AFRICA ISRAEL INVESTMENTS LTD.

Transcription

1 AFRICA ISRAEL INVESTMENTS LTD. Report of the Board of Directors for the Period January September 2011 November 28, 2011 Part A Explanations of the Board of Directors regarding the Company s Business Position 1. General Africa Israel Investments Ltd. (hereinafter the Company ) is an investment company operating in various activity sectors, mainly real estate initiations and synergistically-related areas, in a number of geographical regions, primarily, the Commonwealth of Nations, Eastern Europe, the United States and Israel. On January 20, 2011, the Company made early repayment of the full amount of the debentures (Series Y), in exchange for an aggregate consideration of about NIS 1.08 billion. On April 28, 2011, a notice was received on behalf of the Company s controlling shareholder, whereby pursuant to the terms of the arrangement, the controlling shareholder wishes to execute the first investment increment (as defined in the arrangement), in the amount of about NIS 102 million, by means of a rights issuance to all of the Company s shareholders. On May 8, 2011, the Company published a shelf prospectus and an issuance prospectus by means of rights, whereby the Company offered to its shareholders up to 13,159,805 of the Company s ordinary shares of NIS 0.1 par value each at a price of NIS 16.5 per share, by means of rights. As part of the rights issuance, rights were utilized for acquisition of 13,068,538 of the Company s shares and the aggregate (gross) proceeds received in respect thereto amounted to about NIS million. As part of the rights issuance as stated, the Company s controlling shareholder utilized all the rights to which he was entitled as part of the rights issuance pursuant to the prospectus based on the rate of his holdings in the Company s issued share capital, and acquired accordingly 6,215, of the Company s ordinary shares, in exchange for about NIS million. During the period of the report, the Group completed, among others, the following transactions The Company completed acquisition of about 9.7% of the capital and voting rights in AFI Development. As the date the statement of financial position, the Company holds about 64% of capital and voting rights in AFI Development. In January 2011, Negev Ceramics completed acquisition of 75% of the issued and paid-up share capital of Orgal A.L.P. (2007) Ltd. and in May 2011 Negev Ceramics completed acquisition of 100% of the issued and paid-up share capital of Via Arkadia Home Design Ltd. and H.C.J.J. Home Products Marketing Ltd. In March 2011, Africa Industries acquired an additional 6.59% of the shares of Negev Ceramics Ltd. for a consideration of about NIS 20 million. In June 2011, Danya Cebus completed a transaction for sale of 75% of its holdings in Netivei Hayovel Ltd. for a consideration of about NIS million. In July 2011, AFI USA completed a transaction for sale of rights of AFI USA (about 50%) in part of the areas in the New York Times Building in the United States. A

2 1. General (Cont.) In August 2011, Africa Industries completed a transaction for acquisition of the activities of Jacoby-Barzel Lebiton Ltd. for a consideration of about NIS 91 million. In September 2011, Africa Properties completed sale of rights of its rights (about 50%) in the Flora Shopping Mall in the Czech Republic. AFI USA signed an agreement for sale of all its rights in the 88 Leonard property company in New York, in the United States. In September 2011, the first stage of the transaction was completed. In September 2011, the subsidiary of AFI Development completed an undertaking in a transaction for acquisition of rights of the City of Moscow of about 25% in the AFIMALL shopping center in Moscow, for a consideration of about $157 million (including VAT). As a result of the transaction, AFI Development recorded a pre-tax gain of about $112 million (about $90 million after taxes). In the third quarter of 2011, the Company executed an acquisition of its own debentures (Series Z) in an aggregate amount of about NIS 91 million. In October 2011, AFI USA signed an agreement for sale of all its holdings (95%) in the Clock Tower Building in New York for a consideration of US$165 million. In October 2011, Africa Residences executed an acquisition of its own shares constituting about 2.46% of its issued share capital for a consideration of about NIS 14 million. Set forth below is a table summarizing the Company s main results as they are presented in its consolidated financial statements (in millions of NIS): Nine Months Three Months Year Ended Ended Ended September 30 September 30 December Operating income before financing 1, ,178 Financing expenses (663) (543) (363) (1,683) (856) Income from Company s debt arrangement with the debenture holders 1,455 1,455 1,455 Income for the period 486 1, ,834 Income attributable to the owners of the Company 230 1, ,702 In the first nine months of 2011 the following revaluations/devaluations were recorded: In the first nine months of 2011, the Company recorded net revaluations in the amount of about NIS 712 million (about NIS 599 million was recorded in the third quarter of 2011) the increase stemmed mainly from revaluation in respect of an investment property in the amount of about NIS 690 million (about NIS 611 million was recorded in the third quarter of 2011), update of the provision for decline in value mainly in respect of a residential project in the United States, in the amount of about NIS 61 million (which was recorded in the third quarter of 2011), less a write down for decline in value in the amount of about NIS 20 million deriving from recording of a provision for loss in respect of an investment in a jointly-controlled company presented based on the equity method of accounting in the first quarter of B

