Condensed Consolidated Interim Financial Statements (Unaudited)
Condensed Consolidated Interim Financial Statements Unaudited Contents Page Auditors Review Report 2 Condensed Consolidated Interim Statements of Financial Position 3 4 Condensed Consolidated Interim Statements of Income 5 Condensed Consolidated Interim Statements of Comprehensive Income 6 Condensed Consolidated Interim Statements of Changes in Equity 7 8 Condensed Consolidated Interim Statements of Cash Flows 9 10 Notes to the Condensed Consolidated Interim Financial Statements 11 42
Review Report of the Independent Auditors to the Shareholders of Africa Israel Investments Ltd. Introduction We have reviewed the accompanying financial information of Africa Israel Investments Ltd. and its subsidiaries (hereinafter the Group ) including the condensed consolidated interim statement of financial position as at March 31, 2017 and the condensed consolidated interim statements of income, comprehensive income, changes in equity and cash flows for the three-month period then ended. The Board of Directors and Management are responsible for the preparation and presentation of financial information for this interim period in accordance with IAS 34 Financial Reporting for Interim Periods, and are also responsible for the preparation of financial information for this interim period in accordance with Section D of the Securities Regulations (Periodic and Immediate Reports), 1970. Our responsibility is to express a conclusion on the financial information for this interim period based on our review. We did not review the condensed financial information for the interim period of subsidiaries, the assets of which included in the consolidation constitute about 1% of the total consolidated assets as at March 31, 2017. In addition, we did not review the condensed financial information for the interim period of associated companies and jointly-controlled entities accounted for using the equity method of accounting, the investment in which totaled about NIS 8,202 thousand as at March 31, 2017, and the Group s share in their income, was about NIS 160 thousand, for the three-month period ended on that date. The condensed financial information for the interim period of those companies was reviewed by other auditors whose review reports thereon were furnished to us and our conclusion, insofar as it relates to amounts included in respect of those companies, is based on the review reports of the other auditors. Scope of the Review We conducted our review in accordance with Review Standard 1, Review of Financial Information for Interim Periods Performed by the Independent Auditor of the Entity of the Institute of Certified Public Accountants in Israel. A review of financial information for interim periods consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review and on the review reports of other auditors, nothing has come to our attention that causes us to believe that the above-mentioned financial information was not prepared, in all material respects, in accordance with International Accounting Standard IAS 34. In addition to that mentioned in the previous paragraph, based on our review and on the review reports of other auditors, nothing has come to our attention that causes us to believe that the above-mentioned financial information does not comply, in all material respects, with the disclosure requirements of Section D of the Securities Regulations (Periodic and Immediate Reports), 1970. Without qualifying our above-mentioned opinion, we direct attention to that stated in Note 1B to the condensed interim financial statements regarding: 1. The Company s financial position and the adverse impact on its ability to meet its liabilities, including a deficit in the consolidated working capital, in the amount of NIS 2,594 million (a deficit in the separate-company (solo) working capital, in the amount of NIS 2,384 million), a deficit in the equity attributable to the owners of the Company, in the amount of NIS 484 million, and a negative value of the assets (based on the present market prices of the marketable holdings) in a significant amount. 2. The existence of grounds for calling the Company s debentures for immediate repayment, in the amount of NIS 2.4 billion, which have been classified as part of the current liabilities (at par value in the amount of NIS 2.86 billion). 3. The decision of the Board of Directors to take action in order to formulate an arrangement with the holders of the debentures and suspension of Management s plans to sell additional core assets. These factors, together with other factors detailed in Note 1B, raise significant doubts regarding the continued existence of the Company as a going concern. These financial statements do not include any adjustments to the value of the assets and liabilities and the classification thereof, which may be necessary if the Company is not able to continue operating as a going concern. Sincerely, Somekh Chaikin Certified Public Accountants (Isr.) Breitman Almagor Zohar & Co. Certified Public Accountants (Isr.) May 28, 2017 2
Condensed Consolidated Interim Statements of Financial Position At March 31 At December 31 2017 2016 2016 (Unaudited) (Audited) In Thousands of New Israeli Shekels Current Assets Cash and cash equivalents 1,144,726 1,042,783 945,241 Short-term investments 373,745 389,601 311,017 Marketable securities 231,985 227,362 337,268 Trade receivables 911,318 1,194,524 1,067,187 Other receivables and debit balances, including financial derivatives 354,249 386,078 355,088 Income taxes receivable 11,838 25,898 22,215 Inventory of buildings held for sale 1,665,764 2,503,227 1,394,586 Other inventories 225,816 438,606 427,890 Non-current assets and assets of realization group classified as held for sale (see Note 10) 1,438,113 764,168 1,306,263 6,357,554 6,972,247 6,166,755 Non-Current Assets Investments in investee companies accounted for using the equity method of accounting 423,145 370,522 405,429 Loans to investee companies 296,038 356,362 316,897 Property, plant and equipment 494,648 1,071,911 833,726 Investment property 4,449,756 8,301,110 4,492,683 Investment property under construction 760,792 1,887,405 817,296 Long-term loans, investments and other debit balances 106,993 96,880 106,579 Inventory of real estate (land) 1,915,119 1,883,567 2,013,955 Intangible assets 39,733 150,045 128,352 Excess of assets over liabilities in respect of employee benefits 1,628 1,326 Deferred tax assets 73,788 109,199 81,492 8,560,012 14,228,629 9,197,735 14,917,566 21,200,876 15,364,490 The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 3
