headquarter activities and financing expenses, as specified above. The business results of the Company, and sometimes also the capital attributed to its shareholders, may fluctuate (in accordance with current accounting principles) a great deal between the various reporting periods, inter alia, due to the timing and extent of realizing and making investments by DIC and its investee companies, to the effects of changes in prices of securities on the capital market and in the value of assets, and 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 included in their reports. 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 of December 31, 2016, as compared with market value, are presented in Note 3.F. to the financial statements. The Company s capital and its comprehensive income (loss), are also affected by various capital reserves, different capital reserves with respect to adjustments from the translation of financial statements of investee companies which are prepared in foreign currency, as well as changes in the Company s issued capital following the performance of capital issuances from the raising of subordinated loans. The business results of the Company and its investee companies are affected, inter alia, by the condition of capital markets and by the economic condition of the Israeli and global economies. Changes in trends on capital markets in Israel and around the world may affect the values of assets and the prices of marketable securities held by the Company and by its investee companies, and may cause, in certain cases, amortization or recordings of losses, whether in the statement of income or in the statement of comprehensive income, with respect to impairments of the aforementioned holdings, and may affect their ability to generate appropriate proceeds and profits, whether those charged to profit and loss or those charged directly to shareholders in the Company, from the realization of their holdings. Additionally, a change in the aforementioned trend may affect the raising of funds through the performance of private or public offering of securities by the Company and investee companies of the Company, or by finding financing sources or financing terms once these are required of it in order to finance their operating activities. The recently increased sector-wide legislation, standardization and regulation in various operating segments of the Israeli economy have a negative affect, and sometimes a significantly negative effect, 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. 4

173 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.1 General (Cont.) The Group s operations are affected by many additional external factors (see sections 7 and 22 in Part A of the Periodic Report). The local developments, as well as the developments in global markets, which also include fluctuations in the prices of securities and in exchange rates, inflation and fluctuations in prices of raw materials and in the demand for the products of investee companies, affect the business results of the Company and of its investee companies, as well as their liquidity, equity, the value of their assets and their ability to dispose of their assets, and value of their liabilities, the condition of their business operations, their financial covenants, their credit ratings, their ability to distribute dividends, their ability to raise financing for their operating activities and long term activities, and their allocation of resources, as well as the availability and terms of financing from financial entities and from banks. 1.2 Results for 2016 The Company concluded 2016 with income of NIS 262 million, as compared with loss of 360 in the corresponding period last year. Profit in the fourth quarter of 2016 amounted to NIS 567 million, as compared with loss of NIS 353 million in the corresponding period last year. For details regarding primary profits (losses), see section 1.10 below. 1.3 Results of investee companies directly held by the Company and their contribution to the Company s results 4 Company Holding rate (rounded) On the level of the Company Contribution to profit (loss) in On the level of operating period (100%) Profit (loss) from the investee company in NIS millions Discount Investment 68% (323) (674) Clal Holdings Insurance Enterprises 5 55% 53 (255) (360) Other 6 (289) (201) (305) Net profit (loss) for the year 262 (360) (988) 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 owners of the Company, unless specified otherwise. The contribution to the results takes into account the Company s share in the results of the investee, the taxes which are attributable to this investment, the Company s share in the realization or amortization of holdings in the investee company, all after deducting / adding amortization of excess cost. 5 The contribution to profit primarily constitutes the change in the market value of the Company s holding in Clal Holdings Insurance Enterprises, and is presented in the statement of income under discontinued operations. 6 Includes, inter alia, financing expenses, general and administrative expenses, amortization for impairment, profits from realization and contributions to loss in respect of the Company s direct holdings in projects in Las Vegas, IDB Tourism, gas and oil assets, IDB Tourism and Clal Venture Capital Limited Partnership. 5

174 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.4 Weight of segments and contribution of segments to the Company s results, by operating segment Segment Segment weight relative to total holdings 7 Data on the level of the On the level of the Company investee company 8 Contribution to profit (loss) in Profit (loss) in Dividend Paid NIS millions Cellcom 18% (31) Property & Building and 100 projects in Las Vegas 21% Shufersal 24% (214) (110) 100 Clal Holdings Insurance - Enterprises 5 28% 53 (255) (360) Adama (2) 13 (251) Credit Suisse All other holdings 8% (86) Total 913 (99) (528) Financing, administrative and others (see section 1.12) (651) (261) (460) Net profit (loss) for the year 262 (360) (988) 7 See section 1.5 below. 8 The presented data pertain to the results of the investee companies, as presented in their financial statements, without taking into account the Company s rate of holding in them and without taking into account transactions between the companies and between segments. 9 Including the Company s share in the amortization of goodwill in 2014, in the amount of NIS 158 million. 10 Includes an amortization in the amount of NIS 55, 70 and 17 million, with respect to the Great Wash project in Las Vegas in the years 2016, 2015 and 2014, respectively. 11 Refers to the results of Property & Building and IDBG, a subsidiary owned by the Company and by Property & Building in equal parts, which holds projects in Las Vegas. Property & Building earned, in the years 2016, 2015 and 2014, a total of NIS 263 million, NIS 188 million and NIS 146 million, respectively. The Company s direct share in the losses of IDBG in the years 2016, 2015 and 2014 amounted to a total of NIS 37 million, NIS 59 million and NIS 22 million, respectively. 12 Including the Company s share in the amortization of goodwill in the amount of NIS 130 million in In 2016, includes Company s share in the profit from realization of Adama and from the write-off of a non-recourse loan in the amount of NIS 524 million. In the years 2016, 2015 and 2014, the contribution includes the Company s in a provision for impairment of the investment in Adama in the amount of NIS 23 million, NIS 105 million and NIS 348 million, respectively. 14 The results of Adama are reported in USD and are presented in this table in NIS, based on a convenience translation according to the average exchange rates for the relevant periods. 15 In January 2014, Koor sold the entire balance of its holdings in Credit Suisse shares. The impact of the realization is presented in the statement of income under discontinued operations. 16 Includes profit from the sale of Given Imaging in the amount of NIS 324 million. 6

175 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 March 20, 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 Financial Enterprises 29% services 30% 2 Commerce and Shufersal 24% services 27% 3 Property & Building and projects in Las Vegas 21% Real estate 21% 4 Cellcom 18% Communications 18% All other holdings 8% Technology 4% Total 100% Total 100% 1.6 Summary of primary operational holdings The Company, directly and indirectly, has material holdings in leading companies in several sectors, which constitute the core of its business operations. The Company believes that its holdings mix, which is characterized by a variety of companies which are considered leaders in the central market sectors, contributes to its stability, and to the stability of the investee companies which are held by it. In this regard, presented below is a summary reference to the Company s main holdings which constitute reporting segments: Cellcom - Cellcom operates and sells to its custumers various telecommunication services. The main activity of Cellcom involves the provision of mobile telecommunication services in Israel, mobile equipment and complementary services, which, as of December 31, 2016, Cellcom provided cellular services to approximately 2.8 million subscribers. Cellcom also provides its customers with associated services, such as content and data services, and also offers end user equipment, warranty and repair services for end user equipment. Additionally, Cellcom also offers (including through its subsidiary, Netvision) landline communication services to business customers and telecommunication operators, internet connectivity services, international telephony services and additional services such as conference calls, cloud services and data security. Additionally, beginning in December 2014, Cellcom offers to private customers, through Netvision systems, television over internet services ("Cellcom TV") which includes television channel broadcasts, including channels provided by Eidan +, and VOD (Video on Demand channels). In January 2017 Cellcom signed with Electra Consumer Products (1970) Ltd. a network sharing agreement for third and fourth generation networks who contact in parallel with Golan Telecom Ltd. ("Golan") and shareholders of Golan in agreement of acquiring the share capital of Golan.. Cellcom operates in a very competitive environment. The main components of the goals in Cellcom s business strategy are: offering comprehensive solutions for the provision of mobile and landline telecommunication services; Increase in landline telephony services; And optimization of the expense building, including by implementing increased efficiency measures Property & Building and projects in Las Vegas - Property & Building is engaged in the revenuegenerating properties segment - its core business segment, and in the residential construction segment in high demand areas in Israel and around the world. As part of the revenue-generating properties segment, Property & Building holds, inter alia, full ownership of the HSBC tower on Fifth Avenue in Manhattan, New York City, with an rea of approximately 80 thousand sq. m., which is rented out for long periods, and which has full occupancy as of the reporting date. Property & Building also holds, jointly with the Company, in equal parts, a project in Las Vegas (through IDBG), which includes commercial and office areas (the Tivoli project), whose first part has been entirely built, and as of the end of 2016, has an occupancy rate of approximately 87%. 7

176 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Summary of primary operational holdings (Cont.) Property & Building and projects in Las Vegas (cont.) The construction of the second part of the project has concluded, and it was occupied in October The second part included commercial and office areas. Until now, rental agreements have been signed with an anchor tenant and with additional tenants, with an occupancy rate of approximately 64% and 36%, respectively. As of the reporting date, the Company intend to advance the sale efforts of IDBG Shufersal - Shufersal is the owner of the largest food retail chain in Israel in terms of sales volume. In recent years, Shufersal has performed, and continues performing, strategic processes and structural changes, with the aim of contributing to the optimization of its business operations, to substantiate its market leadership, and to deal with the challenge which it faces in its business and regulatory environment. Shufersal s real estate activity includes both branches leased to Shufersal and real estate properties leased to third parties, and additionally, Shufersal is active in the customer club management segment, in which it offers to the general public credit cards which provide an extra-banking credit facility and benefits to customers. In 2016, implementation of continued with the implementation of its business plan, which is intended to create a commercial and operational infrastructure for growth in the coming years, to increase competitiveness ability, improve the value offered to customers, and improve services. Within the framework of the aforementioned business plan, Shufersal is continuing to expand and strengthen the private brand, through acceleration of Shufersal s digital platforms, which primarily include the system Shufersal Online, promotion of new/supplementary operations to Shufersal s current operating segments, and continued increased efficiency in real estate, which includes the closing and reduction of branches, concurrently with the opening of new branches Clal Holdings Insurance Enterprises (Discountinued Operations) Clal Insurance Enterprises Holdings is one of the largest insurance groups in Israel, and is active primarily in the insurance, pension and provident fund segments, as well as in the holding of assets and other businesses (such as the holding of insurance agencies). In 2016, Clal Holdings Insurance Enterprises continued to work towards developing the business operations of Clal Insurance, while deepening the core activities of Clal Insurance (with an emphasis on the traditional insurance segments), along with exiting operations which were not in the business core of Clal Insurance Enterprises. In accordance with a requirement of the Commissioner, approximately 50% of the shares of Clal Holdings Insurance Enterprises are held by Mr. Moshe Terry, who serves as the trustee for the Company, for the purpose of exercising the Company s authorities which are available to it by virtue of the means of control of Clal Holdings Insurance Enterprises. An outline plan has been prepared for the sale over time of control of Clal Holdings Insurance Enterprises. For details regarding the non-success of the negotiations for the sale of the Company s holdings in Clal Holdings Insurance Enterprises, the passage of the period set by the Commissioner of Capital Markets for the Company to sign an agreement for the sale of the control of Clal Holdings Insurance Enterprises, and the outline for the sale of the Company s holding in Clal Holdings Insurance Enterprises, as instructed by the Commissioner of Capital Markets. With respect to a notice by the Commissioner to the trustee that as the Company did not comply with its commitments to dispose of 5% of the shares of Clal Holdings Insurance Enterprises in accordance with the outline plan, the trustee is required to act to dispose of them in lieu of the Company and in accordance with all authority afforded him and the trustee's application to the Court for instructions, see note 3.H.5.B. to the financial statements. 17 The value of holdings which does not include the liquid cash balance or the liabilities of the Company and Discount Investment 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 March 20, 2017; The figures presented in the table are rounded. 8

177 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.6 Summary of primary operational holdings (Cont.) Clal Holdings Insurance Enterprises (Discountinued Operations) (cont.) The Company believes that, at this time, and in light of the current market circumstances, it should not work to sell its holdings in Clal Insurance Enterprises Holdings in accordance with the outline instructed by the Commissioner, and that it would be appropriate to formulate an alternative outline, which will allow the Company to sell its shares in Clal Insurance Enterprises Holdings within the framework of a transaction for the sale of the control core, or any other outline which would prevent the harm which may be caused to the Company if the Commissioner s outline is implemented. In parallel, the Company is continuing to evaluate the possibility of selling the control core of Clal Holdings Insurance Enterprises Adama (Discontnued Operations) - Adama specializes in the development and manufacturing of crop protection products. In November 2016, the transaction for the sale of Koor s holdings (40%) in Adama was completed, in which Koor received USD 230 million. For details, see Note 3.H.4.B. to the financial statements. For additional details regarding the description of the company s business by reporting segments, see Chapter C of Part A - Description of the Corporation s Business. 1.7 Select Data from the Financial Statements Condensed balance sheet data Company Consolidated As at December NIS millions Current assets 1, ,176 10,650 Total assets 4,109 3,460 37,510 39,181 Non-current liabilities 2,276 2,250 22,072 25,047 Current liabilities 995 1,079 9,748 10,277 Capital attributable to shareholders in the Company Liabilities and financing Data regarding debt and cash in the Company and in its wholly-owned companies (excluding IDB Tourism): As at March 20 As at December NIS millions Financial liabilities 19 (3,766) (3,079) (3,092) Liquid asset balances Deposit in trust account Debt, net (2,927) (2,878) (3,048) Average lifetime of liabilities The net balance of the Company s debt, and the Company s share in the net debt of DIC and Koor as at December 31, 2015 and 2016, and proximate to the approval date of this report, 18 See also section 1.8 below. 19 Primarily includes bonds, liabilities to banks and liabilities to financial institutions, including accrued interest, but not including a subordinate convertible loan in the amount of NIS 558 million, which was received from the controlling shareholder (see Note 13.C. to the financial statements). For details regarding the Company s undertakings towards banks and a financial corporation to fulfill the financial covenants, and for details regarding guarantees and pledges given by the Company, see section and Annex C below, as well as Notes 14.C, 14.E and 20 to the financial statements. 20 Includes cash and cash equivalents, marketable securities and short term deposits. 21 Deposit for the bondholders (Series K). For details, see Note 14.C.(4) to the financial statements. The balance of the deposit was transferred to the Company on March 22,