3 1. General (Cont.) In the first nine months of 2010 the following revaluations/devaluations were recorded: In the first nine months of 2010, the Company recorded write downs to fair value in the gross amount of about NIS 165 million (income of about NIS 27 million was recorded in the third quarter of 2010), mainly in respect of write downs of investment property under construction and property, plant and equipment in Russia. The increase in value in the third quarter stems mainly from positive revaluation of an investment property in Romania and update of the provision for decline in value of a residential project in the United States. 2. Group s Areas Activities The Company, through its subsidiary and associated companies (hereinafter the Group ), is engaged in holdings and investments in wide variety of areas in and outside of Israel. Most of Group s activities involve initiation and construction of real estate projects intended for residential, industrial, office and commercial use, where after the construction stage with respect to non-residential projects, the Group focuses on rental and operation of these buildings. The Group is active mainly in the Commonwealth of Nations (mainly Russia), Eastern and Central Europe, the United States and Israel. In addition, the Group has activities in areas synergistically related to its real estate activities, such as, contracting and infrastructures, and steel and ceramics. The Company has five public subsidiaries traded on the Tel-Aviv Stock Exchange, one public subsidiary traded on a stock exchange in London and one associated company traded on a stock exchange in London. The Group has nine areas of activities that are reported as main segments in the Company s financial statements, as detailed below: A. Development of real estate in Israel. B. Rental properties in Israel. C. Development of real estate in Eastern and Central Europe. D. Development of real estate and rental properties in the United States. E. Development of real estate and rental properties in the Commonwealth of Nations. F. Construction contracting. G. Infrastructure contracting. H. Steel products. I. Ceramic products. In addition to the areas of activities detailed above, the Group is engaged in the hotels sector. This activity do not rise to the level of an activity segment. Furthermore, the Group has various other activities conducted through associated companies. C

4 2. Group s Areas Activities (Cont.) Set forth below is a table summarizing the rates of the Company s holdings in the Group s publicly-traded subsidiaries, as at November 24, 2011 (1) Name of Company Rate of Holdings (at November 24, 2011) Africa Development (AFID) 63.7% Africa Properties 56% Africa Industries (2) 76.6% Danya Cebus (3) 73% (1) (2) (3) In addition, as at the date of the statement of financial position the Company holds 3,673,889 shares of Alon USA Energy Inc. Africa Industries holds about 90% of the capital and voting rights in Negev Ceramics, a public company registered for trading on the Tel-Aviv Stock Exchange. Danya Cebus holds about 76.35% of the capital and voting rights in Africa Residences, a public company registered for trading on the Tel-Aviv Stock Exchange. 3. Analysis of the Financial Position 3.1 Set forth below is main data taken from the statement of financial position (in millions of NIS) September 30 December Total assets 25,332 26,403 Equity attributable to the Company s shareholders 4,309 3,533 Equity attributable to holders of rights not conferring control 4,213 4,508 Total equity 8,522 8,041 Property, plant and equipment Investment property 8,688 5,192 Investment property under construction 3,585 6,052 Real estate 1,805 1,640 Investments in investee companies 1,355 1,516 Loans to investee companies Long-term loans, investments and other debit balances Cash and cash equivalents 1,570 2,156 Assets held for sale 61 1,784 Other current assets 6,119 6,212 Long-term liabilities 10,780 10,217 Short-term credit from banking institutions and others 2,561 2,270 Debentures presented as part of current liabilities 204 1,277 Liabilities intended for realization 1 1,620 Other current liabilities 3,264 2,978 D

5 3. Analysis of the Financial Position (Cont.) 3.2 Liquidity The sources of the Company s liquidity are, mainly, dividends and debt repayments from the Group companies as well as taking out loans, floating debentures, sale of holdings in investee companies and issuance of share capital. The liquidity sources of the Group companies is cash deriving from, among other things, rental properties, sale of residential units, revenues from their areas of activities, realization and sales of properties and/or holdings in properties, raising/issuance of credit lines, long-term loans, debentures and share capital. Use of the said sources is for acquisition and development of properties and land, payment of liabilities, investments in associated companies, other long-term investments and payment of dividends. As at September 30, 2011, the liquid balances at the Group s disposal, including short-term investments, amounted to about NIS 2,066 million, compared with about NIS 2,772 million as at December 31, The decline in the liquid balances stems mainly from early repayment of the entire amount of the debentures (Series Y), in the total amount of about NIS 1.08 billion. As at November 24, 2011, the aggregate market value of the Company s holdings in the shares of its public subsidiaries was about NIS 2.2 billion. As part of the arrangement with the holders of its debentures, the Company recorded a lien on part of its holdings in Africa Properties (51%) and AFI Development (24.17%). The value of pledged holdings is about NIS 0.8 billion. 3.3 Current Assets The balance of the current assets as at September 30, 2011 was about NIS 7.7 billion, compared with about NIS 10.1 billion as at December 31, The decrease in the current assets in the period of the report stems mainly from a decrease in the Group s liquid balances due early repayment of the entire amount of the debentures (Series Y), as noted above, and from a decrease in the category assets held for sale, in the amount of about NIS 1,723 million, stemming from completion of the transaction for sale of 75% of the holdings of Danya Cebus in the issued and paid-up share capital of Netivei Hayovel. As at December 31, 2010, assets relating to these activities, in the amount of about NIS 1,519 million, were classified as assets intended for sale as part of the current assets category. 3.4 Investment Property and Investment Property under Construction A. The balance of the investment property as at September 30, 2011 was about NIS 8.7 billion, compared with about NIS 5.2 billion as at December 31, The increase in the period of the report derives primarily from: (i) (ii) Initial classification in the first quarter of 2011 from investment property under construction to investment property recorded in the financial statements of AFI Development with respect to the AFIMALL and Pablatzka projects in Moscow (in the amount of about NIS 2.86 billion) as a result of completion of these projects. Reduction due to completion of the first stage of a transaction for sale of the property of AFI USA Leonard 88 in New York, as a result of which the holding in the property company declined from control to joint control and, as a result, the property is no longer consolidated in the Company s books (the balance of the property as at December 31, 2010 was about NIS 758 million) due to an agreement signed in the period of the report. For details see Note 4(B)(1)(e) to the Company s financial statements as at September 30, E