Condensed Consolidated Interim Statements of Financial Position At March 31 At December 31 2017 2016 2016 (Unaudited) (Audited) In Thousands of New Israeli Shekels Current Liabilities Debentures 2,651,649 2,996,873 2,619,270 Short-term credit from banks and others 2,113,634 5,041,722 2,811,805 Contractors and suppliers 1,048,836 *1,205,112 1,194,863 Other payables and credit balances, including financial derivatives 614,914 566,231 601,948 Income taxes payable 289,864 140,099 202,277 Advances from customers 932,079 1,580,063 1,086,828 Provisions 249,571 *191,407 259,838 Liabilities of realization group classified as held for sale (see Note 10) 1,050,786 238,882 8,951,333 11,960,389 8,776,829 Long-Term Liabilities Debentures 1,396,894 1,398,093 1,544,061 Liabilities to banks 2,272,962 2,653,055 2,399,284 Other liabilities 772,157 651,272 880,836 Excess of losses over investments in investee companies accounted for using the equity method of accounting 4,527 26 Employee benefits 17,991 20,120 18,643 Liabilities for deferred taxes 492,763 634,282 598,208 4,952,767 5,361,349 5,441,058 Equity Share capital 384,867 384,867 384,867 Premium on shares 4,492,059 4,492,059 4,492,059 Capital reserves (1,174,662) (2,155,293) (1,102,220) Retained earnings (accumulated deficit) (4,186,413) (1,473,351) (4,165,165) Total equity (deficit) attributable to the Company s owners (484,149) 1,248,282 (390,459) Non-controlling interests 1,497,615 2,630,856 1,537,062 Total equity 1,013,466 3,879,138 1,146,603 * Reclassified see Note 2C. 14,917,566 21,200,876 15,364,490 Lev Leviev Avraham Novogrocki Menashe Sagiv Chairman of the Board of Directors CEO CFO Approval date of the financial statements: May 28, 2017 The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 4
Condensed Consolidated Interim Statements of Income For the Three Months Ended Year Ended March 31 December 31 *2017 *2016 *2016 (Unaudited) (Audited) In Thousands of New Israeli Shekels Revenues Construction and real estate transactions 1,008,500 1,011,606 4,425,272 Rental and operation of properties 85,747 89,287 360,208 Industry 240,726 243,556 935,690 Share in income of investee companies accounted for using the equity method of accounting, net 14,863 5,145 21,194 Increase in fair value of investment property, net 15,632 196,968 499,976 Increase in fair value of investment property under construction, net 24,084 12,387 Other income 3,988 1,346 24,739 1,369,456 1,571,992 6,279,466 Cost and expenses Construction and real estate transactions 934,234 932,931 4,107,142 Maintenance, supervision and management of real estate and properties 5,849 5,247 21,709 Decrease in fair value of investment property under construction, net 171 Industry 221,832 226,152 849,037 Administrative and general expenses 41,829 45,078 174,098 Amortization of intangible assets and other expenses 3,475 10,443 101,702 1,207,390 1,219,851 5,253,688 Operating income 162,066 352,141 1,025,778 Financing expenses (139,682) (148,678) (632,919) Financing income 12,741 3,866 25,036 Financing expenses, net (126,941) (144,812) (607,883) Operating income (loss) before taxes on income 35,125 207,329 417,895 Taxes on income (23,564) (61,118) (220,340) Net income from continuing activities 11,561 146,211 197,555 Loss from discontinued activities (after taxes) (see Note 9) (12,056) (130,857) (2,850,420) Net income (loss) for the period (495) 15,354 (2,652,865) Income (loss) attributable to: The Company s owners (21,248) (40,706) (2,733,061) Holders of non-controlling interests 20,753 56,060 80,196 Net income (loss) for the period (495) 15,354 (2,652,865) Income (loss) per share (in NIS) Basic and diluted income (loss) per share from continuing activities (0.06) 0.22 (0.11) Basic and diluted loss per share from discontinued activities (0.04) (0.42) (13.18) Total basic and diluted loss per share (0.10) (0.20) (13.29) * See Note 9 regarding Discontinued Activities. The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 5
Condensed Consolidated Interim Statements of Comprehensive Income For the Three Months Ended Year Ended March 31 December 31 2017 2016 2016 (Unaudited) (Audited) In Thousands of New Israeli Shekels Net income (loss) for the period (495) 15,354 (2,652,865) ---------- --------- Components of other comprehensive income (loss) that after the initial recognition in the statement of comprehensive income were transferred or will be transferred to the statement of income Foreign currency translation differences in respect of foreign activities (135,930) (33,428) (124,984) Change in fair value of instruments hedging cash flows, net of tax 2,956 (5,990) (1,694) Realization of capital reserve in respect of translation differences relating to foreign activities, net of tax 1,086,817 Realization of financial hedge to the statement of income 801 Total other comprehensive income (loss) for the period that after the initial recognition in the statement of comprehensive income was transferred or will be transferred to the statement of income, net of tax (132,974) ---------- (39,418) --------- 960,940 Components of other comprehensive income (loss) that will not be transferred to the statement of income Re-measurement of defined benefit plan (1,837) Total other comprehensive income (loss) for the period that will not be transferred to the statement of income, net of tax ---------- --------- (1,837) Total comprehensive loss for the period (133,469) (24,064) (1,693,762) Total comprehensive loss attributable to: The Company s owners (93,690) (70,516) (1,711,225) Holders of non-controlling interests (39,779) 46,452 17,463 Total comprehensive loss for the period (133,469) (24,064) (1,693,762) The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 6