178 amount to NIS 5.9 billion, NIS 4.8 billion and NIS 4.9 billion. 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) Financing characteristics The Company, due to its status as a holding corporation, evaluates, in the context of the financing and liquidity issue, the value of it assets against its liabilities, and the repayment dates thereof, as well as the existence of its liquid resources, and its evaluation regarding the reasonable access to such resources, in consideration of the restrictions which apply by virtue of the law and directives issued by various regulatory authorities (see section below, Note 14.E to the financial statements and section 22 of Part A of the Periodic Report). For details regarding debt raisings, including subordinated convertible loans which the Company received during 2016 and until the publication date of this report, see Note 13.C. to the financial statements The Company s activities (repayment of debts, general and administrative expenses, investments, when performed, and dividends) are financed using dividends which are received from investee companies, from bond issuances, from loans from financial corporations, including from banks, from subordinated convertible loans from the controlling shareholder, and from consideration from the realization of assets. For details regarding positive and negative balances of distributable profits, for the Company and its directly held investee companies, see section below Issuance of bonds an issuance of bonds which was performed by the Company in 2016 and until this publication date, see Note 14 C. to the financial statements and Annex B below For details regarding the repayment of the Company s liabilities in the next two years, see the cash flow forecast in section below. 10

179 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) The Company s financing sources Presented below are the principal monetary movements in the Company s headquarters For the year ended December 31, 2016 Deposit Liquid assets (1) held in trust Financial debt Net financial debt NIS millions Balance at start of year 44 - (3,092) (3,048) Subordinated loans from the controlling shareholder (see Note 13.C.(4)-(5) to the financial statements) Debt raisings (2) (890) (7) Repayment of financial debt - principal (649) (239) Repayment of financial debt - interest (155) Other investments (3) (95) - - (95) Consideration from realization of DIC shares (4) General and administrative expenses less financing income, net (37) - - (37) Receipts in respect of derivatives Financing expenses - linkage differentials and rate differentials with the addition of the accrual of interest on financial debt - - (140) (140) (3,079) (2,878) For the year ended December 31, 2015 Liquid assets (1) Financial debt Net financial debt NIS millions Balance at start of year 296 (3,885) (3,589) Capital raisings Subordinated loans from controlling shareholder (see Note 13.C to the financial statements) Receipts from settlements regarding legal claims Release of funds from pledged deposit Repayment of financial debt - principal (755) Repayment of financial debt - interest (177) Other investments (5) (111) - (111) General and administrative expenses less financing income, net (33) - (33) Payments in respect of derivatives, net (4) - (4) Financing expenses - linkage differentials and rate differentials with the addition of the accrual of interest on financial debt - (139) (139) Balance at year end 44 (3,092) (3,048) (1) Liquid assets including cash, cash equivalents, marketable securities and short term deposits. (2) For details regarding the completion of the debt settlement in IDB Holdings, and regarding an issuance of bonds (Series I), see Note 14.G.(3) to the financial statements. For details regarding an issuance of new series of bonds (K and L), see Note 14.C.(4) and (5) to the financial statements. (3) Including exercise of options in investee companies (primarily DIC), and including loans and capital notes to investee companies. For details, see Note 3.H.6.D. to the financial statements. (4) For details, see Note 3.H.6.A to the financial statements. 11

180 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) The Company s financing sources (Cont.) Presented below are details regarding the repayment of the Company s liabilities (1), (2) : For the year ending December 31, 2017 For the six months ended June 30, 2017 Principal Interest Total Principal Interest Total NIS millions Bonds Loans from banks Loans from financial institutions and others Total , (1) The projected repayments are presented according to the repayment dates specified in the loan agreements, After amendments as report in sections (1), (2), (7) and (8) to note 14.C. to thr financial statements. (2) The amounts do not include a guarantee in the amount of approximately NIS 7 million, which the Company has guaranteed towards a debt of the Tourism Group, towards a banking corporation. For details, see Note 20 to the financial statements. See also the Company s report regarding the Company s set of liabilities, by repayment dates (T- 126), which was published through public electronic reporting on March 22, 2017 (reference number Restrictions and financial covenants In connection with the Company s loans from banks and from a financial corporation, where the balance of its debt to them as at December 31, 2016 amounts to NIS 367 billion (the Relevant Lending Corporations ), the Company has undertaken towards those relevant lending corporations, inter alia, to fulfill various financial covenants, as specified in Note 14.E. to the financial statements. In March 2017, subsequent to the date of the statement of financial position, the Company received the consent of the relevant lending corporation, according to which, in light of the Company s intention to implement a partial early repayment of the principal of the Company s loans, 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 will be 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 paid-up share capital (at full dilution). For details regarding a loan from a secured creditor, which was repaid in an early repayment in March 2017, subsequent to the date of the statement of financial position, see Note 14.C.(1) to the financial statements. For details regarding the results of the calculation regarding the financial covenants which were in effect as of December 31, 2016, see Note 14.E. to the financial statements. Proximate to the publication date of the report, the Company s balance of cash and marketable securities amounted to a total of NIS 839 million, an amount which 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 726 million. As at December 31, 2016, the Company fulfilled the calculated financial covenants which were in effect and which were set forth in the agreements between it and the financing corporations, and it fulfills the new financial covenant which was determined also proximate to the publication date of this report. 12

181 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) The Company s financing sources (Cont.) Cash flow forecast report for the Company and its wholly-owned headquarter companies (excluding IDB Tourism) In a separate report of the Company, the Company has ongoing negative cash flows from operating activities. The public auditors of the Company have drawn the attention of the readers of the financial statements to the financial position of the Company and to management's plans vis-à-vis 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 December 31, The information provided in this section should be read in conjunction with the entire periodic report Following the completion of the debt settlement in IDB Holding, from May 2014 until the date of the report, a sum of NIS 2,272 million was invested in the Company. The investments were carried out through: a rights issues which was performed by the Company, exercises of options, and by; The provision of convertible subordinated loans which were received from Dolphin Netherlands (for details, see Note 13.C. to the financial statements). The other sources which the Company requires in order to fulfill the uses in 2018 amount to a total of NIS 115 million, as 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 issuance of bonds (Series M) which were issued by the Company subsequent to the date of the statement of financial position. B) Receipt of dividend from DIC subsequent to the date of the statement of financial position. C) Consideration from the sale of the Company s holdings in private companies. For details, see Note 3.H.6.B. to the financial statements. For the period from January 1, 2017 to December 31, 2017 January 1, 2018 to December 31, 2018 NIS millions Sources Balance of liquid assets at start of period (1) Net consideration from issuance of bonds (Series M) (2) 1,044 - Cash flows from financing activities Receipts from IDB Tourism with respect to debt repayment (3) Dividend from DIC 481 Other sources required to finance the uses (4) Total sources 1, Expected liabilities (expected uses) : Cash flows used for operating activities General and administrative expenses, net Cash flows used for financing activities (6) Repayment of principal of loans from banks and institutions (5) Repayment of interest on loans from banks and institutions (5) 16 - Repayment of bond principal Repayment of bond interest (5) Cash flows from investing activities Exercise of DIC's options held by the Company (7) Other investments 2 - Total uses 1, Balance of liquid assets at the end of the period

182 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) The Company s financing sources (Cont.) Cash flow forecast report for the Company and its wholly-owned headquarter companies (excluding IDB Tourism) (Cont.) (1) The balance of liquid assets (including cash, cash equivalents and short-term deposits). The balance of liquid assets presented above includes a total of NIS 85 million which, as of the date of the statement of financial position, was held in a trust account with respect to the bonds (Series K), which was released in March See Note 14.C.(4) to the financial statements. (2) Consideration, net, from the issuance of bonds (Series M), which were issued on February 16, for details, see Note 14.C.(6) to the financial statements. (3) For details of a possible transaction for the merger of Israir and Sun Dor, see note 3 H 6 B to the financial statements. Said amount includes NIS 14 million received in fact in March (4) The Company believes that the 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 bonds series. (5) The Company s cash flow forecast report is presented according to the contractual amortization schedule of the Company s liabilities, as at financial statements publication date. (6) The following table presents a breakdown of the 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 publication date of the report): NIS millions Total Q1 Total Q2 Total Q3 Total Q4 Total Q1 Total Q2 Total Q3 Total Q4 Series G bonds Principal Interest Series I bonds Principal Interest Series J bonds Principal Interest Series K bonds Principal Interest Series L bonds Principal Interest Series M bonds Principal Interest Banks Principal Interest Financial Principal institutions Interest Total Principal Interest Total The bonds (Series G, I, J, K, L and M) were offered to the public and are traded on the stock exchange. Out of the total repayments in the six months ending June 30, 2017, as of the publication date of this report, a total of NIS 211 million was repaid to banking corporations, a total of NIS 194 million, to institutional corporations, and a total of NIS 7 million was repaid to bondholders (interest payment with respect to Series K and L). In order to fulfill the repayments in December 2018 and thereafter, the Company requires additional sources. 14

183 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) The Company s financing sources (Cont.) Cash flow forecast report for the Company and its wholly-owned headquarter companies (excluding IDB Tourism) (Cont.) (7) The Company intends to exercise all option series of DIC (Series 5 and Series 6) at a cost of approximately NIS 210 million. 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. 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 Insurance Enterprises Holdings, 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 Insurance Enterprises Holdings, and the reduced ability to maximize the consideration which will be received with respect to the sale; a deterioration in the business or financial position of any of the Group s member companies; non-completion 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 21 of Part A of the periodic report). 15

184 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) The Company s financing sources (Cont.) The following table presents a comparison between data from the forecasted statement of cash flows published by the Company as at December 31, 2015 and the actual cash flow data of the Company and its wholly-owned headquarter companies (excluding IDB Tourism), and explanations regarding the main differences for the year ended December 31, For the Year Ended December 31, 2016 Published Actual figures forecast NIS millions Sources Balance of liquid assets at start of period Cash flows from financing activities Injections against subordinated debt and bond issuance from the completion of the outline (1) Issuances of bonds (Series K and Series L) Sale of DIC shares (3) Settlement of derivatives - 1 Other sources required to fulfill the uses Total sources 813 1,121 Uses General and administrative expenses, net (2) Cash flows used for financing activities Cash flows from investing activities (3) 2 95 Total uses Liquid assets as at the end of the period (1) Received in the months February and March See Note 13.C.(4) and (5). (2) The general and administrative expenses which were actually paid were higher than expected, mainly, due to expenses associated with attempts to sell and pledge the shares of Clal Holdings Insurance Enterprises and payments with respect to claims of trustees for the bonds (Series I). (3) For information in respect of the sale of DIC's shares to the controlling shareholder, and exercise of DIC's options to shares, see sections A and D in Note 3 H 6 to the financial statements Dividends A. In March 2017, subsequent to the date of the statement of financial position, DIC announced a dividend distribution in the amount of NIS 4.5 per-share, which will be distributed in April It should be noted that the Company intends to exercise the balance of the options (Series 5 and Series 6) before the date set for the distribution to DIC shares at a cost of NIS 210 million. The Company s share in the aforementioned dividend, after exercise of the options is NIS 481 million. B. For details regarding dividends which were announced by investee companies, directly and indirectly, subsequent to the date of the statement of financial position, see Note 33.I and J to the financial statements. 16

185 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) Retained earnings and negative balances of distributable profits 22 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 as at December 31, 2016, is as follows: Balance of distributable earnings The Company NIS millions IDB Development Corporation Ltd. 23 (98) DIC Clal Holdings Insurance Enterprises Presented below are the changes in the capital (deficit) attributable to the shareholders of the Company 25 For the year ended December NIS millions Balance at start of year 131 (210) (671) Changes during the year Capital raisings, net ,147 Receipt of convertible subordinated loans from the controlling shareholder Net profit (loss) attributable to the Company s owners 262 (360) (988) Reserves from translation differences 218 (39) 379 Hedging reserves (23) (12) 107 Reserves in respect of transactions with non-controlling interests (102) (7) (182) Capital reserves and other movements, net (2) Balance at end of year (210) 22 For information pertaining to the 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 by law to various agreements or permits and restrictions pertaining to the distribution of dividends. See also note 14.E and F to the financial statements. 23 The balance of distributable earnings is calculated based on the net profit (loss) to the shareholders accrued in the last eight quarters, in accordance with section 302 of the Companies Law, as of December 31, The balance of accumulated earnings is lower. 24 For information pertaining to the restrictions on the distribution of dividends by insurance companies, see note 3.H.5.(I) to the financial statements. 25 See also section 1.8 below. 26 For details regarding the convertible subordinated loan, see Note 13.C.(3)-(4) to the financial statements. 27 Including a controlling shareholders reserve in the amount of NIS 65 million, which was recorded following the issuance of Company bonds (Series I) within the framework of the completion of the debt settlement in IDB Holdings (see Note 13.C.(5) to the financial statements). 28 Includes a total of NIS 28 million with respect to the settlement funds which were received by the Company in

186 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) Linkage balance of the assets and liabilities of the Company as at December 31, 2016 (including wholly owned subsidiaries, other than IDB Tourism) Linked Unlinked Nonmonetary items to the CPI Total NIS millions Investments in investee companies - - 2,054 2,054 Fixed assets Derivatives Other receivables and debit balances Investments held for sale - - 1,710 1,710 Deposit held in trust Cash and cash equivalents Total assets ,765 3,969 Bonds (including maturities) 1, ,476 Loans from banks and other financial liabilities Subordinated loan from controlling shareholder (see Note 13.C.(5) to the financial statements) Employee benefits Short-term credit from banking corporations and others Other payables and credit balances Current provisions Total liabilities 2,072 1, ,131 Net exposure as at December 31, 2016 (2,070) (847) 3, Net exposure as at December 31, 2015 (2,218) (891) 3, For details regarding the linkage bases of assets and liabilities in the consolidated statement of financial position, see Note 19.D. to the financial statements. 18