6 3. Analysis of the Financial Position (Cont.) 3.4 Investment Property and Investment Property under Construction (Cont.) A. (Cont.) (iii) Additions due to revaluations in the amount of about NIS 690 million recorded in the period of the report (of which about NIS 611 million was recorded in the third quarter of 2011), mainly as a result of update of the valuations in the financial statements of the subsidiary, AFI Development (for details see Note 4B(2)e to the Company s financial statements as at September 30, 2011) and from income created as a result of the share of the City (25%) in the AFIMALL project in Moscow (for details see Note 4B(2)d to the Company s financial statements as at September 30, 2011) in the amount of about NIS 417 million (about US$112 million). B. The balance of the investment property under construction as at September 30, 2011 was about NIS 3.6 billion, compared with about NIS 6.1 billion as at December 31, The decline in the period of the report stems mainly from: reclassification of the AFIMALL and Pablatzka projects to the investment property category as detailed above (in the amount of about NIS 2.86 billion), which was recorded in the first quarter of Set forth below is a geographic breakdown of the Group s investment property and investment property under construction as at September 30, 2011: Investment Property Investment Property under Construction Israel 996,266 (11%) Israel 177,155 (5%) Europe 3,277,169 (38%) Europe 514,926 (14%) United States 104,678 (1%) United States 5,939 (0%) Russia 4,309,898 (50%) Russia 2,886,683 (81%) 3.5 Breakdown of the Group s Real Estate Properties 1 as the are Presented in the Company s Consolidated Statements of Financial Position as at September 30, 2011 (in NIS thousands): Commonwealth of Nations U.S. Europe Israel Lands 2 (real estate) 125, , ,992 Residential projects in progress 2 (inventory of buildings held for sale) 675, , ,433 1,025,595 Rental properties under construction 3 (investment property under construction) 2,891,407 5, , ,431 Rental properties 3 (investment property) 4,309, ,678 3,277, ,266 Total 7,876,484 1,158,166 5,034,319 2,904,284 1 Not including real estate included as part of property, plant and equipment (mainly in the hotels sector). 2 Presented for the most part at cost (except for cases of reduction below original cost). 3 Presented at fair value. F

7 3. Analysis of the Financial Position (Cont.) 3.6 Current Liabilities The balance of the current liabilities as at September 30, 2011 was about NIS 6 billion, compared with about NIS 8.1 billion as at December 31, The decrease in the current liabilities stems mainly from early repayment of the debentures (Series Y), for a consideration of about NIS 1.08 billion, which appeared in the financial statements as at December 31, 2010 as part of the current liabilities, and from a decrease in the category assets held for sale, in the amount of about NIS 1,619 million, stemming from completion of a transaction for sale of 75% of the holdings of Danya Cebus in the issued and paid-up share capital of Netivei Hayovel. As at December 31, 2010, liabilities relating to these activities were classified as liabilities intended for sale as part of the current liabilities category, in the amount of about NIS 1,541.9 million. 3.7 Equity Attributable to the Company s Shareholders The shareholders equity attributable to the Company s shareholders as at September 30, 2011 amounted to about NIS 4,309 million, compared with about NIS 3,533 million as at December 31, Set forth below are the main changes in the period of the report: Income in the period of the report of about NIS 230 million. Increase in the capital reserves (1) an increase of about NIS 197 million in the capital reserves category translation adjustments (adjustments deriving from translation of financial statements of foreign activities); (2) net capital reserve from transactions with holders of rights not conferring control (credit) in the amount of about NIS 151 million, reflecting mainly the difference between the consideration paid for the shares of AFI Development (see Note 10C to the Company s financial statements as at September 30, 2011) and the decrease in the rights not conferring control. Consideration, net, in the amount of about NIS 213 million, from an issuance of rights made by the Company in May As at September 30, 2011, the shareholders equity per share (including rights not conferring control) was about NIS 65.15, compared with about as at December 31, As at September 30, 2011, the shareholders equity per share (not including rights not conferring control) was about NIS 32.94, compared with about 30.0 as at December 31, Restatement of income (loss) per share The income per share data for the nine-month and three-month periods ended September 30, 2010 and for the year ended December 31, 2010 was restated due to issuance of the rights made by the Company up to the signing date of the statement of financial position see also Note 4(A)(5) to the financial statements as at September 30, G