Condensed Consolidated Interim Statements of Changes in Equity For the three-month period ended March 31, 2017 (unaudited) Attributable to the owners of the Company Reserve for Capital transactions reserve with from holders of Premium cash Other non- Non- Share on flow capital Translation controlling Accumulated controlling Total capital shares hedges reserves adjustments* interests deficit Total interests equity In Thousands of New Israeli Shekels Balance at January 1, 2017 384,867 4,492,059 (6,704) 24,444 (583,872) (536,088) (4,165,165) (390,459) 1,537,062 1,146,603 Total comprehensive loss for the period Net income (loss) for the period (21,248) (21,248) 20,753 (495) Other comprehensive loss for the period, net of tax 1,642 (74,084) (72,442) (60,532) (132,974) Total comprehensive loss for the period 1,642 (74,084) (21,248) (93,690) (39,779) (133,469) Transactions with owners recorded directly to equity Share-based payments (net of tax) 17 17 Dividend paid to holders of non-controlling interests 315 315 Balance at March 31, 2017 384,867 4,492,059 (5,062) 24,444 (657,956) (536,088) (4,186,413) (484,149) 1,497,615 1,013,466 For the three-month period ended March 31, 2016 (unaudited) Balance at January 1, 2016 384,867 4,492,059 (6,218) 24,444 (1,607,741) (535,968) (1,432,645) 1,318,798 2,598,196 3,916,994 Total comprehensive income (loss) for the period Net income (loss) for the period (40,706) (40,706) 56,060 15,354 Other comprehensive loss for the period, net of tax (3,314) (26,496) (29,810) (9,608) (39,418) Total comprehensive income (loss) for the period (3,314) (26,496) (40,706) (70,516) 46,452 (24,064) Transactions with owners recorded directly to equity Share-based payments (net of tax) 983 983 Dividend paid to holders of non-controlling interests (14,775) (14,775) Balance at March 31, 2016 384,867 4,492,059 (9,532) 24,444 (1,634,237) (535,968) (1,473,351) 1,248,282 2,630,856 3,879,138 * As at March 31, 2017, the amount of NIS 2,927 thousand constitutes translation adjustments deriving from an asset group held for sale. The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 7
Condensed Consolidated Interim Statements of Changes in Equity Attributable to the owners of the Company Reserve for Capital transactions reserve with from holders of Premium cash Other non- Accumu- Non- Share on flow capital Translation controlling lated controlling Total capital shares hedges reserves adjustments interests deficit Total interests equity In Thousands of New Israeli Shekels For the year ended December 31, 2016 Balance at January 1, 2016 384,867 4,492,059 (6,218) 24,444 (1,607,741) (535,968) (1,432,645) 1,318,798 2,598,196 3,916,994 Total comprehensive income (loss) for the year Income (loss) for the year (2,733,061) (2,733,061) 80,196 (2,652,865) Other comprehensive income (loss) for the year, net of tax (486) 1,023,869 (1,547) 1,021,836 (62,733) 959,103 Total comprehensive income (loss) for the year (486) 1,023,869 (2,734,608) (1,711,225) 17,463 (1,693,762) Transactions with owners recorded directly to equity Share-based payments (net of tax) (120) (120) 2,091 1,971 Options for shares of subsidiaries that expired 1,750 1,750 (1,750) Exercise of options for shares of subsidiaries 338 338 (322) 16 Dividend paid to holders of non-controlling interests (18,701) (18,701) Elimination of noncontrolling interests due to sale of subsidiary (1,059,915) (1,059,915) Balance at December 31, 2016 384,867 4,492,059 (6,704) 24,444 (583,872) (536,088) (4,165,165) (390,459) 1,537,062 1,146,603 The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 8
Condensed Consolidated Interim Statements of Cash Flows For the Three Months Ended Year Ended March 31 December 31 *2017 *2016 *2016 (Unaudited) (Audited) In Thousands of New Israeli Shekels Cash flows from operating activities Net income (loss) for the period (495) 15,354 (2,652,865) Adjustments: Share in income of investee companies accounted for using the equity method of accounting (14,881) (8,998) (28,583) Depreciation and amortization and decline in value of property, plant and equipment and intangible assets 15,599 25,337 264,689 Losses from decline in value of investments and loans, net 2,064 2,487 Loss on sale of subsidiary see Note 9A below 2,383,398 Change in fair value of investment property, net (15,632) (7,945) (200,777) Change in fair value of investment property under construction, net 171 13,889 71,495 Capital loss on sale of property, plant and equipment and investment property, net 84 146 9,810 Share-based payments 17 983 2,091 Loss (gain) on marketable securities, net (145) 1,839 5,850 Taxes on income recognized in the statement of income 23,593 52,579 217,097 Financing expenses, net 143,146 109,706 570,618 Change in inventory of real estate (land) (293,128) (9,553) (437,800) Change in inventory of buildings held for sale 90,435 (4,305) 591,009 Change in other inventories 50,565 74,694 75,809 Change in trade receivables and other receivables and debits (25,587) (75,116) (27,077) Change in contractors, trade payables and other payables and credits (19,402) **49,151 30,824 Change in advance deposits from customers (47,484) 88,708 (311,142) Change in provisions and employee benefits 7,625 **2,648 133,967 Income taxes paid, net (20,191) (12,631) (52,329) Net cash provided by (used in) operating activities (105,710) 318,550 648,571 ------------- ------------- ------------- * Regarding cash flow data relating to discontinued activities and significant non-cash transactions deriving from sale of discontinued activities see Note 9 below. ** Reclassified see Note 2C. The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 9