187 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) Sensitivity tests to financial instruments For details regarding sensitivity tests for sensitive financial instruments included in the consolidated financial statements as at December 31, 2016, based on changes in market factors, see Annex A to the Board of Directors Report. See also note 19.E. to the financial statements. Presented below are the summing-up lines of the sensitivity tables As at December 31, 2016: 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 NIS millions Sensitivity to changes in interest rates 1, (23,549) (172) (347) (2,005) Gain (loss) from changes in parameters examined in the sensitivity tests Increase in parameter Decrease in parameter 10% 5% Fair value 5% 10% NIS millions Sensitivity to changes in the US Dollar exchange rate (17) (7) (310) 7 17 Sensitivity to changes in the prices of marketable securities ,157 (158) (315) Gain (loss) from changes in parameters examined in the sensitivity tests Increase in parameter Decrease in parameter 2% 1% Fair value 1% 2% NIS millions Sensitivity of Index Forward and SWAP to changes in the Consumer Price Index* (25) (18) (37) As at December 31, 2015: Gain (loss) from changes in parameters examined in the sensitivity tests Increase in parameter Decrease in parameter 2% in absolute 2% in absolute value 10% 5% Fair value 5% 10% value NIS millions Sensitivity to changes in interest rates 1, (22,291) (208) (423) (1,713) Gain (loss) from changes in parameters examined in the sensitivity tests Increase in parameter Decrease in parameter 10% 5% Fair value 5% 10% NIS millions Sensitivity to changes in the US Dollar exchange rate (387) (194) (3,979) Sensitivity to changes in the prices of marketable securities ,268 (163) (327) 19

188 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.7 Select Data from the Financial Statements (Cont.) Sensitivity tests to financial instruments (cont.) As at December 31, 2015 (cont.) Gain (loss) from changes in parameters examined in the sensitivity tests Increase in parameter Decrease in parameter 2% 1% Fair value 1% 2% NIS millions Sensitivity of Index Forward and SWAP to changes in the Consumer Price Index* (47) (20) (41) * For details regarding the possible effect of changes in the Consumer Price Index on the Company s results of operations, see Note 19.D to the financial statements regarding the linkage bases of assets and liabilities in the consolidated statement of financial position. 1.8 Changes in capital and profit (loss) quality For details regarding factors which influence the Company s profit net (loss), and comprehensive profit (loss), see section 1.1 above. The Company s total comprehensive income in 2016 (including non-controlling interests) amounted to NIS 1,134 million, as compared with comprehensive loss (including non-controlling interests) in the amount of NIS 118 million in The aforementioned difference is primarily due to the following factors: A. Profit in 2016 (including non-controlling interests) amounted to NIS 908 million, as compared with loss in the amount of NIS 65 million in B. In 2016, recorded other comprehensive income (including rights that do not confer control) with respect to investee companies accounted by the equity method net of tax in the amount of NIS 266 million, as compared with other comprehensive loss in the amount of NIS 69 million in Most of the difference is to the realization of translation reserves due to the realization of the investment in Adama and due to the change in the USD exchange rate in 2016 (decrease of 1.5%) relative to 2015 (increase of 0.3%). C. In 2016, recorded other comprehensive loss (including rights that do not confer control) net of tax with respect to foreign currency translation differences in respect of foreign operations in the amount of NIS 38 million, as compared with comprehensive income net of tax in the amount of NIS 11 million in 2015, which was primarily due to the rate of change in the USD exchange rate in 2016, relative to 2015, as stated above. Comprehensive income attributable to the owners of the Company in 2016 amounted to NIS 396 million, as compared with comprehensive loss in the amount of NIS 401 million in

189 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.9 Summary of the Company s results (consolidated) For the year ended For the three months ended Select data from the Company s results December NIS millions Net profit (loss) attributable to shareholders 262 (360) 567 (353) Net profit attributed to non-controlling interests Net profit (loss) attributed to shareholders and to noncontrolling interests 908 (65) 900 (292) Profit (loss) from the realization and the increase in value of investments, assets and dividends, and profit due to rise to control, less losses from realizations, impairment, amortization of assets and investments, net (including noncontrolling interests) (15) Profit (loss) from discontinued operations (including noncontrolling interests) 637 (151) 822 (361) Comprehensive income (loss) attributable to Company shareholders 396 (401) 870 (364) 1.10 Details regarding main non-recurring events Details regarding main non-recurring profits (losses) For the three months For the year ended ended December 31, 2016 NIS millions Involving cash flows Profit from realization of Adama Profit from early repayment with respect to the acquisition of loans from the minority interests in investee companies of IDBG * 32 - Decrease of income in Cellcom (13) - Expenses in respect of a collective agreement with (4) represetatives of Cellcom's labor union and its voluntary retirement program - Not involving cash flows 29 Impairment which was recognized with respect to an expected to merger transaction between Israir and Sun D Or (110) (110) Update to deferred tax balances due to a change in the tax rate Increase in market value of Clal Insurance Enterprises 272 Holdings 56 Impairment of real estate inventory and the Tivoli project in IDBG * (75) (10) Impairment of investment in Adama (23) - Revaluation of the HSBC building 34 - Update to the fair value of convertible subordinated loans from the controlling shareholder 5 (3) * See Notes 3.H.2.D to the financial statements. 29 For details regarding income from the increase in the fair value of real estate, including real estate under construction, see section below. 21

190 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.10 Details regarding main non-recurring events (Cont.) Details regarding main non-recurring profits (losses) (Cont.) For the three months For the year ended ended December 31, 2015 NIS millions Involving cash flows Expenses with respect to agreements with representatives of the Cellcom employees committee and voluntary retirement program (17) - Ruling in connection with tax assessments in Tadiran Ltd Sale of the Diesenhaus operation Profit from receipts with respect to a settlement in a legal claim in which the Company was a party Not involving cash flows Impairment of investment in Adama. (105) (18) Impairment of the market value of Clal Holdings Insurance Enterprises. (250) (113) Revaluation of the HSBC building Impairment of the GW project in Las Vegas (70) (70) Elron s rise to control of Pocared 15 - Profit from self-purchases of bonds by DIC Profit from realization of Kyma Main non-recurring effects on the Company s capital, which do not involve the recording of profit (loss) For details regarding the sale of 12% of the issued share capital of Property & Building, by DIC, see Note 3.H.2.A to the financial statements. For details regarding the sale of 14% of the share capital of Gav-Yam, by Property & Building, see Note 3.H.2.B to the financial statements. For details regarding the acquisition of 7.7% of the share capital of Shufersal, by DIC, see Note 3.H.3 to the financial statements. For details regarding the sale of DIC shares to the controlling shareholder, and regarding the exercise of options (Series 4) of DIC into shares, see sections A and D in Note 3.H.6., respectively, to the financial statements. 30 Capital attributed to the owners of the Company also includes a total of NIS 28 million with respect to receipts within the framework of settlements which were reached in claims in which the Company was a party. 22

191 1.11 Contribution to the business results of the Company and of investee companies, by operating segment Cellcom Segment The Company s share in the results of the Cellcom segment in 2016 amounted to profit of NIS 56 million, as compared with profit of NIS 38 million in was characterized by growth in the landline segment and continued increased competition in the mobile segment, as reflected in the erosion of income from services relative to In the landline segment, Cellcom is continuing the growth trend, in light of customer acquisition in the television segment, in the wholesale market and in the triple service. The increase in income in the internet and television segment was partially offset by the decrease in income from international calls. Cellcom is continuing to reduce its operating expenses. Summary of the business results of the Cellcom segment: In In Decrease 2014 NIS NIS millions % millions Explanation Revenues from services 3,033 3,132 (3.2) 3,565 The decrease in 2016, as compared with 2015, was due to the decrease of 4.9% in revenues from services in the mobile segment, primarily due to the decrease in revenues from mobile services, following the ongoing erosion in the prices of those services, and the decrease in the customer base, in light of the increased competition on the mobile market. This decrease was partially offset by the increase with respect to intra-national roaming services. In the landline segment, an increase of 0.8% in income was recorded in 2016, as compared with 2015, primarily as a result of the increase in income in the internet and television segment, which was partially offset by the decrease in income from international calls. The decrease in 2015, as compared with 2014, was mainly due to the decrease of 14.7% in revenues from mobile services, due to the continued erosion in the prices for these services, and the decrease in the customer base, in light of the increased competition on the mobile market, as well as the decrease in revenues from internet services and international calls, as a result of increased competition. The aforementioned decrease was partly offset by revenues from television service, which was launched at the end of Revenues from equipment 994 1,048 (5.2) 1,005 The decrease in 2016 as compared with 2015 was primarily due to the decrease in the scope of end user equipment in the mobile segment which was sold in 2016, as compared with 2015, which was partly offset by the sales of end user equipment in the landline segment. The increase in 2015 relative to 2014 was primarily due to an increase of 63.9% in Netvision equipment sales. Revenues from the sale of mobile devices remained at a similar level to Total income 4,027 4,180 (3.7) 4, In the tables presented in this section, the percentage of change relating to the comparison of data to the corresponding periods of last year is calculated based on exact figures which are not rounded to the nearest million. 23

192 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 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 (Cont.) In In Decrease 2014 NIS NIS millions % millions Cost of sales and services (2,702) (2,763) (2.2) (2,727) Gross profit 1,325 1,417 (6.5) 1,843 Explanation The decrease in 2016, as compared with 2015, was primarily due to the decrease in the cost of sales of the end-user equipment which was sold, primarily due to the amount of end-user equipment which was sold in the mobile segment sold in 2016, as compared with 2015, which was partly offset by the increase in content costs related to the television segment and to costs associated with the wholesale market, as compared with last year. The increase in 2015 relative to 2014 was primarily due to the increase of 0.9% in the cost of revenues from services, and from an increase of 2.6% in the cost of equipment sales. The increase in the cost of revenues from services was primarily due to the increase in content expenses with respect to the television services which were launched at the end of 2014, and to a one-time cancellation of the provision for site rental expenses, in a total amount of NIS 66 million, which was recorded in 2014, and which was partly offset, inter alia, by the decrease in various expenses under cost of sales, such as depreciation and maintenance. The increase in the cost of equipment sales was primarily due to the increase in sales of Netvision equipment to business customers. Rate of gross profit from total revenues 32.9% 33.9% (2.9) 40.3% Operating expenses Other expenses, net (994) (1,085) (8.4) (1,135) (21) (22) (4.5) (46) Operating profit The decrease in 2016 as compared with 2015 was primarily due to the increased efficiency measures which were implemented by Cellcom, the non-recurring expense which was recorded in 2015 with respect to the signing of a collective agreement, and the decrease in depreciation and amortization expenses. The decrease in 2015 relative to 2014 was mainly due to the increased efficiency measures which were implemented by Cellcom, which led to a decrease in advertising expenses and other expenses, and a decrease in depreciation and amortization expenses attributed to the acquisition of Netvision. The item primarily includes expenses with respect to voluntary retirement plans of employees in the amount of NIS 13 million, NIS 25 million and NIS 39 million, in the years 2016, 2015 and 2014, respectively. 24

193 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 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 (Cont.) In In Decrease 2014 NIS NIS millions % millions Explanation EBITDA (1.6) 1,282 The decrease in 2016, as compared with 2015, was primarily due to the continued erosion in income from services, which was partly offset by the decrease in operating expenses, due to the increased efficiency measures which were implemented by Cellcom, and the larger nonrecurring expense in 2015 with respect to the signing of the collective agreement, as stated above. Rate of EBITDA from total revenues Financing expenses, net 21.3% 20.9% % Neutralized by non-recurring expenses as a result of the decrease of the provisions for site rental expenses and telecommunication lines, the signing of the collective agreement and the voluntary retirement program, as stated above, EBITDA in 2016, 2015 and 2014 amounted to NIS 871 million, NIS 927 million and NIS 1,255 million, respectively, which reflect, in the years 2016 and 2015, a decrease of 6.0% and 26.1% relative to the previous years, respectively. (150) (177) (15.3) (198) The decrease in 2016, as compared with 2015, was primarily due to the decrease in interest expenses in connection with Cellcom s bonds, due to the decrease in its scope of debt in 2016 relative to The decrease in 2015, as compared with 2014, was primarily due to the decrease in interest expenses, as a result of the decrease in Cellcom s scope of debt, and the decrease of the CPI in 2015, at a rate of 0.9%, as compared with the CPI s decrease in 2014 at a rate of 0.1%. Tax expenses (10) (36) (2.2) (110) The decrease in 2016 relative to 2015 was primarily due to the recording of tax income with respect to Cellcom s assessment agreement visà-vis the Israel Tax Authority, regarding Cellcom s in Israel for the years , and the reduction of the corporate tax rate in Israel, from a rate of 26.5% in the beginning of 2016, to a rate of 23% beginning in January Net profit The decrease in 2015 as compared with 2014 was mainly due to the decrease in profit before taxes on income. 25

194 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Cellcom Segment (cont d) Cellcom s main operational indicators: In % of change Increase (decrease) In the mobile segment: Number of Cellcom subscribers at the end of the period (in thousands) 2,801 2,835 (1.2) Churn rate 42.4% 42.0% 1.0 Monthly average revenue per user (ARPU) (in NIS) (2.6) In the landline segment: Number of households in the television segment (in thousands) Number of households in the internet infrastructure segment (in thousands) For details regarding principal changes in the holdings of the Cellcom segment during the reporting period, see Note 3.H.1. to the financial statements. 26