8 3. Analysis of the Financial Position (Cont.) 3.8 Restatement of income (loss) per share (Cont.) The impact of the restatement on the basic and diluted income (loss) per share is as follows: For the nine-month period ended September 30, 2010 Impact As presented As of the in these previously retroactive financial reported application statements In NIS (Unaudited) Basic income per share (0.46) Diluted income per share (0.47) For the three-month period ended September 30, 2010 Impact As presented As of the in these previously retroactive financial reported application statements In NIS (Unaudited) Basic income per share Diluted income per share For the year ended December 31, 2010 Impact As presented As of the in these previously retroactive financial reported application statements In NIS (Audited) Basic income per share (0.59) Diluted income per share (0.59) H

9 4. Results of Business Operations 4.1 Set forth below are significant items from the statement of income (in NIS millions): For the Nine Months Ended For the Three Months Ended For the Year Ended September 30 September 30 December * * Income from construction and real estate transactions Realization of properties 102 (8) 102 (8) Update of provision for decline in value of inventory of land and buildings (1) Decrease in fair value of investment property under construction, net (9) (139) (10) (11) (20) Increase in fair value of investment property, net Income from real estate initiations 1, Income from rental and operation of properties Income from industry Income (loss) from other activities 1 (9) 1 (3) (11) Other income, net Income from associated companies, net Administrative and general expenses (209) (203) (77) (71) (297) Amortization of other assets and other expenses (98) (158) (42) (28) (255) Income from regular operations 1, ,178 Financing income 318 1, ,730 Financing expenses (981) (745) (425) (304) (1,131) Financing income (expenses), net (663) 911 (363) (228) 599 Taxes on income (287) (68) (203) (2) (156) Net income from continuing operations 409 1, ,621 Income from discontinued operations, net of tax Net income for the period 486 1, ,834 Allocated to: Holders of the Company s equity rights 230 1, ,702 Holders of rights not conferring control 256 (16) * Restated due to discontinuance of operations I

10 4. Results of Business Operations (Cont.) 4.1 Set forth below are significant items from the statement of income (in NIS millions) (Cont.) The Company s results may experience wide fluctuations between different reporting periods, mainly as a result of the timing of realizations made by the Company and the Group companies, from time to time, the timing of revaluations and write-downs of investment property and investment property under construction, and changes in the financing expenses (net) incurred by the Company and the Group companies, the scope of which is affected by the amount of the net debt, the debt s linkage channels and the net monetary assets and rate of change in the Consumer Price Index and the exchange rates of the various foreign currencies against the shekel in the periods reported In the first nine months of 2011, the Company recorded net revaluations in the amount of about NIS 712 million (about NIS 599 million was recorded in the third quarter of 2011) the increase stems mainly from revaluation of investment property, in the amount of about NIS 690 million (about NIS 611 million was recorded in the third quarter of 2011), update of the provision for decline in value mainly in respect of a residential project in the United States, in the amount of about NIS 61 million (which was recorded in the third quarter of 2011), less of a write down of about NIS 20 million deriving from recording a provision for loss in respect of a jointly-controlled company accounted for using the equity method of accounting recorded in the first quarter of In the first nine months of 2010, the Company recorded reductions to fair value in the amount of about NIS 165 million (gross) (about NIS 27 million was recorded in the third quarter of 2010) mainly in respect of investment property under construction and property, plant and equipment in Russia. The increase in value in the third quarter derives mainly from a positive revaluation of an investment property in Romania and update of the provision for decline in value of a residential project in the United States. 4.2 Income (loss) from real estate initiations The income (losses) from real estate initiations derive from the following sources: A. Income (losses) from sale of residential units. B. Sale of properties. C. Income (losses) from contracting work. D. Update of the provision for decline in value of the inventory of land and buildings. E. Income (losses) from increase (decrease) in the fair value of investment property, net. F. Income (losses) from increase (decrease) in the fair value of investment property under construction, net. J

11 4. Results of Business Operations (Cont.) 4.2 Income (loss) from real estate initiations (Cont.) Set forth below is a table summarizing the earnings from each of these sources (in NIS thousands): For the Nine Months Ended For the Three Months Ended For the Year Ended September 30 September 30 December Income from sale of residential units 179, ,922 75,259 35, ,276 Income (loss) on sale of properties 101,944 (7,790) 101,944 (7,790) Update of provision for decline in value of inventory of land and buildings 60,830 46,085 (1,348) 29,767 60,195 Income from increase in the fair value of investment property, net 690,043 6, ,464 7, ,242 Losses from change in the fair value of investment property under construction, net (9,134) (139,219) (10,674) (10,605) (20,290) Income from contracting work 18,394 67,816 10,749 15,973 80,488 Total income from initiations and real estate 1,042, , ,394 78, , Updates to fair value During the first nine months of 2011, the Company made updates to fair value. Set forth below are the main updates made: In the period of the report, a positive revaluation of an investment property under construction was recorded, in the amount of about NIS 22 million (of which about NIS 3 million was recorded in the third quarter of 2011). The amount stems from interim income accrued in Danya Cebus in respect of projects involving investment property under construction being performed for the Group A subsidiary operating in the United States recorded a restoration of value of inventories of land in the United States, in the amount of about NIS 14 million, in respect of Gowanus land. This update was recorded in the first quarter of 2011 as a result of receipt of an updated valuation for a number of land parcels and an indication provided by a transaction closed in the period of the report, with respect to a certain parcel A subsidiary operating in the United States recorded a restoration of value, in the amount of about NIS 91 million, in respect of the inventory of buildings relating to the Marquis project in the United States (of the above-mentioned amount about NIS 43 million was recorded in the third quarter of 2011). This update was recorded as a result of receipt of an updated valuation for the project. K