Condensed Consolidated Interim Statements of Cash Flows For the Three Months Ended Year Ended March 31 December 31 *2017 *2016 *2016 (Unaudited) (Audited) In Thousands of New Israeli Shekels Cash flows from investing activities Payments in respect of sale of properties and investee companies (32,065) Investment in associated and other companies (2,881) (3,336) (102) Repayment (provision) of loans from (to) associated companies, net** 43,282 (4,805) (39,588) Investment in intangible assets (6,542) (1,842) (8,392) Tax refund in respect of sale of investment property 3,353 Investment in investment property and investment property under construction (54,475) (161,728) (436,030) Investment in property, plant and equipment (8,871) (13,974) (63,863) Proceeds from sale of property, plant and equipment 144 483 1,925 Proceeds from sale of investment property, net 581,333 53,154 368,823 Investment in long-term deposits and loans (106) (3,266) (15,620) Repayment of long-term deposits and loans 2,143 1,551 5,864 Elimination of discontinued activities less cash eliminated (86,500) Sale (acquisition) of marketable securities, net 104,595 62,023 (77,506) Dividends received 375 3,971 5,439 Interest received 12,232 10,868 23,046 Short-term investments, net (69,235) 52,163 122,736 Net cash provided by (used in) investing activities 605,347 ------------- (4,738) ------------- (231,833) ------------- Cash flows from financing activities Interest paid (93,659) (221,502) (549,515) Dividend paid to holders of non-controlling interests (500) (18,955) Proceeds from exercise of options for shares of the Company and subsidiaries 16 Receipt of long-term loans and liabilities and issuance of debentures 175,307 262,411 1,423,357 Repayment of long-term loans, debentures and liabilities (172,613) (506,501) (1,556,929) Short-term credit, net (177,900) (73,629) (25,751) Net cash used in financing activities (268,865) ------------- (539,721) ------------- (727,777) ------------- Increase (decrease) in cash and cash equivalents 230,772 (225,909) (311,039) Cash and cash equivalents at beginning of the period 945,241 1,275,202 1,275,202 Cash and cash equivalents included as part of assets of a realization group held for sale (7,997) (231) Effect of exchange rate fluctuations on balances of cash and cash equivalents (23,290) (6,279) (18,922) Cash and cash equivalents at the end of the period 1,144,726 1,042,783 945,241 * Regarding cash flow data relating to discontinued activities and significant non-cash transactions deriving from sale of discontinued activities see Note 9 below. ** In the three-month period ended March 31, 2017, includes also a loan received from a jointly-controlled company, in the amount of NIS 35 million see Notes 4E and 11D, below. The accompanying notes to the condensed consolidated interim financial statements are an integral part thereof. 10
Note 1 General A. The Reporting Entity Africa Israel Investments Ltd. (hereinafter the Company ) is an Israeli-resident company that was incorporated in Israel and its registered address is Derech Hahoresh 4, Yehud. The Group s consolidated financial statements as at March 31, 2017, include the financial statements of the Company and those of its subsidiaries (hereinafter the Group ) as well as the Group s rights in associated companies and jointly controlled entities. The Company s controlling shareholder is Mr. Lev Leviev, who holds the Company directly as well as through companies he wholly owns and controls. The Group is engaged in holdings and investments in a variety of sectors in and outside of Israel. The Company s securities are registered for trading on the Tel-Aviv Stock Exchange. B. The Company s Financial Position Since entry into effect of the debt arrangement in May 2010, Company Management has taken serious action to sell properties as appropriate prices in order to assure its ability to settle its extensive financial liabilities. In addition, during the above-mentioned period, the Company s shareholders invested a cumulative amount of about NIS 1.35 billion (of which, the share of the Company s controlling shareholder amounts to about NIS 765 million). As stated in Note 1B(2) to the Annual Financial Statements as at December 31, 2016, on September 7, 2016, the Sale Transaction was completed for sale of all of the Company s holdings in AFI Development (64.88%) to its controlling shareholder, Mr. Lev Leviev (including through a company he controls), in exchange for a consideration of NIS 550 million, which was used to make a partial early repayment of the Company s debentures (Series Z, ZA and ZB). As at the date of the statement of financial position: The Company had a deficit in the equity attributable to the shareholders, in the amount of about NIS 484 million. The Company had negative working capital in the solo financial statements of NIS 2,384 million, and negative working capital of NIS 2,594 thousand in the consolidated financial statements. The amount of cash required by the Company in order to repay its liabilities in the upcoming years significantly exceeds the balance of cash it presently has. The net value of the Company s assets (based on the current market value of its marketable holdings plus the book value of its other assets and less its financial liabilities) is a large negative amount. The yield rate on the Company s debentures is two-digit, in such a manner that removes the possibility, from a practical standpoint, to refinance the Company s financial liabilities by means of raising debt. As stated in Note 8A below, there are grounds for calling the Company s debentures (Series Z, ZA and ZB) for immediate repayment and, accordingly, in the statement of financial position the liability in respect of the debentures, in the amount of NIS 2.4 billion, is classified as a current liability (at par value in the amount of NIS 2.86 billion). 11
Note 1 General (Cont.) B. The Company s Financial Position (Cont.) In light of all that stated above, the Company s Board of Directors reached the conclusion that at the present time there are significant doubts with respect to the Company s ability to meet its liabilities. In order to provide a proper response to the risks described above, as well as to additional unfavorable changes that may occur as time goes on, and as a practical result, in order to improve the Company s chances of successfully coping with payment of its liabilities, the Company commenced negotiations with the holders of the debentures, in order to formulate a plan for reorganizing the Company s liabilities to all of the holders of its debentures, which will include, among other things, strengthening of the Company s capital base, including, a request from the Company s controlling shareholder to invest monies in the Company subject to completion of the arrangement as stated. The Company s Board of Directors instructed Company Management to take action to formulate an arrangement as stated within accelerated and intensive timetables, with an undertaking to maintain fairness and unbiased treatment as between the holders of the debentures, taking into account the terms of each debenture series, the existing collaterals for securing them and the rate of the unsecured debt to them. On