195 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Property & Building and projects in Las Vegas The Company s share in the results of the Property & Building segment and projects in Las Vegas in 2016 amounted to loss of NIS 101 million, as compared with income of NIS 41 million in The results in 2016 include the Company s share in the revaluation of the HSBC building in the amount of NIS 34 million, the Company s share in the amortization for impairment with respect to the Tivoli project in Las Vegas ( Tivoli ), and with respect to real estate inventory in the amount of NIS 72 million. In 2015, the results included the Company s share in the revaluation of the HSBC building, and the Company s share in the impairment of the Tivoli project, in the amount of NIS 59 million and NIS 70 million, respectively was characterized by stability in the income-generating property branch in Israel, as 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%. Summary of the business results of Property & Building 32 In Increase In (Decrease) 2014 NIS NIS millions % millions Explanation Revenues from The increase in 2016, as compared with 2015, property rentals was due to the occupancy of revenue-generating projects in Israel, which were completed in the end of 2015, and which began generating revenues in The increase in 2015, as compared with 2014, was due to the occupancy of revenue-generating projects which were completed in the end of 2014, and which began generating revenues in 2015, and to the increase in revenues from the HSBC building in New York, USA. Revenues from the rental of identical properties, after the deduction of holding expenses ( NOI ) 33 Revenues from the sale of apartments and real estate The increase in income in each of the years, relative to the corresponding years, respectively, was due to the increased occupancy in some of the revenue-generating properties of Property & Building, and the real increase in rent The recording of revenues from the sale of apartments and real estate is affected by the timing of the occupation of apartments. It is noted that in the years 2016, 2015 and 2014, Property & Building sold in Israel 480 apartments, 360 apartments and 280 apartments, respectively, and that in the years 2016, 2015 and 2014, 230 apartments, 130 apartments and 230 apartments were occupied, respectively. EBITDA The increase in 2016 as compared with 2015, and in 2015 as compared with 2014, was mainly due to the increase in income from property rentals. 32 Includes the share of Property & Building in projects in Las Vegas. 33 Assets which existed as of December 31, 2016, and existed also in previous years 34 Profit before taxes on income, financing expenses, depreciation, amortization, revaluations and Property & Building s share in the losses of investee companies. 27

196 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 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 (cont.) In Increase In (Decrease) 2014 NIS NIS millions % millions Explanation Income from (9.6) 431 The decrease in 2016, as compared with 2015, increase in the was primarily due to the lower revaluation of the fair value of amount of the fair value update with respect to the investment HSBC building in New York, USA, and to the property and update to the fair value of lands intended for fixed assets, net revenue-generating properties in Israel of Property & Building (for additional details, see Note 6.B. to the financial statements). This income was derived from a general revaluation of the property portfolio and the progress made in the construction of revenuegenerating real estate projects under construction. The revaluation amounts of investment property in Israel in the years 2016, 2015 and 2014 amounted to NIS 223 million, NIS 194 million and NIS 159 million, respectively. The update amounts to the fair value of the HSBC building in New York, the United States, in the years 2016, 2015 and 2014, amounted to NIS 126 million, NIS 200 million and NIS 272 million, respectively. Share of Property & Building in the net profit (loss) of investee companies 21 (26) Transition to profit (66) The increase in 2016 relative to 2015 was primarily due to the improvement in the results of Mehadrin and of the Tivoli project in Las Vegas, and the sale of the Hyderabad project in India. In the years 2016, 2015 and 2014, Property & Building recorded amortization in the amount of NIS 21 million, NIS 45 million and NIS 11 million, respectively, with respect to the update to the fair value of the Tivoli project in Las Vegas. Loss from realization of investee companies In 2014, one-time loss was recorded in the amount of NIS 34 million with respect to the repayment of a swap transaction which was performed by TPD (30) The loss in 2014 was due to a non-recurring accounting expense with respect to a change in the accounting treatment of TPD, in the amount of NIS 30 million. 28

197 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 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 (cont.) Financing expenses, net In Increase In (Decrease) 2014 NIS NIS millions % millions (385) (351) 9.7 (385) Tax expenses (62) (210) (70.5) (163) Net profit Explanation The increase in 2016 relative to 2015 was primarily due to the decrease of the impact of the CPI in 2015 by 0.3%, as compared with the decrease of the CPI by 0.9% in 2015, on the CPIlinked liabilities of Property & Building. It is noted that the rental fees from revenue-generating properties of Property & Building in Israel are CPI-linked, and the fair value of the aforementioned revenue-generating properties are derived, inter alia, from the linked rental fees. Therefore, Property & Building considers its investment property as a long-term economic hedge against its financial liabilities, most of which are CPI-linked. The decrease in 2015 relative to 2014 was primarily due to the decrease of the impact of the CPI in 2015 by 0.9%, as compared with the decrease of the CPI by 0.1% in 2014, on the CPIlinked liabilities of Property & Building. The decrease in financing expenses was partly offset by the transition from net profit due to an update to the fair value of marketable securities in 2014, to net loss in The decrease in 2016 relative to 2015 was primarily due to legislative amendments which were implemented in 2016, which reduced the corporate tax rate in Israel from a rate of 26.5% at the beginning of 2016, to a rate of 23% beginning in January As a result, Property & Building recorded, in 2016, non-recurring income from in the amount of NIS 126 million, due to the update to deferred taxes, of which a total of NIS 78 million was attributable to the owners of Property & Building (including the share of Property & Building in the results of associate companies). The increase in 2015 as compared with 2014 was mainly due to the increase in profit before taxes on income. For details regarding principal changes in the holdings of the Property & Building segment and projects in Las Vegas during the reporting period, see Note 3.H.2. to the financial statements. 29

198 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 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 2016 amounted to profit of NIS 92 million, as compared with profit of NIS 25 million in Shufersal s results in 2016 were affected by several factors: Continued acceleration of the development of Shufersal s digital platform, which primarily includes the Shufersal Online system, including the opening of designated warehouses for that platform. Continued expansion and strengthening of the private brand. Continued increased efficiency in real estate. The gradual launch of the new logistical center in Shoham, which began operating in February Adjustment of Shufersal s operations to changes in the retail food market, including upon the sale of the Mega chain. Summary of the business results of Shufersal Revenues from the retail segment Revenues from the real estate segment In Increase In (Decrease) 2014 NIS NIS millions % millions 11,798 11, ,553 Explanation The increase in 2016 as compared with 2015 was mainly due to the changes in the retail food market. Same store sales which were fully active in 2016 and in 2015 increased in 2016 at a rate of 4.4% relative to the corresponding period, primarily due to the changes in the components of the basket and in the mix of sales, and to changes which are taking place in the retail food market. The decrease in 2015 relative to 2014 was primarily due to the increase in franchise activities in Shufersal branches, where total sales attributed to franchise activities were included under turnover, although income only included commissions which are received with respect to the aforementioned activity. Shufersal s turnover in 2015 remained unchanged relative to Identical store sales which were fully active in 2015 and in 2014 increased in 2015 at a rate of 0.4% as compared with the corresponding period last year (5.6) 178 The decrease in 2016, as compared with 2015, was due to the decrease in the set of occupied properties and renters. Revenues from the credit card customer club management segment Total revenues 11,842 11, ,602 Sales per square meter (in NIS) The increase in 2016 as compared with 2015 was mainly due to the increase of commercial areas. The increase in 2015 as compared with 2014 was mainly due to the reduction of commercial areas. After adjustments in respect of inter-segmental rentals and in respect of other inter-segmental items. 30

199 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Shufersal Segment (cont d) Summary of the business results of Shufersal (Cont.) In In Increase 2014 NIS NIS millions % millions Gross profit 3,037 2, ,648 Rate of gross profit from total revenues Operating expenses Other income and increase in fair value and gain from sale of investment property, net Operating profit (loss) ** Rate of operating profit (loss) ** 25.6% 24.2% % Explanation The increase in gross profit and in the rate thereof in 2016, as compared with 2015, was primarily due to the increase in franchisees, the increase in the share of the private brand, the improvement in trade terms, the components of the basket, the mix of sales, and the increased efficiency due to the implementation of the business plan. The increase in gross profit and the rate thereof in 2015 relative to 2014 was primarily due to the improvement of trade conditions, change in the mix of franchisees, increase in the share of the private brand, and increased efficiency due to the implementation of the business plan. (2,618) (2,515) 4.1 (2,695) The increase in 2016, as compared with 2015, was primarily due to the increased activity and to the increase in payroll costs, including the minimum wage. The decrease in 2015, as compared with 2014, was primarily due to the closing and reduction of branches, increased efficiency measures and nonrecurring expenses which were recorded in (36) 3.8% 2.5% 52.0 (0.3%) In 2016, income in the amount of NIS 26 million was recorded from an increase in fair value and profit from the realization of investment property. In 2015, income in the amount of NIS 9 million was recorded from an increase in fair value and profit from the realization of investment property. In 2014, income in the amount of NIS 12 million was recorded from an increase in the fair value and profit from realization of investment property. EBITDA The increase in 2016 as compared with 2015, and in 2015 as compared with 2014, was mainly due to the improvement in operating profit. Rate of EBITDA from total revenues 6.0% 4.7% % ** After other revenues and expenses. 31

200 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Shufersal Segment (cont d) Summary of the business results of Shufersal (Cont.) In In Increase 2014 NIS NIS millions % millions Explanation Financing expenses, net Tax income (expenses) (118) (87) 35.6 (103) The decrease in 2016, as compared with 2015, was primarily due to the decline of the CPI at a lower rate in 2016 relative to the CPI s decrease in On the other hand, interest expenses decreased relative to last year, due to the repayment of bonds. The increase in expenses in 2016 was also due to the recording of income from the reversal of impairment of a loan to an associate company of Shufersal, and the discounting of borrowing costs which were recorded in The decrease in 2015 relative to 2014 was primarily due to the CPI s decrease in 2015, at a greater rate than the CPI s rate of decrease in Additionally, a decrease occurred in financing expenses, due to the decrease in Shufersal s total debt. On the other hand, a decrease occurred in interest income from securities in which Shufersal invested its monetary balance, primarily due to the sale of its securities portfolio during the first quarter of (68) (46) The increase in 2016 as compared with 2015 was mainly due to the increase in profit before taxes on income, which was partly offset by tax expenses due to the reduced tax rate. The transition from tax income in 2014 to tax expenses in 2015 was primarily due to the improvement in pre-tax profit. Net profit (loss) (110) 32

201 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.11 Contribution to the business results of the Company and of investee companies, by operating segment (Cont.) Adama Segment In November 2016, the sale transaction was completed according to which Koor sold its entire stake (40%) in Adama to China National Agrochemical Corporation ( CNAC ) (the Sale Transaction ), in which Koor received USD 230 million. From that date onwards, Adama has been presented in the financial statements as a discontinued operation. For details, see Note 3.I.3 to the financial statements. The Company s share in the results of Adama in 2016, until the completion date of the sale transaction, amounted to profit of NIS 697 million, which includes profit from realization pf the investment in Adama, as stated above, in the amount of NIS 524 million (for additional details, see Note 3.H.4.B to the financial statements), as compared with loss of NIS 2 million in Clal Holdings Insurance Enterprises Segment The Company s share in the results of the Shufersal segment in 2016 amounted to profit of NIS 53 million, as compared with loss of NIS 255 million in 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 Insurance Enterprises, from the aforementioned date, are in accordance with the changes in the market value of the Company s holdings of the shares of Clal Holdings Insurance Enterprises. For details regarding the market value of the shares of Clal Holdings Insurance Enterprises which are owned by the Company as at December 31, 2016, and proximate to the date of approval of this report, see Note 3.H.5.H. to the financial statements For details regarding the appointment of a trustee for the majority of the Company s holdings in Clal Holdings Insurance, by the Commissioner, and regarding the outline over time which was determined for the sale of the Company s control of and holdings in Clal Insurance Holdings, and regarding the non-success of the negotiations for the sale of the Company s holdings in Clal Holdings Insurance Enterprises, and the passage of the date specified in the Commissioner s outline for the signing of an agreement for the sale of the control core of Clal Holdings Insurance Enterprises, see Notes 3.H.5.A. and B. to the financial statements. For details regarding principal changes in the holdings of the Clal Holdings Insurance Enterprises segment during the reporting period, see Note 3.H.5. to the financial statements. 33

202 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.12 Administrative, financing and other expenses, net For the year ended December NIS millions Explanation Administrative expenses, taxes and other expenses, net: The Company The increase in 2016 as compared with 2015 was mainly due to: 1. An increase in the consulting expenses and legal expenses due to the conduct vis-à-vis the trustees for Administration and other expenses (45) (33) (29) the Company s bonds, in connection with a motion to liquidate which was filed against the Company Taxes (and which was removed). Reversal of provisions for donations An increase in payroll expenses, including with respect to the Company s share in share-based payment (31) (33) (25) to the Company s CEO, as stated in Note 31.C.(2) to the financial statements. 3. On the other hand, in 2016, the Company reversed a tax provision in the amount of NIS 14 million, net. 4. Recording of a provision for donations in 2016, in the amount of NIS 4 million. The increase in 2016 as compared with 2015 was mainly due to: 1. Increase in expenses with respect to directors compensation, due to the many meetings and in light of the retroactive approval for the payment of compensation to directors who are controlling shareholders in Discontinuation of the participation of IDB Holdings in the headquarter expenses (20% in some of the expenses in May 2014). 3. In 2015, DIC did not pay management fees to the Company (in approximately NIS 1 million). The Company s share in the expenses of DIC and Koor (39) (11) (18) The increase in 2016 as compared with 2015 was mainly due to: The recording of the Company s share in income in 2015, with respect to a ruling which was given in July 2015 by the Supreme Court in connection with a tax assessment from 1999 of Tadiran Ltd. ( Tadiran ), a wholly owned subsidiary of Koor. Additionally, in 2016, the Company s share in the payroll expenses of DIC increased, primarily due to the granting of options to the CEO of DIC (and the Company) and the increase in the Company s share, in the amount of NIS 5 million, in the provision for donations of DIC. The decrease in 2015 relative to 2014 was primarily due to the Company s share in the recording of income with respect to the ruling in connection with the assessment of Tadiran, as stated above. Financial expenses, net: The Company (147) (140) (191) the years 2016, 2015 and 2014, the known index decreased at a rate of 0.3%, 0.9% and 0.1%, respectively. The increase in 2016 relative to 2015 was primarily due to the increase of NIS 8 million in financing expenses on the Company s gross debt in 2016, as compared with the corresponding period last year, which was primarily due to the lesser decrease of the CPI *. This increase was primarily offset by the decrease in the Company s scope of gross debt due to repayments. The decrease in 2015 as compared with 2014, was primarily due to: 1. A decrease of NIS 62 million, due to a decrease in the scope of gross debt, due to repayments in the period, and due to the change in the CPI s rate of increase *. 2. On the other hand, in 2014, the Company recorded financing income with respect to a million to a financial institution in the amount of NIS 3 million, as compared with negligible income in Additionally, in 2015, the Company recorded financing income in the amount of NIS 4 million, due to the revaluation of a subordinated loan which the Company received from the controlling shareholder in December