12 4. Results of Business Operations (Cont.) 4.3 Updates to fair value (Cont.) In the period of the report, a subsidiary of AFI Development recorded an increase in fair value, in the amount of about NIS 209 million, in respect of the AFIMALL project in Moscow (of the above-mentioned amount NIS 161 million was recorded in the third quarter of 2011 whereas the balance of NIS 48 million was recorded in the second quarter of 2011). The increase in value in the second quarter was made on the basis of an outside valuation received from the Office of JLL as at June 30, In the third quarter of 2011, the exchange rate of the U.S. dollar vis-à-vis the ruble increased by about 13.7%, which gave rise to a decline in the balance of the investment properties of AFI Development against a capital reserve for translation differences, as a result of which AFI Development updated the valuations of the investment properties including AFIMALL based on a discount rate 0.25% higher than the discount rate used in the valuations as at June 30, based on an opinion of JLL whereby when there is significant fluctuation in the exchange rates as between the U.S. dollar and the ruble for a period of 6 months or more, this may have an impact of the discount rate at a rate of 0.25%. The opinion of JLL is attached to the financial statements as at September 30, As a result of the impact of the changes in the exchange rates and update of valuations as stated above, revaluation income was recorded with respect to AFIMALL in the third quarter of 2011, in the amount of about NIS 161 million. For details see Note 4(B)2e to the Company s financial statements as at September 30, In addition, AFI Development recorded income from acquisition of the City s share (25%) in the AFIMALL project in the third quarter of 2011, in the amount of about NIS 417 million. For details see Note 4(B)2d to the Company s financial statements as at September 30, In the second quarter of 2011, a subsidiary of AFI Development recorded an increase in fair value, in the amount of about NIS 45 million, in respect of Stage 2 of the Pablitzkia project. The cost of the project was written down in 2008 and 2009 in light of the situation in the Russian real estate market and the uncertainty regarding continuation of the development of the project. In light of the recovery of the real estate market in Moscow in 2010 and 2011, AFI Development intends to develop the project and is presently in the advanced stages of development and, therefore, an increase in fair value was recorded on the basis of an outside opinion received from the Office of JLL In the first nine months of 2011, Africa Properties recorded an increase in the fair value of investment property, in the amount of about 0.7 million. The increase in the fair value stems mainly from a revaluation, in the amount of about 43.8 million, in respect of properties of Africa Properties in the Czech Republic and a revaluation, in the amount of about 25 million in respect of the properties in Israel. The increase in the fair value was offset by a decline in fair value, in the amount of about 46.2 million, in respect of a property in Bulgaria (which was caused by exit of a significant tenant) and in the amount of about 15.2 million, in respect of a property in Serbia. In the third quarter of 2011, Africa Properties recorded an increase in the fair value of investment property, in the amount of about 7.5 million, compared with an increase of about NIS 7.8 million in the corresponding period last year. In the first nine months of 2011, Africa Properties recorded a decline in the fair value of investment property under construction, in the amount of about 5.5 million. The decline in the fair value stems mainly from a decline in value, in the amount of about 25.3 million, in respect of a property of Africa Properties in Bulgaria, which was offset by an increase of a property in the Czech Republic, in the amount of about 6.8 million, and of properties in Israel, in the amount of about 17.4 million. In the third quarter of 2011, Africa Properties recorded a decline in the fair value of investment property under construction, in the amount of about 14.3 million. In addition, in the third quarter of 2011, Africa Properties recorded a write down due to decline in value of real estate, in the amount of about 33.2 million, in respect of the Laromat project. L

13 4.4 Operation and rental of properties The Company s revenues from operation and rental of properties in the first nine months of 2011 amounted to about NIS 485 million, compared with about NIS 331 million in the corresponding period last year. The increase stems mainly from Russia due to the opening of the AFIMALL project in Moscow Set forth below is a breakdown of the net revenues from rental and operation of properties (NOI) based on geographic areas (in NIS millions): Net Revenues from Q3 Q2 Q1 Q3 Year Rental and Operation of Properties Properties in Israel Properties in the United States (1) (2) (10) 9 17 Properties in Europe Properties in Russia Total Revenues from the steel and ceramics sectors The income from the above-mentioned sectors in the first nine months of 2011 amounted to about NIS 168 million, compared with about NIS 117 million in the corresponding period last year. The increase in the income derives, mainly, from the two areas from the steel sector, due to an increase in steel prices and an increase in the total sales, compared with the corresponding period last year, and from the ceramics sector, wherein the increase derives mainly from an increase in the scope of the activities of Negev Ceramics, as a result of the retail activities, acquisition of 75% of the issued and paid-up share capital of Orgal A.L.P. (2007) Ltd., a change in the product mix, and acquisition of all the issued and paid-up share capital of H.C.J.J. Construction Products Marketing Ltd. and Via Arkadia Home Design Ltd. M