May 26, 2016, the holders of the Company s debentures decided to set up a joint representative body for the debentures (Series Z and Series ZA) and a separate representative body for the holders of the debentures (Series ZB). On September 26, 2016, the Company s Board of Directors decided, among other things, to appoint Mr. Amir Burger, as an observer on the part of the Trustees and confirmed his various authorities (hereinafter the Observer ). The Company s Board of Directors confirmed that the Observer will be permitted to receive information relating to the Company, subject to a confidentiality commitment, and to participate in meetings of the Board of Directors and its committees (except for discussions relating to the Company s actions with reference to the holders of the debentures) and in the relevant management forum. On September 29, 2016, a number of decisions made by the Company s Board of Directors entered into effect regarding advancement and examination of a comprehensive debt arrangement for the Company by means of recruiting an investor (whether the controlling shareholder or another investor) (hereinafter the Comprehensive Arrangement Track ) while concurrently examining the course of selling off the Company s main assets (hereinafter the Sale of Holdings Track ). As part of that stated above, the Company s Board of Directors approved establishment of a special and independent committee of the Board of Directors, on which will serve the two external directors along with one additional independent director that are not related to the controlling shareholder (hereinafter the Committee ), and also determined its functions and authorities, including regarding determination of a process for submission of proposals under both Tracks, setting timetables for the process of receiving the proposals, and approval of the relevant parties submitting the proposals. 12
Note 1 General (Cont.) B. The Company s Financial Position (Cont.) As part of its functions, the Committee will examine the various proposals, make decisions together with Company Management regarding advancement of negotiation proceedings with potential bidders in connection with the Comprehensive Arrangement Track and/or the Sale of Holdings Track, supervise the proceedings with respect to both Tracks and formulate recommendations to the Company s Board of Directors. The Committee will be accompanied by both the Company and an investment banker chosen by the Committee with the approval of the Trustees (hereinafter the Investment Banker ), and to the extent necessary by officers of the subsidiaries or external investors, and will act with transparency and in cooperation with the Trustees, the representatives of the holders of the debentures and the Observer. It is noted that an undertaking in a binding transaction by the Company will be subject to approval of the Board of Directors as well as every other approval required by law. In addition, a decision with respect to sale of the Company s holdings in its subsidiaries and, likewise, a decision to enter into a comprehensive debt arrangement will be subject to approval of the debenture holders. On December 1, 2016, the Company published an invitation to submit bids, both under the Comprehensive Arrangement Track and under the Sale of Holdings Track, as formulated by the Committee and by the Investment Banker. A number of bids were received from various investors both under the Sale of Holdings Track with respect to the Company s subsidiaries, and under the Comprehensive Arrangement Track, including a joint bid of the present controlling shareholder with Mr. Moti Ben-Moshe. The Company was informed by the Investment Banker that up to the final date for submission of bids, namely, April 4, 2017, a number of non-binding offers were received from various investors both under the Sale of Holdings Track with respect to the Company s subsidiaries, and under the Comprehensive Arrangement Track, including recruiting an investor for the Company. The Investment Banker and the representatives of the holders of the debentures, with the knowledge of the Board of Directors committee for maintaining the debt arrangement proceedings, are carrying on contacts, which are in various stages, with a number of bidders, in the framework of the two above-mentioned tracks. As a practical result of that stated above, taking into account the amount of the liquid balances held by the Company, and so long as the negotiations for formulation of a debt arrangement are ongoing, the Company will not be able to continue to make payments of principal and interest on its debts to its financial creditors in accordance with the present repayment schedules. The sum total of all of these events and circumstances raise significant doubts regarding the continued existence of the Company as a going concern. In these financial statements no reclassifications or adjustments have been included to the value of the Company s assets and liabilities, which may be necessary if the Company is not able to continue operating as a going concern. 13
Note 1 General (Cont.) B. The Company s Financial Position (Cont.) On May 28, 2017, the Company was informed that Mr. Moti Ben-Moshe and Mr. Lev Leviev reached agreements with representatives of the holders of the Company s debentures regarding the foundational principles for formulation of a debt arrangement. It is emphasized that to the best of the Company s knowledge, as at the approval date of the financial statements, all the principles of the debt arrangement had not yet been finally agreed to, and in any event the format of the debt arrangement has not yet been brought for discussion by the special committee of the Company s Board of Directors for maintaining the debt arrangement. Taking into account that stated above, at this preliminary stage, there is no certainty that the parties will reach agreement regarding the details of the debt arrangement and/or that the proposed debt arrangement will be ultimately be approved by the Company and/or the holders of the debentures. Note 2 Basis of Preparation of the Financial Statements A. Declaration of compliance with International Financial Reporting Standards (IFRS) The condensed consolidated interim financial statements were prepared in accordance with IAS 