203 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.12 Administrative, financing and other expenses, net (cont d) For the year ended December NIS millions Explanation Financial expenses, net (Cont.) The Company s share in the expenses of DIC (434) (86) (226) The increase in 2016 as compared with 2015 was mainly due to: 1. The Company s share in net financing income in the amount of NIS 248 million, with respect to interest and revaluation of a hybrid financial instrument of the hybrid financial instrument (the Hybrid Instrument ) in 2016, as compared with the Company s share in net financing income, in the amount of NIS 69 million, in 2015**. 2. The Company s share in financing income in the amount of NIS 15 million, with respect to the ruling which was given in connection with the tax assessment of Tadiran, as specified above. 3. The recording of the Company s share in the expense, in the amount of NIS 14 million, in 2016 relative the Company s share in the income in the amount of NIS 1 million in 2015 with respect to the revaluation of the bonds (Series K) of DIC. 4. In 2015, the Company recorded its share in the profit with respect to self-purchases of bonds which were performed by DIC, in the amount of NIS 13 million. 5. A decrease in the amount of NIS 18 million in the Company s share in interest expenses, net, due to a decrease in DIC s scope of liabilities. The decrease in 2015, as compared with 2014, was primarily due to: 1. The Company s share in net financing income in the amount of NIS 69 million with respect to interest and revaluation of the hybrid instrument, as compared with the negligible impact, as stated above, in The Company s share in the decrease of financing expenses, net, in the amount of NIS 25 million, in respect of linkage differentials on the liabilities of DIC that are linked to the known index, less expenses from hedging transactions on some of the aforementioned CPI-linked liabilities of DIC, primarily due to the differences in the CPI s rate of change*. 3. Recording of the Company s share in the expenses with respect to the early repayment of Koor bonds, before the completion of its merger with DIC, in the amount of NIS 19 million in the first quarter of The Company s share in the income in the amount of NIS 15 million, with respect to interest and linkage differentials which were received in accordance with the ruling given in connection with the tax assessment of Tadiran, as specified above. 5. The Company s share in profit in the amount of NIS 13 million in 2015 with respect to self-purchases of DIC bonds which were performed by its wholly owned company. 6. A decrease in the amount of NIS 9 million in the Company s share in income with respect to the revaluation of bonds (Series T) which was recorded in 2015, as compared with Other (The Company) In 2015, the Company recorded income in cash in the amount of NIS 8 million, with respect to a settlement regarding a claim pertaining to the acquisition of shares of Ganden Tourism. Following a ruling which was given regarding another claim, the Company received, in 2015, an additional NIS 1 million. Total (651) (261) (460) * In the years 2016, 2015 and 2014, the known index decreases at a rate of 0.3%, 0.9% and 0.1%, respectively. ** For details regarding the realization of the investment in Adama, see Note 3.H.4.B to the financial statements. 35

204 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.13 Analysis of business results on a quarterly basis In the fourth quarter of 2016, the Company recorded profit of NIS 567 million, as compared with loss of NIS 353 million in the corresponding quarter of The results in the fourth quarter of 2016 include, inter alia, the Company s share in the gain on the realization of Adama in the amount of NIS 524 million, profit from the increase in market value of shares of Clal Holdings Insurance Enterprises in the amount of NIS 272 million and from the recording of deferred tax income due to the change in the tax rate beginning on January 1, 2018, in the amount of NIS 34 million NIS, and on the other hand, the provision for impairment due to the expected transaction involving the merger between Israir and Sun D Or, in the amount of 110 million. In the fourth quarter of 2015, the results included the Company s share in impairment loss with respect to the market value of shares of Clal Holdings Insurance Enterprises, in the amount of NIS 320 million The Company s results of operations on a quarterly basis for the years 2016 and 2015: Primary profit and loss items 2016 Quarter Total for the year NIS millions Sales and services 17,227 4,224 4,445 4,409 4,149 The Group s share in the net profit (loss) of investee companies accounted by the equity method, net (16) (13) 37 Profit (loss) from the realization and revaluation of investments and dividends (15) 10 (14) 14 (25) Increase (decrease) in the fair value of investment property, net (10) Profit (loss) from discontinued operations (3) (217) 35 Net profit (loss) for the period attributed to owners of the Company (114) (239) Quarter Total for the year NIS millions Sales and services 35 16,948 4,265 4,402 4,059 4,222 The Group s share in the (net profit) loss of investee companies accounted by the equity method, net (20) (6) 21 Profit from realization and revaluation of investments and assets, net Increase in the fair value of investment property, net Profit (loss) from discontinued operations (151) (361) (70) Net profit (loss) for the period attributed to owners of the Company (360) (353) (183)

205 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) 1.13 Analysis of business results on a quarterly basis (Cont.) Contribution to business results by investment companies directly held by the Company For the three months ended December NIS millions DIC Clal Holdings Insurance Enterprises (321) Other (184) (39) Loss for the period 567 (353) Contribution to the Company s business results by operating segments For the three months ended December NIS millions Clal Holdings Insurance Enterprises 272 (321) Cellcom 7 6 Adama (32) Property & Building and projects in Las Vegas 12 7 Shufersal All other holdings, net (116) (318) Financing, administrative and others (170) (35) Net profit (loss) for the period 567 (353) Presented below are changes in the results by investee companies in the fourth quarter of 2016 relative to the fourth quarter of 2015: Cellcom The decrease in Cellcom s income in the fourth quarter of 2016, as compared with the corresponding quarter of 2015, from a total of NIS 1,046 million in the corresponding quarter last year to a total of NIS 984 million in the fourth quarter of 2016, was due to the decrease of 5% in income from services, which was primarily due to the decrease in income from mobile services due to the ongoing erosion in the prices of those services, and the abandonment of customers due to the increased competition on the mobile market, due to the decrease in income from international calls (which was partly offset by the primarily from the increase in income in the internet and television segments), and a decrease of 8.3% in revenues from equipment, primarily as a result of the decrease in the scope of end user equipment sales in the mobile segment, which were sold in the fourth quarter of 2016 as compared with the fourth quarter of 2015 (which was partly offset by the increase in sales of end user equipment in the landline segment). In the fourth quarter of 2016, an increase of 1.3% occurred in Cellcom s cost of sales and services, as compared with the fourth quarter of 2015, primarily due to the increase in content costs associated with the television segment and in costs associated with the wholesale market (which was partly offset by the decrease in the cost of sales of end user equipment which was sold due to the decrease in the number of end user devices which were sold in the mobile segment). Cellcom s operating profit in the fourth quarter of 2016 decreased by NIS 47 million, compared with the corresponding quarter last year. On the other hand, Cellcom recorded tax income in the amount of NIS 22 million in the fourth quarter of 2016, as compared with relative to in the amount of NIS 12 million in the corresponding quarter last year, due to the reduction of the tax rate in the coming years. Cellcom s financing expenses in the fourth quarter of 2016 decreased by NIS 8 million, compared with the corresponding quarter last year. 35 These figures were restated due to a discontinued operations (Adama and IDB Tourism), see Note 3.I.1. to the financial statements. 36 Primarily the revaluation of shares of Clal Holdings Insurance Enterprises to market value. 37 Including the profit from the realization of Adama 37

206 1. Board of Directors Remarks Regarding the State of the Company s Affairs (Cont.) Presented below are changes in the results by investee companies in the fourth quarter of 2016 relative to the fourth quarter of 2015 (cont.) Shufersal The increase in Shufersal s contribution to the Company s business operations results in the fourth quarter of 2016 as compared with the corresponding quarter of 2015 was due, inter alia, to an increase in its gross and operating profit, mainly as a result of the increase in Shufersal franchisees, the improvement in trade terms, the increase in the share of the private brand, the basket component, increased efficiency due to the implementation of the business plan, and the increase in the fair value of investment property, and additionally, a decrease occurred in the amount of NIS 7 million in Shufersal s tax expenses, primarily due to the reduction of the tax rate in the coming years. On the other hand, an increase in the amount of NIS 21 million occurred in financing expenses, primarily due to the decrease of the CPI at a slower rate in the fourth quarter of 2016 relative to the corresponding quarter last year. Property & Building and projects in Las Vegas The increase in Property & Building s contribution to the Company s business results in the fourth quarter of 2016, as compared with the corresponding quarter last year, was primarily due to an increase of 8.1% in income from property rentals, primarily the occupancy of income-generating projects in Israel, which were completed at the end of 2015, and which began generating income in 2016, to an increase of NIS 68 million in income from apartment sales and land in the fourth quarter of 2016, as compared with the corresponding quarter last year, to the increase in the Company s share in the net profit of investee companies of Property & Building, and the transition from tax expenses in the amount of NIS 31 million in the fourth quarter of 2015, to tax income in the amount of NIS 51 million, primarily due to the reduction of the tax rate in the coming years. On the other hand, an increase in the amount of NIS 112 million occurred in net financing expenses. The Company In the fourth quarter of 2016, the Company recorded net financing expenses in the amount of NIS 38 million, as compared with net financing expenses in the amount of NIS 19 million in the corresponding period last year. Financing expenses on the Company s gross debt amounted in the fourth quarter of 2016 to a total of NIS 34 million, as compared with expenses in the amount of NIS 23 million in the corresponding period last year. The aforementioned increase in expenses was primarily due to the more moderate decrease (0.3%) in the rate of decrease of the CPI in the fourth quarter of 2016, relative to the decrease at a rate of 0.7% in the corresponding period last year. Additionally, in the fourth quarter of 2016, the Company recorded an expense in the amount of NIS 3 million, due to the increase in the value of the subordinate convertible loans which the Company received from the controlling shareholder, as compared with income in the amount of NIS 4 million, due to the decrease in the value of the loans in the corresponding period last year. The Company s general and administrative expenses in the fourth quarter of 2016 amounted to NIS 14 million, including a provision for donations in the amount of NIS 4 million, as compared with NIS 9 million in the corresponding period last year. DIC In the fourth quarter of 2016,, the Company recorded its share in the net financing expenses of DIC in the amount of NIS 100 million, as compared with its share in the net financing expenses in the amount of NIS 7 million in the corresponding period last year. These expenses included, in the fourth quarter of 2016, primarily the Company s share in the net financing expenses with respect to the hybrid financial instrument with respect to the non-recourse loan from the Chinese bank, in the amount of NIS 62 million, as compared with the Company s share in net financing income in the amount of NIS 22 million in the corresponding period last year. Additionally, in the fourth quarter of 2016, the Company s share in the payroll expenses of DIC increase in the amount of NIS 2 million, primarily with respect to the provision of options to the CEO of DIC (and of the Company), and the increase in the Company s share in the provision for donations in the amount of NIS 5 million, as compared with the corresponding period last year. 38

207 2. Exposure to and Management of Market Risks 2.1 For details regarding the management of market risks in the Company, and regarding the market risks to which the Company is exposed, as well as methods for managing such risks, see Note 19.A.1. to the financial statements. For details regarding the individual responsible for managing market risks in the Company, see section 3 of the specification in accordance with Regulation 26A in Part D of the periodic report. 2.2 Company policy regarding the management of market risks Company policy regarding risk management is implemented only for the Company itself and its wholly owned subsidiaries, excluding IDB Tourism. The Company does not determine policy, and does not manage the risks of its investee companies. The policies of the investee companies are determined directly by the companies themselves. Additionally, the Company does not take any actions to hedge market risks arising from the activity of its investee companies, and from the activities of investee companies which are held by them. Furthermore, the Company does not manage the aggregate risks of its investee companies and/or of investee companies which are held by them. For details regarding the Company s policy regarding the management of market risks, see Note 19.A.1. to the financial statements. For details regarding the management of market risks to which the Company s main investee companies are exposed, and methods for their management, see Note 19.A.2. to the financial statements. 2.3 Control of the market risk management policy, and its method of implementation In general, control over the implementation of the policy, and provision of a response to extraordinary developments in the various markets, is under the responsibility for the risk management supervisor in the Company. Control over the implementation of Company policy is implemented through periodic reporting by the risk supervisor to the Company s financial statements review committee and Board of Directors. 2.4 Linkage balance sheet For details regarding the Company s consolidated balance sheet, and positions in derivatives in the consolidated report, see Note 19.D. to the financial statements For details regarding the linkage balance sheet of the Company and its wholly owned subsidiaries (excluding IDB Tourism), see section above. For details regarding sensitivity tests for sensitive financial instruments included in the consolidated financial statements as at December 31, 2016, based on changes in market factors, see Annex A to the Board of Directors Report. See also Note 19.E to the financial statements. 3. Corporate Governance Aspects 3.1 Contributions and Assistance to the Community The IDB Group regards contribution and assistance to the community in Israel as a component of its business vision, and believes that it has a responsibility towards Israeli society, based on the recognition that business leadership goes hand in hand with moral-social leadership. In 2016, the IDB Community Foundation (R.A.), a not-for-profit association which concentrates donations from the main member companies of the group (the Foundation ) donated a total of NIS 1.7 million to the field of education, and a total of NIS 2 million to the field of welfare, and a total of NIS 1 to the field of health. It is noted that, in consideration of the Company s financial position, in the years , the Company did not provide any donations, and the Foundation did not receive any donations from the Group s member companies, as stated above. Therefore, the funds which have accumulated in the Foundation are funds which were donated in previous years. In accordance with the decision of the Company s general meeting 38 on July 5, 2005, the Company s Board of Directors resolved, on March 22, 2017, that the Company s donation budget for 2017 would amount to a total of up to NIS 3.93 million (up to 1.5% of the Company s net profit for 2016, according to its audited consolidated financial statements), and that a total of 100% out of the aforementioned amount would be provided as a donation to the Foundation. For details regarding resolutions of the Company s Board of Directors regarding the manner of determination of the Company s annual donation budget, and regarding the method for determination of the budget for donations to the Foundation, see Note 31.B.(6).(a) to the financial statements. 39