14 4.6 Income from associated companies Set forth below are the main amounts of income (losses) realized by the Group in connection with its holdings in associated companies (in thousands of NIS): For the Nine Months Ended For the Three Months Ended For the Year Ended September 30 September 30 December Derech Eretz (2,597) (5,522) (2,597) Associated companies in Russia 4 57,913 (26,697) 62,262 (14,031) 235,002 Associated companies in the United States 5 21,277 84,891 (34,189) 125,670 54,311 Associated companies in Europe 6 45,711 33,759 (4,042) 24,245 27,377 Africa Israel Hotels (its results are presented on the equity basis of accounting commencing from the first quarter of 2011) (10,396) (1,420) Other 1,121 11,987 (1,336) 5,488 51,074 Total 115, ,343 21, , , Administrative and general expenses In the first nine months of 2011, the administrative and general expenses amounted to about NIS 209 million, compared with about NIS 203 million in the corresponding period last year. The increase in the administrative and general expenses stems mainly from the steel and ceramics activities due to an increase in the activities owing to new activities and inclusion thereof in the statements of Africa Industries in the period of the statement of financial position. 4.8 Write-downs of other assets and expenses The other expenses in the first nine months of 2011 included mainly: A decline in value recorded in the first quarter of 2011 in respect of a jointly-controlled company accounted for based on the equity method of accounting, in the amount of about NIS 20 million Write downs of hotel properties in AFI Development, in the amount of about NIS 9 million, as a result of receipt of updated valuations for the properties, which was recorded in the second quarter of In 2011, the amount includes revaluation of investment property in Moscow, in respect the Four Winds project, in the pre-tax amount of about NIS 70 million, which was recorded, for the most part, in the third quarter of 2011, as a result of receipt of an updated valuation for the said property as at June 30, 2011, and update of a valuation as a result of the strengthening of the dollar vis-à-vis ruble in the third quarter of 2011, based on a discount rate that is 0.25% higher than the discount rate used in the valuation as at June 30, For details see also Note 4(B)2e to the Company financial statements as at September 30, Constitutes mainly the share of AFI USA in the accrued income of a company holding the New York Times Building. In the period of the report, the company revalued the property as a result of an agreement to sell part of the building and receipt of an outside valuation for the balance of the building. See Note 4(B)(1)(b) to the financial statements as at September 30, Constitutes mainly the share of AFI USA in the accrued income of a company holding the Flora Shopping Mall in the Czech Republic. This income was recorded as a result of an agreement signed for sale of the mall and expresses the value of the asset as determined in the transaction. See Note 4(B)(3)(b) to the financial statements as at September 30, N

15 4. Results of Business Operations (Cont.) 4.8 Write-downs of other assets and expenses (Cont.) A provision recorded by Africa Properties in respect of a compromise with a landowner in Romania in the third quarter of For details see Note 4(B)3d to the Company s financial statements as at September 30, The other expenses in the first nine months of 2010 included mainly: A loss from sale of investment property under construction in the United States, in the amount of about NIS 8 million (first quarter of 2010) A write down due to decline in value of a loan to an associated company in Europe, in the amount of about NIS 13 million (first quarter of 2010) Costs, in the amount of about NIS 28 million, which were written off due to cancellation of the investment in construction of the AFIMALL Hotel in AFI Development (first quarter of 2010) Costs, in the amount of about NIS 50 million, in respect of a write down of 2 land parcels intended for hotels and presented in the property, plant and equipment category in AFI Development, in the City of Kislodvodsk (first quarter of 2010). 4.9 Financing income/expenses The Group s financing expenses in the first nine months of 2011 amounted to about NIS 981 million, compared with about NIS 745 million in the corresponding period last year. Most of the financing expenses in the first nine months of 2011 were in respect of the Group s index-linked liabilities primarily the Company. In the first nine months of 2011, the known index increased by 2.76%, compared with an increase of 1.62% in the corresponding period last year. On the other hand, in the first nine months of 2011, the Group s financing income amounted to about NIS 318 million, compared with NIS 1,656 million in the corresponding period last year. As part of the financing income in the first nine months of 2010, income was recorded due to completion of the Company s debt arrangement with the holders of its debentures, in the amount of about NIS 1.45 billion. After eliminating this income, the Group s financing income in the first nine months of 2010 amounted to about NIS 202 million. Accordingly, the total net financing expenses in the first nine months of 2011 amounted to about NIS 663 million, compared with net financing income of NIS 911 million in the corresponding period last year Taxes on income In the first nine months of 2011, the tax expenses totaled about NIS 287 million. The pre-tax income net of equity income in the above-mentioned period amounted to about NIS 580 million. The statutory tax rate in the period was 24% whereas the effective tax rate was 41.2%. The reason for the high tax rate is the Company s financing expenses with respect to which deferred taxes were not recorded due to accumulated losses in the Company. In the first nine months of 2010, the tax expenses totaled about NIS 68 million. The pre-tax income net of equity losses in the above-mentioned period amounted to about NIS 1,166 million. Of the above amount, about NIS 1.45 billion stemmed from income recorded as a result of completion of the debt arrangement with the debenture holders, with respect to which no deferred taxes were recorded in the books due to the Company s existing losses for which deferred taxes had not been recorded in the past. The main reason for recording tax expenses in the first nine months of 2010 is, mainly, in respect of losses for which deferred taxes were not recorded, mainly in connection with the activities in Russia. O