34, Financial Reporting for Interim Periods and do not include all of the information required in complete, annual financial statements. These statements should be read together with the financial statements for the year ended December 31, 2016 (hereinafter the Annual Financial Statements ). In addition, these financial statements were prepared in accordance with the provisions of Section D of the Securities Regulations (Periodic and Immediate Reports) 1970. The condensed, consolidated, interim financial statements were approved for publication by the Company s Board of Directors on May 28, 2017. B. Use of estimates and judgment In preparation of the condensed consolidated interim financial statements in accordance with IFRS, Company management is required to use judgment when making estimates, assessments and assumptions that affect implementation of the policies and the amounts of assets, liabilities, income and expenses. It is clarified that the actual results are likely to be different from these estimates. Management s judgment, at the time of implementing the Group s accounting policies and the main assumptions used in the estimates involving uncertainty, are consistent with those used in the Annual Financial Statements. C. Reclassification In the statement of financial position as at March 31, 2016, the amount of NIS 326,384 thousand was reclassified from the provisions category to the contractors and suppliers category, in order to properly reflect the Group s liability to suppliers in the same manner as the presentation in the financial statements as at December 31, 2016. 14
Note 3 Significant Accounting Policies A. The Group s accounting policies in these condensed consolidated interim financial statements are the same as the policies applied in the Annual Financial Statements. B. New accounting standards and interpretations not yet adopted (1) International Financial Reporting Standard IFRS 15, Revenues from Contracts with Customers (hereinafter the Standard ) Further to that stated in Note 3X(1) to the Annual Financial Statements as at December 31, 2016, set forth below is an update regarding the manner of implementation of the Standard in the financial statements: Africa Israel Residences Ltd., through which the Group operates in the real estate initiations area (hereinafter Africa Residences ), intends to adopt the Standard commencing with its financial statements as at June 30, 2017. The management of Africa Residences has estimated the quantitative impact of application of the Standard, and in its estimation, if Africa Residences would have applied the Standard in the current reporting period, the balance of the retained earnings as at January 1, 2017 would have been about NIS 100 million higher. It is emphasized that the information presented in this Note regarding the impact of the initial application of the Standard constitutes merely an estimate, and it is possible that it will ultimately be different than the quantitative data that will be included in the financial statements for the period of initial application. The Group is examining application of the Standard during 2017. (2) International Financial Reporting Standard IFRS 9 (2014), Financial Instruments (hereinafter the Standard ) Further to that stated in the disclosure with respect to new standards and interpretations not yet adopted in the Significant Accounting Policies note in the Annual Financial Statements, the Group is examining the impacts of application of the Standard on the financial statements, with no intention of making early adoption. C. Exchange rates and linkage basis (1) Balances in foreign currency, or linked thereto, are included in the financial statements based on the representative rates of exchange published by Bank of Israel and that were in effect at the end of the period of the report. (2) Balances linked to the Consumer Price Index (CPI) are presented in accordance with the last known index at the end of the period of the report (the index for the month preceding the date of the financial report). (3) Set forth below is data with respect to the rate of exchange of the euro, the U.S. dollar and the ruble, and with respect to the Consumer Price Index (CPI): 15
Note 3 Significant Accounting Policies (Cont.) C. Exchange rates and linkage basis (Cont.) Known Representative rate of exchange of the CPI in Ruble Euro U.S. Dollar Israel NIS NIS NIS In points Date of the financial statements: March 31, 2017 3.882 3.632 122.591 March 31, 2016 0.056 4.286 3.766 122.09 December 31, 2016 *0.058 4.044 3.845 122.84 Rate of change in the period: Three months ended March 31, 2017 (4.00) (5.54) (0.203) Three months ended March 31, 2016 3.16 0.91 (3.49) (0.91) Year ended December 31, 2016 *7.6 (4.8) (1.5) (0.30) * The representative rate of exchange of the ruble above is as at September 7, 2016, and for the period from January 1, 2016 through that date, which is the date on which the sale transaction of the Company s holdings in the subsidiary, AFI Development, was completed, through which the real estate activities in Russia were carried on, to the Company s controlling shareholder, as stated in Note 1B(1) of the Annual Financial Statements. Note 4 Significant Events during the Period of the Report A. Real Estate Activities Outside of Israel Real estate activities in Central and Eastern Europe The Company s operations in Central and Eastern Europe are performed through AFI Europe N.V. (hereinafter AFI Europe ), a wholly-owned subsidiary of Africa Israel Properties Ltd. (which is held by the Company at the rate of about 56%). The Company s Central and Eastern European operations are concentrated in the Czech Republic, Romania, Bulgaria, Poland, Serbia, Hungary, and Latvia. Further to that stated in Note 4B(3)(a) to the Annual Financial Statements regarding the agreement signed in August 2016 for sale of the 18 real-estate properties in Berlin (hereinafter the Agreement ) with the purchaser, for a consideration of 125.5 million, on January 31, 2017, the transaction was closed. As a result of closing of the transaction, Africa Israel Properties received free, after-tax cash flows (after payment of a loan and the transaction expenses), in the amount of about 51 million (about NIS 207 million). During 2016, Africa Israel Properties recorded a gain from revaluation of investment property to the value of the properties in the transaction, in the amount of about 44 million (about NIS 184 million), and tax expenses and additional costs in respect of the transaction. In addition, further to that stated in Note 4B(3)(A) to the Annual Financial Statements regarding sale of additional properties in West Germany, sale of two additional properties, in the amount of about 10.8 million, was completed in the first quarter of 2017. The balance of the properties in West Germany, including the property the sale of which has not yet been completed, amounts to about 4.6 million (about NIS 18 million) and is classified in the assets held for sale category. 16