208 3. Corporate Governance Aspects (cont.) 3.2 Directors with accounting and financial expertise On February 26, 2014, the Company s Board of Directors resolved that the minimum required number of directors on the Company s Board of Directors who must have accounting and financial expertise is two (of which, at least one outside director), in consideration of the Company s type, the Company s areas of activity, and the scope and complexity of its activities, and in consideration of the composition of the Company s Board of Directors, which includes members with a great deal of business, managerial and professional experience. According to the Board of Directors assessment, and after taking into account the directors declarations, in which the directors specified their education, experience and knowledge on the relevant subjects, for the purpose of evaluating whether they fulfill the conditions and tests in accordance with the Accounting and Financial Expertise Regulations, the Company s Board members who hold office as of the date of the report and who have accounting and financial expertise are Messrs. Giora Inbar (outside director) and Alina Frankel Ronen (outside director). For details regarding the facts by virtue of which the aforementioned directors can be considered as such, see the specification in accordance with Regulation 26 in Part D of this report. 3.3 Independent directors The Company s bylaws do not include any provision regarding the number of independent directors. 3.4 Details Regarding the Company s Internal Audit Details regarding the internal auditor: Name of auditor: Ilan Amit Tenure commencement August 31, 2000 date: Qualifications for the B.A. in Accounting, The Hebrew University of Jerusalem; CPA, member position: of the Institute of Internal Auditors in Israel, possessed of a great deal of experience and qualifications regarding auditing, accounting and systems analysis, over approximately 40 years. The internal auditor is not an interested party of the Company, a corporate officer of the Company (other than as its internal auditor) or a relative of any of the foregoing, and is also not the independent auditor or anyone acting on behalf of the independent auditor. The internal auditor does not fulfill any other position in the Company or in the other member companies in the Group other than internal auditing, save for handling of complaints by the Company s employees in connection with the management of its business, in accordance with a resolution by the Company s Audit Committee. Securities held To the best knowledge of the Company, the internal auditor does not hold securities of the Company or of any related party. Employment status: The internal auditor is a employee of the Company (60% scope of position) and is a member of the Audit Committee of the IDB Community Fund (RA). Other roles: The internal auditor is a member of the Audit Committee of the association Tapuach, and a member of the Audit Committee of the association MIHA Tel Aviv and Central District. The internal auditor does not fulfill any position outside of the Company that creates or may create a conflict Appointment of the internal auditor: Supervisor of the auditor in the organization: of interests with his position as internal auditor. Approved by the Company s Board of Directors, in its meting dated August 31, Chairman of the Board. 40

209 3. Corporate Governance Aspects (Cont.) 3.4 Details on the Company s Internal Audit (Cont.) Work plan of the internal auditor: The work plan is prepared in an annual framework. due to the Company s status as a holding corporation, the audit work plan is divided into three main parts: A) Audit of the activities of the Company itself (on subjects which include, inter alia, compliance with policies, cost control, management of Company funds, reporting policies, compliance with rules and control over decision making). This control was implemented in the reporting year by the internal auditor. Information security audits were prepared with the assistance of a professional in the field. B) Routine control of internal auditing in investee companies, as specified below. C) Centralization of the performance of audit activities (testing) within the framework of the implementation of provisions of the Securities Regulations (Periodic and Immediate Reports), , regarding the effectiveness of internal control over financial reporting and disclosure. 39 The content of the work plan was determined, inter alia, with reference to risk assessment, which is evaluated on an ongoing basis. The entities who are involved in the determination of the work plan are the internal auditor, Company management and the audit committee, which approved the plan for 2017 on,january 31, 2017 and evaluated the Company s internal audit unit and the performance of the internal auditor. The internal auditor has the discretion to deviate from the work plan, subject to reporting to the Audit Committee and receiving its approval for the proposed change. During the reporting year, internal auditing included an evaluation of material transactions. In 2016, approximately 900 work hours were invested by the internal auditor in the Company s internal auditing. It is the opinion of the Company s Board of Directors that the work plan of the internal auditor, and the scope of hours determined for its implementation, correspond to the Company s needs. The Company has the option to expand the aforementioned scope of hours, if necessary. Auditing of held corporations are auditing of international activities: As part of internal auditing, the internal auditor also performed routine monitoring of the existence of adequacy of internal auditing actives in several investee companies, of which several of the Company s material investee companies, including foreign corporations. It should be clarified that internal auditing work of the aforementioned investee companies, insofar as is relevant, is not performed by the internal auditor. Hours directly invested in the internal auditing of (material) investee companies by the Company: Annual Name of company work hours Notes DIC 870 Performed by an external auditor. IDB Tourism 1,000 Performed by an external auditor with respect to all member companies of the Tourism Group (Israir Aviation and Tourism Ltd.). Performance of the audit: In accordance with a notice given by the internal auditor, the internal audit work is conducted by it in accordance with generally accepted professional standards pursuant to the Internal Audit Law. Access to information: The internal auditor has access to information held by the Company, as stated in Section 9 of the Internal Audit Law, , including continuous and unrestricted access to the information systems of the Company, including financial data. 39 Centralization of the performance of audit activities (testing) within the framework of the implementation of provisions of the Securities Regulations (Periodic and Immediate Reports), , regarding the effectiveness of internal control over financial reporting and disclosure, will be undertaken in 2017, by an external entity. 41

210 3. Corporate Governance Aspects (Cont.) 3.4 Details on the Company s Internal Audit (Cont.) Report by the internal auditor: The reports of the internal auditor are submitted in writing. During the year, three internal audit reports were submitted with respect to the work plan for During the year, audit reports were submitted in advance of the meetings of the Audit Committee, which discussed them in its meetings, which were held on the following dates: March 17, 2016, March 27, 2016, June 29, 2016, September 21, 2016 and December 28, The audit reports are distributed on an ongoing basis to the CEO, the Chairman of the Board, and members of the Audit Committee, as well as to Company management. Assessment of the Board of Directors: In the opinion of the Board of Directors, the scope, nature and continuity of the internal auditor s work and his work plan are reasonable under the circumstances of the matter and are sufficient to obtain the objectives of the internal audit in the Company. Compensation: The scope of employment of the Company s internal auditor is 60% 40. Principal terms of the internal auditor s employment: 12 monthly salaries, linked to the consumer price index, relative to the index which was published on November 15, 2007, and social benefits and fringe benefits, which primarily include the provision of a personal vehicle (grossed up for tax), telephone and provisions for managers insurance and study fund. Employer s cost with respect to the internal auditor s employment in 2016 amounted to a total of approximately NIS 627 thousand. The Company s Board of Directors believes that the compensation of the internal auditor is appropriate in light of the scope of the internal auditor s activity and responsibilities, and is no exceptional relative to companies of a size and type similar to the Company, of a similar activity level to the Company, and with a similar scope of responsibility as that of the internal auditor, and that the foregoing does not affect the internal auditor s judgment. 3.5 Code of ethics In November 2010, the Company s Board of Directors approved a code of ethics that affirms the fundamental basic values according to which, inter alia, the Company operates, into a comprehensive set of rules regarding conduct which are binding towards its corporate officers, managers and employees. The ethical code of conduct does not suffice with mere compliance with the provisions of the law, but rather includes broader norms of conduct. The foregoing includes, amongst others, the following matters: employee rights in connection with assistance and contribution to the community, preventing conflicts of interests, fairness, prohibiting exploitation of the Company s business opportunities, protection of the Company s property and ensuring the adequate use of its facilities, prohibiting giving and taking of benefits in inappropriate ways, retention of records and maintaining confidentiality. 3.6 Disclosure regarding the approval process of the Company s financial statements For details regarding the approval process of the financial statements, see the corporate governance questionnaire which is included in Part D of this report, which is implemented on a voluntary basis by the Company. 40 As of April 2017, the scope of service of the internal auditor to the Company will be reduced to 30% 42

211 4. Disclosure Requirements Regarding the Corporation s Financial Report 4.1 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 33 to the financial statements. 4.2 Critical accounting estimates The preparation of the financial statements of the Company and of its consolidated companies, in accordance with international accounting principles, require their management teams to make assumptions and prepare estimates which affect the amounts presented in the financial statements. Among these are estimates that require exercising discretion in an environment of uncertainty and which significantly affect the data presented in the financial statements. For details regarding the critical accounting estimates used in the preparation of the financial statements, see Note 1.E.(3) to the financial statements, regarding which, during their preparation, assumptions are required regarding circumstances and events which involve significant uncertainty. In its judgment while determining the estimates, the Company or the investee company, as applicable, base their rationale on past experience, various facts, external factors and reasonable assumptions, in accordance with the appropriate circumstances for each estimate. Actual results may differ from these estimates. 4.3 Reference in the opinion of the Company s auditors The auditors 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 Insurance Enterprises Holdings, the requirements of the Concentration Law and the Company's ability to deal with the requirements of Concentration Law. However, Company management estimates that it will be able to repay its liabilities when they come due, and to continue its activities. 4.4 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, March 22,

212 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 December 31, 2016 (NIS millions) (Cont.) Sensitivity test to changes in interest rates Instrument Profit (loss) from the change Profit (loss) from the change Absolute interest increase of 2% Interest increase of 10% Interest increase of 5% Fair value as at December 31, 2016 Interest decrease of 5% Interest decrease of 10% * The repayment dates of the loans have not yet been determined. Absolute interest decrease of 2% Long-term 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 passed before the date of the statement of Sensitivity test to changes in US Dollar exchange rate Profit (loss) from the change Profit (loss) from the change Instrument Exchange rate increase of 10% Exchange rate increase of 5% Fair value as at December 31, 2016 Exchange rate decrease of 5% Exchange rate decrease of 10% Long-term loans to investee companies accounted by the equity method (including current maturities) (8) (16) Deposits and other long-term 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) Short-term 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, Put-Long Total (17) (7) (311)

213 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 December 31, 2016 (NIS millions) (Cont.) Instrument Sensitivity test to changes in the CPI* Profit (loss) from the change CPI CPI increase increase of of 2% 1% Fair value as at December 31, 2016 Profit (loss) from the change CPI CPI decrease of decrease of 1% 2% CPI forward - not recognized as accounting hedge (27) (11) (22) Swap - Not recognized as accounting hedge Swap - Recognized as accounting hedge ** (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 Note 19.D to the financial statements. ** 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 Rate increase of 10% Rate increase of 5% Fair value as at December 31, 2016 Rate decrease of 5% Rate decrease of 10% 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. B. Sensitivity tests as at December 31, 2015 (NIS millions) Sensitivity test to changes in interest rates Instrument Profit (loss) from the change Profit (loss) from the change Absolute interest increase of 2% Interest increase of 10% Interest increase of 5% Fair value as at December 31, 2015 Interest decrease of 5% Interest decrease of 10% Absolute interest decrease of 2% Long-term loans to investee companies accounted by the equity method (including current maturities)* (5) (2) (1) Current investments, not including derivatives (122) (5) (3) 1, Bonds (including maturities) 1, (19,790) (177) (359) (1,532) Loans from banks (including maturities) (3,238) (31) (61) (255) Other financial liabilities (including maturities) (547) (4) (9) (51) Derivative embedded in nonrecourse loan (1) Total 1, (22,291) (208) (423) (1,713) * The repayment dates of the loans have not yet been determined. ** Includes principal and interest which were paid in January 2016 and whose ex date passed before the date of the statement of financial position as at December 31,

214 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 December 31, 2015 (NIS millions) (Cont.) Instrument Sensitivity test to changes in US Dollar exchange rate Profit (loss) from the change Exchange rate increase of 10% Exchange rate increase of 5% Fair value as at December 31, 2015 Profit (loss) from the change Exchange rate decrease of 5% Exchange rate decrease of 10% Long-term loans to investee companies accounted by the equity method (including current maturities) (9) (17) Deposits and other long-term 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 (7) (15) Short-term loans and deposits (13) (27) Cash and cash equivalents (25) (50) Loans from banks (including current maturities) (201) (100) (2,005) Hybrid financial instrument in respect of nonrecourse loan** (279) (140) (2,791) Trade payables, other payables and credit balances (51) (25) (507) Other current financial liabilities (2) (1) (17) 1 2 USD forward Not recognized as accounting hedge (5) (10) Dollar options for hedging purposes - not recognized as accounting hedge Call - Long * - - Dollar options for hedging purposes - not recognized as accounting hedge Put - Long Total (387) (194) (3,979) * Amount lower than NIS 1 million. ** see Note 3.H.4.B to the financial statements. Instrument Sensitivity test to changes in the CPI Profit (loss) from the change CPI CPI increase increase of of 2% 1% Fair value as at December 31, 2015 Profit (loss) from the change CPI decrease of 1% CPI decrease of 2% CPI forward - not recognized as accounting hedge (50) (20) (40) Swap - Not recognized as accounting hedge (1) Total (47) (20) (41) * For details regarding the possible effect of changes in the Consumer Price Index on the results of the Company s operations, see Note 19 D to the financial statements. Sensitivity test to changes in the prices of marketable securities on Israeli and foreign stock exchanges Fair value as at December Instrument Profit (loss) from the change 31, 2015 Profit (loss) from the change Rate Rate increase of 10% Rate increase of 5% decrease of 5% Rate decrease of 10% Investment in marketable securities ,268* (163) (327) * Including an investment in the amount of NIS 1,445 million in Clal Holdings Insurance Enterprises, which is measured at fair value through prof and loss, and which is presented in the Company s financial statements under held-for-sale assets. 46

215 Information regarding the Company s bonds Presented below is a table specifying the Company s series of bonds Summary of data regarding bonds (1), NIS millions, as at December 31, 2016 Annex B - Financial Position and Financing Sources Series Date of original issuance G (4)(6)(7)(9)(10) 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 December 31, 2016 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 self-purchases (5) (17.6) (5.2) (6.4) (0.2) (6.5) Yes (6.2) 4.50% 10/06/ /06/ /06 CPI Total Series G less selfpurchases Yes % 10/06/ /06/ /06 CPI I (6)(9) 19/12/ /06/2007* 30/03/2016* Total Series I 1, , , ,287.4 Yes 1, % 18/12/ /12/2025 Total Series I self-purchases (5) (106.9) (106.9) (127.5) (0.3) (128.8) Yes (97.5) 4.95% 18/12/ /12/2025 Total Series I less selfpurchases 1, , ,158.6 Yes % 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. IDB Development Corporation Ltd. 47