16 4. Results of Business Operations (Cont.) 4.11 Income from discontinued operations In the first nine months of 2011, the income from discontinued operations amounted to about NIS 77 million, of which about NIS 74 million, net after taxes, constitutes the gain from completion of the transaction for sale of 75% of the holdings of Danya Cebus in the issued and paid-up share capital of Netivei Hayovel. 5. Sources of Financing and Liquidity 5.1 The Company s assets were financed as follows: September 30, 2011 December 31, 2010 % NIS millions % NIS millions Total equity , ,041 Long-term liabilities , ,217 Current liabilities (including short-term bank credit) , , , ,403 Approximately 33.65% of the Group s assets were financed by shareholders equity and rights not conferring control. The Group s investments in investee companies (including loans to investee companies), property, plant and equipment, real estate, investment property, and investment property under construction, totaled NIS 20 billion, which constitutes roughly 78% of its total assets. These investments are considered to be medium and long-term. The working capital ratio at September 30, 2011 was 1.29, compared with at December 31, P

17 5. Sources of Financing and Liquidity (Cont.) 5.2 Condensed statement of cash flows for the Group for the current period: NIS millions NIS millions Sources of cash Income for the period Income and expenses not involving cash flows 6.97 Cash provided by operating activities (after eliminating movement in real estate) Proceeds from sale of property, plant and equipment and investment property Receipt of long-term loans, net 1, Dividend received Receipt of short-term credit, net Sale of marketable securities, net Decrease in cash balances Realization of long-term deposits and loans, net Proceeds from sale of shares in investee companies Issuance of capital to owners Short-term investments, net Decline in real estate Total sources 3, Uses of cash Investment in property, plant and equipment, other assets and investment property under construction Changes in working capital Interest paid, net Investment in and loans to associated companies and subsidiaries, net Repayment of long-term loans 1, Payment of dividend to holders of rights not conferring control Total uses 3, Debt on a separate-company basis Set forth below is a table detailing the debt on a separate-company basis (including certain closely-related companies*). The data is presented in thousands of NIS: September 30, June 30, March 31, December 31, December 31, Gross debt 3,154,190 3,178,322 3,115,485 4,112,124 7,842,375 Cash** 393, , ,429 1,324, ,071 Net debt 2,761,129 2,863,998 2,818,056 2,787,322 7,495,304 * Includes the following companies: Africa Israel Financing (1985) Ltd., Africa Israel Financial and Strategic Properties Ltd., and Africa Israel Trade and Agencies Ltd. ** Includes short-term deposits and marketable securities. Q

18 5. Sources of Financing and Liquidity (Cont.) 5.3 Debt on a separate-company basis (Cont.) The following table presents the amounts of the debentures as they are presented as part of the Company s separate-company financial statements as at September 30, 2011 (in thousands of NIS) and the same debt on a proforma basis as if the debentures were recorded on their issuance date at their par values and not at market value: As presented in the financial statements as at September 30, 2011 Proforma as at September 30, 2011 as if the debentures were recorded at their denominated values and not their market values Total amount of principal including linkage differences in respect of the debentures including the debentures (Series Z) only *2,693,422 3,728,090 Loans from banks 460, ,1768 Total** 3,154,190 4,188,858 Financing expenses in respect of the debentures (Series Z) for the first nine months of , ,648 * Presented net of the discount recorded on the issuance date of the debentures. ** Presented net of interest recorded as part of payables and other credit balances in the amount of about NIS 84,429 thousand. 5.4 Compliance with financial covenants Regarding compliance with financial covenants by the Group companies see Note 9 to the Company s financial statements as at September 30, As part of the debt arrangement, the Company is required to comply with a debt to equity ratio on a separate-company basis of not more than about 70% 7. As at September 30, 2011, the debt to equity ratio is about 39.6% Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report General 6.1 In January 2011, the Company signed an agreement for acquisition of the entire holdings of Nero Group and Nero Holdings, which are foreign companies controlled by the partner in the Company s activities in the Commonwealth of Nations (hereinafter the Sellers and the Partner, respectively) in AFI Development, constituting about 9.7% of the capital and voting rights in AFI Development (hereinafter the Holdings and the Agreement, respectively). Pursuant to the Agreement, the Company acquired 100% of the holdings for an aggregate consideration of about US$129 million, of which about US$84 million was paid in cash and the balance of about US$45 million was paid by means of offset of the balance of a loan granted to the Partner in May See Note 10(C) to the financial statements as at September 30, For full details of the manner of calculation and the detailed conditions see the arrangement documents (Reference No ). 8 Prior to elimination of reductions in value for accounting purposes in respect of properties in respect of which loans were granted in excess of the right of recourse to the borrower that would have reduced this ratio even further. R