Note 4 Significant Events during the Period of the Report (Cont.) B. Africa Israel Properties Ltd. (a subsidiary, hereinafter Africa Properties ) (1) Further to that stated in Notes 37F and 39(7) to the Annual Financial Statements, in connection with conclusion of the management agreement between the Company and Africa Properties, on May 11, 2017, the General Meeting of the shareholders of Africa Properties approved, after receiving the approval of the Board of Directors of Africa Properties, on December 22, 2016, and the approval of the Audit Committee of Africa Properties on the same date, the entry of Africa Properties into an undertaking with the Company, in a new management services agreement, whereby the Company, by itself and/or by means of its subsidiaries and officers or any of them, will provide the services, as detailed below, to Africa Properties and to its subsidiaries, in and outside of Israel. Set forth below are the highlights of the management agreement: (a) Description of the agreement for provision of management services: The Company will provide to Africa Properties, by itself and/or by means of its subsidiaries and officers or any of them: (a) CEO services, in the scope of 25% of a full-time position, and current management consulting services for current and strategic business transactions (business development); (b) directors services (not including external and/or independent directors) to Africa Properties and/or to the subsidiaries of Africa Properties, the shares of which are traded on an Israeli or foreign stock exchange; and (c) additional services. (b) The consideration: In consideration for provision of the management services, Africa Properties will pay the Company a quarterly payment in the aggregate amount equal to NIS 178,750, linked to the rate of increase in the Consumer Price Index (CPI) that is known on the payment date compared with the CPI for the month of January 2017. In consideration for provision of the directors services, Africa Properties will pay the Company, for each director serving or that will serve in Africa Properties or a public subsidiary, who is not an external director or an independent director (including directors that are the controlling shareholder of Africa Properties or a relative thereof) (however not more than five (5) directors serving in each company), the following amounts: (i) (ii) An annual remuneration. Remuneration for participation in every meeting in which the director participates. Notwithstanding that stated above, in a case where the CEO of Africa Properties who is employed as part of the management agreement, also serves as a director of Africa Properties, the Company will not be paid remuneration amounts as stated above, in respect of the CEO director. 17
Note 4 Significant Events during the Period of the Report (Cont.) B. Africa Israel Properties Ltd. (a subsidiary, hereinafter Africa Properties ) (Cont.) (1) (Cont.) (b) The consideration: (Cont.) In consideration for provision of the additional services, Africa Properties will pay the Company a quarterly payment in the aggregate amount equal to NIS 657,500, linked to the rate of increase in the Consumer Price Index (CPI) that is known on the payment date compared with the CPI for the month of January 2017. If the Company ceases to provide to Africa Properties one or more of the additional services, the amount of the consideration in respect of the discontinued service will be deducted from the total consideration for the additional services. (c) Period of the management agreement: The agreement will enter into effect on January 1, 2017. The agreement will remain in effect for a period of 6 months, commencing from the date on which it enters into effect, as stated. (2) Further to that stated in Note 4C(1) to the Annual Financial Statements, in connection with collapse of the Habarzel parking facility (hereinafter the Parking Facility ) during the construction work of the Parking Facility, as at the date of the statement of financial position, the loan from the bank taken out for purposes of financing the construction work, in the amount of NIS 37,741 thousand is presented in the statement of financial position as part of the current liabilities. It is noted that as at the date of the statement of financial position, NIS 8 million had been received from the insurance company NIS 4 million was received by the construction contractor, Danya Cebus Ltd., a wholly-owned subsidiary of the Company, and NIS 4 million was transferred to the account of Africa Properties, pursuant to the lien agreement with the financing bank. (3) Further to that stated in Note 4C(4) to the Annual Financial Statements, regarding sale of all the possessory rights in land in Petah Tiqwa, in consideration of the amount of NIS 86 million, in February 2017, the balance of the consideration, in the amount of NIS 36 million, was paid by the purchasers to a subsidiary of Africa Properties and the transaction was completed. C. Africa Israel Residences Ltd. (a subsidiary, hereinafter Africa Residences ) On December 27, 2016, the Israel Lands Authority (hereinafter the Authority ) issued to Africa Residences approvals of winning in a price to the homeowner tender in Herzliya, with respect to the land known as Plots D and E. Pursuant to the Urban Planning Scheme applicable to Plots D and E, 281 residential units and 245 residential units may be constructed thereon, respectively (before the Shabas Regulations). 18