216 Annex B - Financial Position and Financing Sources (Cont.) Information regarding the Company s bonds (Cont.) Summary of data regarding bonds (1), NIS millions, as at December 31, 2016 (Cont.) Series Date of original issuance Par value on the issuance date J (6)(8)(9) 24/06/ /08/2009* Outstanding par value balance Outstanding linked par value balance Amount of interest accrued on the books Total Series J Total Series J selfpurchases (5) Total Series J less selfpurchases Total Series K (11) Original issuance date: August 3, 2016) Total Series L (12) (Original issuance date: November 30, 2016) (14.4) (4.1) (4.1) - (4.1) Book value of the bond balance as at December 31, 2016 Principal payment dates (3) Value on Interest Material the stock rate series (2) exchange (fixed) From To Yes Yes Interest payment dates Linkage terms % 10/12/ /12/ /12 Unlinked (4.0) 6.60% 10/12/ /12/ /12 Unlinked Yes % 10/12/ /12/ /12 Unlinked No % Yes % Total 2, , ,497.6 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 CPI 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: * An extension was made to the aforementioned series on this dates. The data in the table refer to the entire series, after its extensions. IDB Development Corporation Ltd. 48

217 Annex B - Financial Position and Financing Sources (Cont.) Information regarding the Company s bonds (Cont.) Summary of data regarding bonds (1), NIS millions, as at December 31, 2016 (Cont.) Remarks: (1) According to the Company s position, as at December 31, 2016, 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. The trustee for the Company s bonds (Series I) has claims in connection with the Company s financial position, and in May 2016, it also demanded that the Company immediately repay to the bondholders (Series I) the entire unpaid balance of the bonds, and submitted an application to liquidate the Company. On July 18, 2016, after having withdrawn its demand, a ruling was given in which the Court accepted the consensus motion which was filed by the Trustee for the striking of the motion to liquidate. For additional details, see Note 14.H.(1)-(3) to the financial statements. (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) Self-purchases 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 May-June (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 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) For details regarding the resolution of the meeting of bondholders (Series I) in connection with a demand for the immediate repayment of the Company s entire debt towards the bondholders, subject to terms (immediate report dated April 21, 2016, reference number ), and additionally, the Company s position which rejects that resolution (immediate report dated April 27, 2016, reference number ), and additionally, the announcement of the trustee for the bondholders (Series I) dated May 8, 2016, regarding its demand that the Company immediately repay to the bondholders (Series I) the entire unpaid balance of the bonds (immediate report dated May 9, 2016, reference number ), and regarding the Court s decision from July 18, 2016 to strike by agreement the motion to liquidate (immediate report dated July 18, 2016, reference number ), and for additional details in connection with the correspondence between the trustee for the bondholders (Series I) in connection with the foregoing, see Note 14.H.(1)-(3) to the financial statements. (10) On July 4, 2016, the trustee for the Company s bonds (Series G) notified the Company that in light of the legal proceedings which are being conducted against the Company, as initiated by the Company s bondholders (Series I), and on the other hand, the objection of the bondholders (Series G) to those proceedings, and the Company s announcement regarding its intention to issue new bonds secured by pledges, there is a concern that circumstances may arise which create a contradiction between the activities of the trustee, in its function as the trustee for the bonds (Series I), and therefore, for the sake of caution, it announces the expiration of its tenure as the trustee for the Company s bondholders (Series I). On July 11, 2016, the trustee for the Company s bonds (Series G) announced the convention of a meeting of the Company s bondholders, the agenda of which will include approval of the appointment of Mishmeret Trust as the trustee for the Company s bondholders (Series G), instead of Hermetic Trust, in a manner whereby Mishmeret Trust will be considered as the trustee for the bondholders (Series G) in accordance with the deed of trust, for all intents and purposes, and in a manner whereby Mishmeret Trust, as the alternative trustee, will have all of the same powers, authorities, obligations and other permissions as the current trustee, and will be able to act, in all senses, as if it had been appointed, from the outset, as the trustee for the Company s bondholders (Series G). On July 18, 2016, the general meeting of the Company s bondholders (Series G) approved the foregoing. On November 15, 2016, the Court approved the appointment of Mishmeret Trust as the trustee for the Company s bondholders (Series G). IDB Development Corporation Ltd. 49

218 Annex B - Financial Position and Financing Sources (Cont.) Information regarding the Company s bonds (Cont.) Summary of data regarding bonds (1), NIS millions, as at December 31, 2016 (Cont.) Remarks (cont.) (11) 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 financial statements. For details regarding Clal Insurance Enterprises Holdings, see also the routine reports of Clal Insurance Enterprises Holdings 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 financial statements. The Company has the right to replace the pledge on the shares of Clal Insurance Enterprises Holdings that are pledged in whole or in part, with cash to be deposited in a trust account and/or by an autonomous bank guarantees and the Company will be entitled to sell the shares of Clal Insurance Enterpreses Holdings that are pledged, in whole or in part, at any time. In the letter which was sent by the trustee for the Company s bonds (Series I) to the Company in October 2016, the trustee for the bonds (Series I) requested certain information and a certificate from a corporate officer in connection with the early repayment of the bonds (Series K). The Company does not believe that the bondholders (Series I) are entitled to receive such information and a certificate from a corporate officer in the Company, and accordingly, rejected the trustee s request. (12) On November 30, 2016, the Company issued bonds (Series L), secured by a pledge on part of the Company s holding in DIC. For details, see Note 14.C.(5) to the financial statements. The Company has the right to replace the pledge on the shares of DIC that are pledged in whole or in part, with cash to be deposited in a trust account and/or by autonomous bank guarantees and the Company will be entitled to sell the shares of DIC that are pledged, in whole or in part, at any time. (13) On February 16, 2017, subsequent to the date of the statement of financial position, the Company issued bonds (Series M), secured by a pledge of the right to receive any cash proceeds deriving from the sale of shares of Clal Insurance Enterprises Holdings. For details, see Note 14.C.(6) to the financial statements. (14) The Company does not have the right of early redemption with respect to the bonds, excluding Series K, Series L and Series M. bonds. IDB Development Corporation Ltd. 50

219 Details regarding bond ratings Annex B - Financial Position and Financing Sources (Cont.) Series Name of rating company Rating As at December 31, 2016 Rating As at March 22, 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 March 22, ; ; ; G Maalot CCC BB AA AA AA A+ A- BBB+ BB B CC D BB BB B CCC BB I Maalot CCC BB AA AA AA A+ A- BBB+ BB B CC D BB BB B CCC CCC BB J Maalot CCC BB AA AA A+ A- BBB+ BB B CC D BB BB B CCC BB On January 11, 2016, Maalot announced a reduction of the rating given for the Company and its bonds, to a rating of CCC, negative rating outlook. On March 29, 2016, Maalot announced the provision of a rating of CCC, negative rating outlook, for the issuance of bonds (Series I), at a total scope of up to NIS 200 million par value, within the framework of the completion of the amendment to the debt settlement. For additional details, see Note 14.D. to the financial statements. On February 26, 2017, subsequent to the date of the statement of financial position, Maalot 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, is attached as Annex E to the Board of Directors report. IDB Development Corporation Ltd. 51

220 Annex C - The Corporation s Financing Details regarding loans from banking corporations and financial institutions which have not yet been fully repaid As at December 31, 2016 (A) (B) (C) (D) (E) (F) Loan provider Banking Corporation A Banking Corporation A Banking Corporation A Banking Corporation B Financial institution A Financial institution B Loan acceptance date Original loan amount, NIS in millions Currency type Loan balance in the books as of December 31, 2016, NIS millions Interest rate (annual) 3/ NIS 84.0 P+1.3% 9/ NIS 84.0 P+1.3% 3/ NIS 84.0 P+1.3% 6/ NIS 67.5 P+1.0% 4/ NIS 50.2 P+0.65% 5/ NIS % Principal payment dates One-time, March 2017 One-time, September 2017 One-time, March 2018 Semiannual, January and July (Beginning in January 2012) Semi-annual - May and November (beginning in May 2013) March (NIS 50 million, linked), March (NIS 100 million, linked) Interest payment dates Semi-annual - March and September (beginning in September 2014) Semi-annual - March and September (beginning in March 2015) Semi-annual - March and September (beginning in September 2015) Semi-annual, January and July (Beginning in January 2012) Semi-annual - May and November (beginning in November 2011) Quarterly: March, June, September and December (beginning in June 2012) Loan conclusion date Linkage terms Restrictions and covenants Restrictions and financial covenants, and results of their calculation (1) Date of the Company s evaluation 3/2017 (5) Prime (1) Quarterly 9/2017 (5) Prime (1) Quarterly 3/2018 (5) Prime (1) Quarterly 1/2019 (5) Prime (1) Quarterly 11/2019 (4) Prime (1) Quarterly 3/2018 CPI (3) The Company s right to early repayment Subject to 30 days advance notice Subject to 30 days advance notice Subject to 30 days advance notice Subject to 30 days advance notice Subject to 14 days advance notice, and subject to an early repayment fee Subject to 10 days advance notice, and subject to an early repayment fee Cross Acceleration (2) Existing Existing Existing Existing Existing Existing Material changes and amendments See section of the Board of Directors Report, and Note 14.C and E to the financial statements. IDB Development Corporation Ltd. 52

221 (1) For details regarding grounds for requiring immediate repayment in the Company s financing agreements, and possible claims by lending corporations on the matter, and regarding financial covenants and the results of their calculation, see Notes 14.C. and E. to the financial statements and section of the board of directors report. (2) The lender is entitled to require the immediate repayment of the loan in certain cases in which the Company has not paid its other debts and/or in cases where the Company will be required by any of its other creditors to repay the Company s debts towards those creditors before their maturity dates. (3) This loan was secured by pledges in favor of the aforementioned lender from the Menorah Group. In March 2017, the loan was repaid through an early repayment. For additional details in connection with the developments regarding the aforementioned loan, see Note 14.C.(1) to the annual financial statements. (4) For details regarding amendments to the loan agreement during the reporting period and subsequent to the date of the statement of financial position, See Note 14.C.(2) to the financial statements. (5) For details regarding amendments to loan agreements with banking corporations subsequent to the date of the statement of financial position, See Note 14.C.(7)-(8) to the financial statements. As at December 31, 2016, member companies in the IDB Tourism Group have outstanding bank loans in the total amount of NIS 170 million. These loans bear interest in the range between 3% and 5%. IDB Development Corporation Ltd. 53

222 Annex D - Disclosure Regarding Professional Fees of Auditors Name of company Name of accounting firm Professional fees (NIS thousands) Work hours Professional fees (NIS thousands) With respect With respect to audit and to audit and tax services Other Audit and Other tax services Other * services tax services services * services Work hours Audit and tax services Other services The Company and its wholly owned companies Somekh Chaikin 488-3, , Kesselman & Kesselman 384-4, IDBG Kost Forer Gabbay & Kasierer 577-1, ,219 - Discount Investment and its wholly owned companies Somekh Chaikin 788-2, ,960 - Kesselman & Kesselman 351-3, Material subsidiaries: Property & Building Corporation Ltd. and subsidiaries and its material subsidiaries Somekh Chaikin 1, , , , Kesselman & Kesselman 1,046-6, Kost Forer Gabbay & Kasierer ,393 - Ezra Shemesh , Ziv Haft , ,560 - Cellcom Israel Ltd. and its material subsidiary Shufersal Ltd. and its material subsidiaries Somekh Chaikin 1,377-7,200-2,580-12,116 - Kesselman & Kesselman 1,360-7, Somekh Chaikin ,715 1,397 1, , Kesselman & Kesselman 625-4,687 - IDB Development Corporation Ltd.

223 Annex D - Disclosure Regarding Professional Fees of Auditors (cont.) Name of company Name of accounting firm Professional fees (NIS thousands) With respect to audit and tax Other services * services Work hours Professional fees (NIS thousands) With respect to Audit and audit and tax Other tax services Other services services * services Audit and tax services Work hours Other services Clal Holdings Insurance Enterprises Clal Insurance and subsidiaries Clal Holdings Insurance Agencies and subsidiaries Other companies IDB Tourism and its wholly owned headquarters companies Somekh Chaikin Kost Forer Gabbay & Kasierer Somekh Chaikin 2, ,667 3,278 2,169 1,090 11,347 2,955 Kost Forer Gabbay & Kasierer 2, ,191 1,940 1, ,713 2,669 Kost Forer Gabbay & Kasierer Somekh Chaikin Somekh Chaikin Kost Forer Gabbay & Kasierer Somekh Chaikin Kost Forer Gabbay & Kasierer 1, ,200 1, ,153 1,494 Certified Public Accountants in Germany The Professional fees of auditors of the Company for audit services to the Company are determined on the basis of actual hours reported, and are approved by the board of directors. In 2015, Somekh Chaiken served as public auditors of the Company. In 2016, in addition to Somekh Chaiken, the General Meeting approved the appointment of Kessleman and Kessleman as public auditors of the Company.. * * Audit services - professional fees for audit services, services associated with auditing and tax services. IDB Development Corporation Ltd.

224 Annex E Details Regarding Economic Papers and Valuations in Accordance with Regulation 8B of the Securities Regulations (Periodic and Immediate Reports), IDB Development Corporation Ltd.