19 6. Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report (Cont.) General (Cont.) 6.2 In January 2011, the Company s Board of Directors approved awarding a special grant to Mr. Izzi Cohen, the Company s CEO, further to the approval of the Company s Audit Committee, in the aggregate amount of NIS 6.5 million. See Note 4(H)(2) to the financial statements as at September 30, During the period of the report, the Company s Board of Directors approved early redemption of all of the Company s debentures (Series Y), the total amount of which as at the date of this report is about NIS 1.08 billion (principal plus accrued interest and linkage differences). This step is along with approval of the plan for acquisition by the Company of its own debentures. See Note 4(A)(1) to the financial statements as at September 30, On April 12, 2011, Midrug published an initial rating report for the debentures (Series Z) whereby the said debentures were rated Baa In the period covered by the statement of financial position and up to the signing date of the financial statements, management agreements were signed with some of the Group companies. Regarding the management agreement with Africa Industries see Note 4(E)(3) to the financial statements as at September 30, Regarding the management agreement with Danya Cebus see Note 4(F)(3) to the financial statements as at September 30, In May 2011, a decision of the Company s General Meeting was made to increase the Company s authorized capital by NIS 5,000,000 divided into 50,000,000 ordinary registered shares of NIS 0.1 par value each, such that after the said increase the Company s authorized capital will be NIS 20,000,000 divided into 200,000,000 ordinary registered shares of NIS 0.1 par value each 6.7 During April 2011, Vash Telcanal signed an agreement with a third party (hereinafter the Supplier ) for provision of services (hereinafter the Services Agreement ) whereby the Supplier will be the party responsible for the sales area in Vash Telcanal. In consideration of the Services Agreement and fulfillment of all the Supplier s obligations under the Services Agreement, Vash Telcanal is to pay the Supplier during the period of the Services Agreement an amount equivalent to 50% of the increase in Vash Telcanal s revenues (net) (i.e., revenues less commissions), as they will be after the signing date of the Services Agreement. 6.8 In April 2011, the Company signed an agreement with a foreign investments fund (hereinafter in this Section the Fund ) for sale/distribution of shares whereby it is permitted to require the Fund to acquire from it, from time to time, shares of Alon USA, in the overall amount of US$30 million, in exchange for payment of a commitment commission to the Fund in the amount agreed upon. In the period of the report, the Company realized all the shares in exchange for a commission of about $28 million. 6.9 In May 2011, the Company published a shelf prospectus and a prospectus by means of rights, with respect to which the gross proceeds received is about NIS million. As part of the prospectus for issuance of the rights, the Company s controlling shareholder also participated and acquired shares in the amount of about NIS million. See Note 4(A)(5) to the financial statements as at September 30, On September 13, 2011, the Company s General Meeting approved and ratified continuation of its commitment in a management agreement with Memorand Management (1998) Ltd. for an additional period of 3 years. For details see Note 4(H)(9) to the financial statements as at September 30, S

20 6. Main Data Taken from the Description of the Company s Business and Events Occurring during the Period of the Report (Cont.) General (Cont.) 6.11 In September 2011, the Company s Board of Directors approved an outline for an annual bonus plan, including in respect of 2011, for 9 Company officers (who are not directors), whereby subject to compliance with the targets, they will be entitled to an annual bonus of between 3-4 monthly salaries in a case of compliance with the targets and between monthly salaries in a case of reaching targets beyond the targets in the annual bonus plan In July 2011, the Company exercised all its rights to receive 3,673,899 shares of Alon USA. For details see Note 4(H)(8) to the financial statements as at September 30, In September 2011, the Company and Danya Cebus decided mutually to end their undertaking in an agreement for transfer of construction work from 2000, whereby the Company committed to transfer to Danya Cebus construction work in its projects. For details see Note 4(F)(12) to the financial statements as at September 30, On November 28, 2011, the Company s Board of Directors approved an amendment to the Company s Articles of Association, for purposes of conforming the provisions of the Company s Articles of Association to the provisions of the Companies Law (Amendment No. 16), 2011, and the provisions of the Law for Streamlining the Enforcement Procedures at the Securities Authority (Legislative Amendments), 2011 (hereinafter the Decision to Amend the Articles of Association ). Amendment of the Company s Articles of Association is subject to receipt of approval of the Company s General Meeting On November 28, 2011, the Company s Board of Directors approved, after receiving approval of the Company s Audit Committee, provision of an advance indemnity commitment by the Company to Company directors and other officers, in connection with certain anticipated events, in the opinion of the Board of Directors, in light of the Company s actual activities, in accordance with the provisions of the Companies Law and the provisions of the Law for Streamlining the Enforcement Procedures at the Securities Authority. The indemnity commitment with respect to events, is subject to receipt of approval of the Company s General Meeting and is also subject to approval of the Decision to Amend the Articles of Association It is noted that in accordance with that stated in Section 6.15 above, in connection with the provisions of the Companies Law (Amendment No. 16), 2011, and the provisions of the Law for Streamlining the Enforcement Procedures at the Securities Authority (Legislative Amendments), 2011, Company subsidiaries (Africa Properties, Africa Residences, Danya Cebus, Africa Industries and Negev Ceramics) approved indemnity commitments to their officers, which are subject to approval by the General Meetings of each of the companies referred to above In May 2011, the Company s General Meeting approved the Company s agreement to an addendum to the irrevocable commitment letter signed by the controlling shareholder (on March 21, 2010) for making additional investments by the controlling shareholder in accordance with the arrangement. See Note 4(A)(3) to the Company s financial statements as at September 30, On September 15, 2011, the Company s Board of Directors decided to approve a plan for issuance of options to Company employees and officers, whereby 568,066 non-marketable options will be issued, exercisable for ordinary shares of the Company of NIS 0.1 par value each, to 5 Company employees and officers (hereinafter the Offerees ) exercisable for up to 568,066 ordinary shares of the Company (subject to adjustment). For details see Note 4(H)(13) to the financial statements as at September 30, T