Note 4 Significant Events during the Period of the Report (Cont.) C. Africa Israel Residences Ltd. (a subsidiary, hereinafter Africa Residences ) (Cont.) Pursuant to the terms of the tender, 80% of the residential units on each of Plots D and E are to be marketed in the framework of the price to the homeowner program (hereinafter the Price to the Homeowner Units ), as provided in the winning bid, whereas the balance may be marketed, with no restrictions, in the open market, by the winner. It is noted that based on the bid of Africa Residences, the final price per built-up square meter of the Price to the Homeowner Units (as this term is defined) will be, respectively, NIS 14,889 and NIS 14,742 (plus VAT as per law). In consideration of Plots D and E, Africa Residences is to pay an aggregate amount of about NIS 385 million (plus VAT as per law) (hereinafter the Consideration ), plus development costs, in the amount of about NIS 81 million. During the period of the report, Africa Residences paid 15% of the Consideration and the full amount of development costs. For purposes of completion of the transaction and payment of the Consideration for Plots D and E, on January 26, 2017, Africa Residences signed a loan agreement with a bank in connection with acquisition of Plot D, in the amount of about NIS 221 million, along with a guarantees framework, in the amount of about NIS 5 million (hereinafter the Loan for Plot D ). The Loan for Plot D bears interest at the rate of prime plus a fixed margin, as agreed to between the parties. The loan is scheduled for repayment (principal) in one lump-sum payment, on October 1, 2018. In addition, payments of interest are to be made once every two months, commencing from March 2017. Against the Loan for Plot D, Africa Residences placed a lien in favor of the said bank on its rights in Plot D. In addition, Africa Residences reached agreement with an additional bank, whereby it will sign a long-term agreement with the bank for acquisition of Plot E, in the amount of about NIS 192 million, along with a guarantees framework, in the amount of about NIS 4 million (hereinafter the Loan for Plot E ). The Loan for Plot E will bear fixed interest at the rate of prime plus a margin, as agreed to between the parties. The loan is scheduled for repayment (principal) in one lump-sum payment, on a date that will be determined between the parties. In addition, the interest payments will be made from time to time, on the dates that will be determined by the parties. Against the Loan for Plot E, Africa Residences placed a lien in favor of the said bank on its rights in Plot E. Furthermore, each of the said banks will provide a short-term loan, in the amounts of about NIS 30 million and about NIS 26 million, which will be used by Africa Residences to pay the Value Added Tax (VAT) component of acquisition of Plots D and E. D. Africa Israel Industries Ltd. (a subsidiary, hereinafter Africa Industries ) (1) The financial statements of Africa Industries as at March 31, 2017, include a direction of attention in the Auditors Review Report to the determination of the Board of Directors of Africa Industries that there are significant doubts regarding the continued existence of Africa Industries as a going concern. Regarding the financial position of Africa Industries, its cash flows and its ability to meet its liabilities, it is noted that: 19
Note 4 Significant Events during the Period of the Report (Cont.) D. Africa Israel Industries Ltd. (a subsidiary, hereinafter Africa Industries ) (Cont.) (1) (Cont.) (a) (b) (c) (d) (e) As at the date of the statement of financial position, Africa Industries had a cash balance (solo) of about NIS 3 million. As at the date of the statement of financial position, Africa Industries (solo) had negative working capital of about NIS 571 million. This negative balance stems mainly from: (1) presentation of an institutional loan, the balance of which as at March 31, 2017 was about NIS 152 million, as a current liability, due to non-compliance by Africa Industries with the financial covenants pursuant to the original financial agreement and due to calling of the loan for immediate repayment by the institutional entities; and (2) classification of the negative balance of the holdings of Africa Industries in its wholly-owned subsidiary, Negev Ceramics Ltd. (hereinafter Negev ), in the amount of about NIS 276 million, to excess liabilities of a subsidiary held for sale in the current liabilities. As at the date of the statement of financial position, the negative equity attributable to the owners of Africa Industries amounts to about NIS 141 million. There is significant doubt regarding the ability of Africa Industries to raise new credit or to refinance its debts. As at the date of the statement of financial position, Africa Industries was not in compliance with the financial covenants it undertook vis-à-vis the institutional entities in the framework of the institutional loan. On March 28, 2017, the institutional entities delivered a notice to Africa Industries calling for immediate repayment the unpaid balance of the institutional loan, including accrued interest, in the aggregate amount about NIS 160.6 million, as at the date of the statement of financial position, plus interest and linkage differences no later than the actual payment date. In addition, on April 2, 2017, Africa Industries was delivered a notification on behalf of one of the banks in favor of which Africa Industries provided a guarantee for securing the debts of Negev, regarding realization of the guarantee provided (hereinafter the Guarantee ). In light of completion of the transaction wherein Negev, during April, committed to issue its shares to a third party that is not related to Africa Industries and/or to the Company (as stated in Note 4D(2) below) (hereinafter the Transaction ), the agreement for realization of guarantees with the two banks in favor of which Africa Industries provided guarantees for securing the debts of Negev entered into effect (hereinafter the Secured Banks ) whereby the total debt of Africa Industries to the two Secured Banks, will be NIS 220 million. Pursuant to the agreement for realization of the guarantees, commencing from the completion date of the Transaction, an additional debt of Africa Industries to the banks, in the amount of NIS 220 million, will be added to the total liabilities of Africa Industries. 20