225 Details on an economic paper with respect to an impairment test of Cellcom s goodwill, as at June 30, 2016 [Regulation 49(A) of the Securities Regulations (Periodic and Immediate Reports), ] The following are the main details specified in the foregoing economic paper: A. Subject of the valuation - Cellcom s value in use (for the purpose of an impairment test with respect to the goodwill attributed to Cellcom in the Company s financial statements). B. Date of the paper - June 30, 2016; C. Goodwill attributed to Cellcom in the Company s financial statements as at June 30, NIS 2,135 million. The value of the assets attributed to Cellcom s activity, less the liabilities attributed to Cellcom s activity (including the balances of deferred taxes attributed to the excess costs which were created upon the acquisition of Cellcom, against which DIC recorded goodwill) in the financial statements of DIC and the Company as at June 30, 2016, is lower than the middle of the range determined in the aforementioned economic paper, and therefore, no impairment was recognized in respect of the aforementioned goodwill. D. Identity and details of the valuer - BDO Ziv Haft Consulting and Management Ltd. (for additional details, see the annex to the economic paper). There is no dependence between the valuer and DIC, the orderer of the paper. The valuer received an undertaking to indemnify regarding payments which the valuer may incur as a result of legal proceedings which could be initiated against it, if any, in connection with this economic paper, beyond an amount equal to three times the fees, save in the event that the valuer has performed any malicious action in connection with the opinion. E. Valuation model used by the valuer - discounted cash flows method (DCF). F. Assumptions used to prepare the paper: 1. Annual real discount rate of 8.5% after tax (10.8% before tax); 2. Long-term growth rate of 1.5%; 3. Long-term market share of 24%; 4. ARPU in the representative year - NIS 68 (for details regarding the calculation of ARPU, see also page 52 of the economic paper). G. From the date of this economic paper (June 30, 2016) until the date of approval of the report, nine months (in other words, more than 90 days) have passed. After an evaluation conducted by DIC regarding the need to prepare a new economic paper on the subject of an impairment test regarding the goodwill attributed to Cellcom as at December 31, 2016, DIC and the Company reached the conclusion, in consideration of Cellcom s results in the last six months of 2016, as compared with those included in the aforementioned economic paper, and the increase in the market value of Cellcom from the date of preparation of the said economic paper, that no cautionary indicators exist in respect of the value of DIC s investment in Cellcom, and therefore, no new economic paper on the subject is required as at December 31, IDB Development Corporation Ltd.

226 Details on an economic paper dated June 30, 2016, regarding an economic valuation of a commercial and office project in Las Vegas, USA, which is owned by Great Wash Park, LLC ( GW ), an investee company of IDBG which is held by Property & Building, which were received by the Company and by Property & Building: [Regulation 49(a) of the Reports Regulations] The aforementioned valuation is attached to the Company s financial statements by way of reference to the financial statements of Property & Building. See also Note 6.B.(3) to the financial statements. Presented below are the main details regarding the economic paper: A. Identity of the subject under valuation - the Tivoli project in Las Vegas. B. Date of the valuation - June 30, 2016; C. Value of the subject of the valuation in the books of the associate company Great Wash Park LLC (GW) as at June 30, approximately USD 306 million. D. Value of subject as determined in the valuation - NIS 295 million. As a result of the above, the Company and Property & Building recorded an amortization in the amount of NIS 21 million each in the second quarter of The total amortization was included in the item for decrease in fair value of investment property. The Company s share in the aforementioned amortization, as of the valuation date, in the Company s consolidated financial statements, was NIS 33 million; E. Identity and details of valuer - Marquette Advisors (for additional details, see pages of the valuation). There is no dependence between the valuer and the companies who ordered the valuations. F. Valuation model used by the valuer - discounted cash flows (DCF); G. Assumptions used to perform the valuation: - Annual discount rates: In respect of net revenues* from commerce / offices 8.75% In respect of hotel revenues 10.0% * Less construction costs. - Terminal cap rate upon realization of the asset: In respect of revenues from commerce / offices 6.25% In respect of hotel revenues 7.25% IDB Development Corporation Ltd.

227 Details on the economic paper dated September 30, 2016, regarding the valuation of the embedded derivative and the book value of the host contract in the non-recourse loan which was received by Koor within the framework of the transaction involving the merger of Adama with Chemchina (the Non- Recourse Loan ) and regarding the valuation of Adama shares [Regulation 49(A) of the Securities Regulations]: The following are details regarding the valuation: A. Subjects of the valuation - calculation regarding the value of the investment in Adama shares; The value of the embedded derivative and the book value of the host contract in the non-recourse loan. B. Date of the valuation - September 30, 2016; C. Value of the subject of the valuation in the Company s books shortly before the valuation - the value of the investment in Adama shares as at September 30, 2016, the value of the embedded derivative and the book value of the host contract as at June 30, 2016, are NIS 2,820 million, a negative sum of NIS 2 million, and NIS 751 million, respectively; D. Value of the subject of the valuation as determined in the valuation - the value of the investment in Adama shares as at September 30, 2016 (after deducting the component regarding the non-marketability of the shares and the absence of a control premium) is USD 784 million; the value of the embedded derivative as at September 30, 2016 is USD 1 million; and the book value of the host contract as at September 30, 2016 is USD 784 million; E. Identity and details of the valuer - Deloitte Economic Consulting Services (1986) Ltd. The preparer of the paper on behalf of the valuer has experience of over 20 years in the field of economic and financial consulting and in the performance of valuations, including works for accounting purposes. There is no dependence between the valuer and the orderer of the work - DIC. The contractual agreement with the valuer includes an undertaking by DIC to indemnify the valuer with respect to any amount which the valuer may incur in a ruling given in favor of a third party, as well as any reasonable direct legal expenses which it may incur in connection with the valuation, above an amount equal to 3 times the consideration which is paid to the valuer as part of the engagement with it, save in the event that the valuer has acted with gross negligence or malice; F. Valuation model used by the valuer - 1. The value of the embedded derivative is determined according to the binomial options pricing model, which is derived from the Black & Scholes formula, in consideration of estimates and parameters which are based on predicted market data on the valuation date. Assumptions used to perform the valuation: A. Value of the underlying asset (Adama shares held by Koor) as at the valuation date - USD 784 million (based on the calculation of the value of Adama shares, as specified in section 3 below). This value includes taking into account the absence of a control premium and a discount with respect to the share s non-marketability component; B. Exercise addition for the option - the loan principal with the addition of the interest which is expected to accrue according to the terms of the loan and the base interest at each point involving a decision to either exercise the option or to let it expire. C. Standard deviation of the underlying asset - approximately 37.7% per year; D. Realization period - approximately 2 years; E. Risk-free USD interest rate - approximately 0.77%; F. Dividend - no dividend distributions are expected in 2016; IDB Development Corporation Ltd.

228 Details on the economic paper dated September 30, 2016, regarding the valuation of the embedded derivative and the book value of the host contract in the non-recourse loan received by Koor within the framework of the transaction involving the merger of Adama with Chemchina (the Non-Recourse Loan ) and regarding the valuation of Adama shares [Regulation 49(A) of the Securities Regulations]: (Cont.) Valuation model used by the valuer (Cont.) G. Effect of non-marketability - fixed discount rate of approximately 11.5% of the value of the underlying asset. 2. The book value of the host contract as at September 30, 2016 was determined based on the future value of Adama shares, discounted by the effective interest rate which was determined on the date of initial separation (a rate of 12%, which was determined on the completion date of the Adama - ChemChina transaction). The future value of Adama shares was calculated by discounting the value of the underlying asset, as specified above (after deducting the non-marketability component of the shares and the absence of a control premium, at rates of approximately 11.5% and approximately 4.95%, respectively), until the transfer date of the shares (or alternatively, the repayment date of the loan), based on the return on equity rate as at September 30, 2016 (approximately 12.93%). Based on the findings of the binomial model, it was estimated that the share transfer date (and alternatively, the repayment date of the loan) is in the immediate term from the estimation date. 3. The value of Adama shares as at September 30, 2016 was calculated based on the discounted cash flow forecast which was included in the valuation as at December 31, 2015 and the accrual of returns with respect to it for the period of nine months, as calculated in accordance with the weighted average cost of capital (WACC) on the assets (which was updated as at September 30, 2016 (approximately 10.1%), less Adama s net operational flows in the first nine months of 2016, less Adama s net financial liabilities as at September 30, 2016, and plus the surplus assets as at that date. From the value which was determined above, the share s non-marketability component was discounted at a rate of 11.5%, while the absence of control component was discounted at a rate of 4.95%. The valuation of Adama shares as at the above date did not take into account the transaction involving the sale of all of Koor s holdings in Adama to ChemChina, which was completed in November 2016, as specified in Note 3.H.4.B to the financial statements. IDB Development Corporation Ltd.

229 IDB Development Corporation Ltd. Periodic Report for 2016 Table of Contents: Page Auditor's Report 1-2 Consolidated Statements of Financial Position 3-4 Consolidated Statements of Income 5 Consolidated Statements of Comprehensive Income 6 Statements of Changes in Equity 7-9 Consolidated Statements of Cash Flows Notes to the Financial Statements Note 1-General Note 2- Principles of the Accounting Policy Note 3- Investments in investees Note 4- Other investments 79 Note 5- Fixed Assets Note 6- Investment Property Note 7- Trade Receivables 88 Note 8- Intangible Assets Note 9- Accounts Receivable and Debit Balances 92 Note 10- Inventory and inventory of buildings for sale 93 Note 11- Assets and liabilities classified as held-for-sale 94 Note 12- Cash and Cash Equivalents 94 Note 13- Equity Note 14- Bonds, Bank Loans and other Financial Liabilities at Amortized Cost Note 15- Provisions Note 16- Employee benefits 131 Note 17- Other Payables 132 Note 18- Trade Payables 132 Note 19- Financial Instruments Note 20- Guarantees and charges Note 21- Contingent Liabilities, Commitments and Lawsuits Note 22- Sales and services 175 Note 23- The Group's share of the profits (losses) of investee companies that are treated under the equity method of accounting, net Note 24- Profit (loss) on disposal and the writing down of investments and assets, and dividends 176 Note 25- Increase in the fair value of investment property, net 177 Note 26- Financing income and expenses IDB Development Corporation Ltd.

230 Page Note 27- Cost of sales and services 179 Note 28- Sales and marketing expenses 179 Note 29- General and administrative expenses 180 Note 30- Taxes on income Note 31- Related and Interested Parties Note 32- Segments Note 33- Events subsequent the date of the statement of financial position Appendix to the Financial Statements Appended documents: Financial work regarding an annual review of impairment of goodwill attributed to Cellcom from June is included in these financial statements by way of reference to said work, which is attached to the financial statements of Discount Investments as of June 30, 2016 that was published on August 30, 2016 (reference No ). A valuation as at September 30, 2016 of a commerce and offices project, Great Wash Park, LLC in Las Vegas, which is partly held by the Company and Property & Building Corporation, Ltd. ("Property & Building"), is included in these financial statements by way of reference to the said valuation which is attached to the financial statements of Property & Building as at 30 June, 2016, that was submitted by it to the Securities Authority and published on August 29, 2016 (ref. no: ). 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 March 22, 2017 (reference No ). IDB Development Corporation Ltd.

231 Auditors Report to the Shareholders of IDB Development Corporation Ltd. We have audited the attached consolidated statements of financial position of IDB Development Corporation Ltd. (hereinafter: the "Company") as at December 31, 2016, as well as the consolidated statements of income, comprehensive income, changes in equity and cash flows for the year then ended. These financial statements are the responsibility of the Company s board of directors and management. Our responsibility is to express an opinion on these financial statements, based on our audit. The consolidated financial statements of the Company as of December 31, 2015 and for each of the two years the last of which ended on that date were audited by Somek Chaikin, CPA only, whose report of March 29, 2016 contained an unqualified opinion, and reference to significant doubts regarding the continued existence of the Company as a going concern. Kesselman & Kesselman, CPA were appointed as joint auditors of the Company during Accordingly, their opinion refers to the consolidated financial statemens for 2016 only. We did not audit the financial statements of consolidated subsidiaries, whose assets as included in the consolidation constitute approx. 3% of total consolidated assets as at December 31, 2016, and whose revenues as included in the consolidation constitute approx. 3% of total consolidated income for the year then ended. In addition, we have not audited the financial statements of investee companies accounted by the equity method, the investment in which amounted to approx. NIS 358 million and where the Group's share in their losses amounted to approx. NIS 329 million for the year then ended. In addition, we did not audit the financial statements of a subsidiary which was included in the financial statements as discontinued operations and the total assets with respect to it as of December 31, 2016 are NIS 659 million, and a loss from discontinued operations after tax in respect thereof is NIS 74 million for the year then ended. The financial statements of those companies were audited by other auditors, whose reports were presented to us, and our opinion, insofar as it refers to the amounts included for those companies, is based on the reports provided by the other auditors. The financial statements of certain companies that were consolidated or accounted by the equity method or included in profit (loss) from discontinued operations after tax were audited by Kesselman & Kesselman or by Somek Chaikin separately. We have conducted our audit in accordance with generally accepted accounting principles in Israel, including standards set forth in the Auditors Regulations (Auditor s Mode of Performance), According to these standards, we are required to plan the audit and perform it in order to obtain a reasonable measure of assurance regarding whether the financial statements are free of any material misrepresentation. Performing an audit includes testing, on a sample basis, the evidence provided to support the amounts and information presented in the financial statements. An audit also includes performing an evaluation of the accounting principles used and of the significant estimates made by the Company s board of directors and management, as well as an evaluation of the overall adequacy of presentation in the financial statements. We believe that our audit, and the reports provided by the other auditors, provide a reasonable basis for our opinion. In our opinion, based on our audit and on the reports provided by other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and of its consolidated companies as at December 31, 2016, and the results of their business operations, changes in equity and cash flows for the year then ended, in accordance with IFRS and the directives of the Securities Regulations (Yearly Financial Statements),

232 Auditors Report to the Shareholders of IDB Development Corporation Ltd. (Cont d.) Without qualifying our aforementioned opinion, we hereby draw the reader s attention to the provisions of Note 1.B. to the financial statements, which inter alia, regarding the Company s financial position and the management's plans with respect to the Company's significant liabilities to the bond holders, which are expected to be repaid at the end of In accordance with that stated in the Note, the realization of the management's plans will be affected 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 holding in Clal Holdings Insurance Enterprises, in consideration of the outline which was determined by the Commissioner for the sale of the control of Clal Holdings Insurance Enterprises and the requirements of the Law 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 it will be able to settle its commitments on time and continue with its operations. We have also audited, in accordance with Auditing Standard 104 of the Institute of Certified Public. Accountants in Israel Audit of Internal Control Components over Financial Reporting" and its amendments, the components of the Company s internal control over financial reporting as of December 31, 2016, and our report dated March 22, 2017 expressed an unqualified opinion on the effectiveness of such components. KPMG Somek Chaikin Kesselman & Kesselman PwC March 22,