Africa Israel Investments Ltd. Financial Statements At December 31, 2007 Contents Page Auditors’ Report 2 Consolidated Balance Sheets 3–4 Company Balance Sheets 5–6 Consolidated Statements of Operations 7 Company Statements of Operations 8 Statements of Changes in Shareholders’ Equity 9 Consolidated Statements of Cash Flows 10 – 12 Company Statements of Cash Flows 13 – 14 Notes to the Financial Statements 15 – 285 Appendix – List of Group Companies 286 – 300 Auditors’ Report to the Shareholders of Africa Israel Investments Ltd. We have audited the accompanying balance sheets of Africa Israel Investments Ltd. (hereinafter – “the Company”) as at December 31, 2007 and 2006, and the consolidated balance sheets as at such dates, and the statements of operations, the statements changes in shareholders’ equity, and the statements cash flows – Company and consolidated – for each of the three years, the last of which ended December 31, 2007. These financial statements are the responsibility of the Company’s Board of Directors and of its Management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of certain consolidated subsidiaries and joint ventures, whose assets constitute 36% and 43% of the total consolidated assets as at December 31, 2007 and 2006 respectively, and whose revenues constitute 26%, 47%, and 42% of the total consolidated revenues for the years ended December 31, 2007, 2006 and 2005, respectively. In addition, we did not audit the financial statements of affiliated companies, the investment in which totaled NIS 923,931 thousand and NIS 627,372 thousand, as at December 31, 2007 and 2006, respectively, and the Group’s share in the earnings of these affiliated companies was NIS 96,040 thousand, NIS 100,541 thousand and NIS 233,097 thousand, for the years ended December 31, 2007, 2006 and 2005, respectively. The financial statements of those companies were audited by other auditors, whose reports thereon were furnished to us, and our opinion, insofar as it relates to amounts included in respect of such companies, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards, including standards prescribed by the Auditors’ Regulations (Manner of Auditor’s Performance), 1973. Such standards require that we plan and perform the audits to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and by its Management, as well as evaluating the overall financial-statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and on the reports of other auditors, the financial statements referred to above present fairly, in conformity with generally accepted accounting principles, in all material respects, the financial position – of the Company and consolidated – as at December 31, 2007 and 2006, and the results of the operations, the changes in the shareholders’ equity and the cash flows – Company and consolidated – for each of the three years, the last of which ended December 31, 2007. Furthermore, in our opinion, these statements have been prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements), 1993. As explained in Note 1C, the above-mentioned financial statements are presented in reported amounts, in accordance with Accounting Standards of the Israel Accounting Standards Board. Somekh Chaikin Certified Public Accountants (Isr.) Zohar, Zohar & Co. Certified Public Accountants (Isr.) March 30, 2008 2 Africa Israel Investments Ltd. Consolidated Balance Sheets In Thousands of Reported New Israeli Shekels Note At December 31 2007 2006 Investments in affiliated and other companies 2 1,548,582 -------------- Fixed assets 3 2,075,000 -------------- Real estate for investment 4 8,358,268 -------------- ** 2,931,627 -------------- Real estate for investment under construction 4 8,125,485 -------------- ** 2,664,745 -------------- Long-term loans and debit balances 5 1,730,715 -------------- 1,095,450 -------------- Real estate 6 2,488,250 -------------- ** 1,537,292 -------------- Current assets Inventory of buildings held for sale Construction work in progress, net Other inventories Deferred tax asset Trade receivables Other receivables and debit balances Marketable securities Short-term investments Cash and cash equivalents 7 8 9 10 11 11 12 13 13 4,448,193 4,559 489,153 449,516 2,068,417 1,916,191 1,512,210 811,416 4,605,397 16,305,052 -------------- 2,456,752 – 95,187 243,619 948,668 1,361,142 841,674 1,000,164 1,204,069 8,151,275 -------------- Other assets and deferred expenses 14 217,920 -------------- ** 93,486 -------------- 40,849,272 18,770,737 * ** 1,133,598 -------------* ** 1,163,264 -------------- Restated due to first-time application of accounting standard – see Note 1ZL(2). Reclassified due to first-time application of accounting standard – see Note 1ZL(3) and Note 1ZL(4). ____________________________ Lev Leviev Chairman of the Board of Directors ________________________ Avinadav Grinshpon Acting CEO _________________________ Ron Finaro CFO Approval date of the financial statements: March 30, 2008 The accompanying notes to the financial statements are an integral part thereof. 3 Africa Israel Investments Ltd. Consolidated Balance Sheets In Thousands of Reported New Israeli Shekels Note 39E Shareholders’ equity At December 31 2007 2006 * 7,008,014 -------------- 2,807,337 -------------- 62 -------------- 19,919 -------------- 4,711,020 -------------- * 1,216,565 -------------- 22 Contingent liabilities and commitments Receipts on account of options and equity component in respect of convertible debentures in a subsidiary 2I(1) Minority interest in subsidiaries Long-term liabilities Debentures Convertible debentures Liabilities to banks Other liabilities Deferred tax liability Liabilities in respect of employee severance benefits, net 16 16 16 16 17 18 8,124,822 18,486 8,260,836 350,969 1,348,184 24,090 18,127,387 -------------- 4,448,059 32,792 3,135,092 233,345 208,815 18,014 8,076,117 -------------- Current liabilities Credit from banks and others Contractors and suppliers Other payables and credit balances Customer advances, net, for construction work in progress 19 20 21 8 7,991,704 1,461,166 1,534,587 15,332 11,002,789 -------------- 5,340,163 713,735 586,138 10,763 6,650,799 -------------- 40,849,272 18,770,737 * Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 4 Africa Israel Investments Ltd. Company Balance Sheets In Thousands of Reported New Israeli Shekels Note At December 31 2007 2006 ** Investments in investee and other companies 2 13,917,887 -------------- Fixed assets 3 4,083 -------------- * 3,138 ------------- Real estate for investment 4 82,127 -------------- * 25,772 ------------- Real estate for investment under construction 4 3,992 -------------- 3,652 ------------- Long-term loans and debit balances 5 147,669 -------------- 144,288 ------------- Real estate 6 57,619 -------------- 61,962 ------------- Current assets Inventory of buildings for sale Deferred tax asset Trade receivables Other receivables and debit balances Marketable securities Short-term investments Cash and cash equivalents 7 10 11 11 12 13 13 150,901 32,125 251 1,291,576 8,898 5,735 30,885 1,520,371 -------------- 114,685 21,347 9,636 92,732 14,380 5,000 96,880 354,660 ------------- Other assets and deferred expenses 14 3,136 -------------- * 1,665 ------------- 15,736,884 8,102,012 * ** 7,506,875 ------------- * Reclassified due to first-time application of accounting standard – see Note 1ZL(3) and Note 1ZL(4). Restated due to first-time application of accounting standard – see Note 1ZL(2). ____________________________ Lev Leviev Chairman of the Board of Directors ________________________ Avinadav Grinshpon Acting CEO _________________________ Ron Finaro CFO Approval date of the financial statements: March 30, 2008 The accompanying notes to the financial statements are an integral part thereof. 5 Africa Israel Investments Ltd. Company Balance Sheets In Thousands of Reported New Israeli Shekels Note 38E Shareholders’ equity At December 31 2007 2006 7,008,014 -------------- * 2,807,337 ------------- Contingent liabilities and commitments 22 Long-term liabilities Capital notes Debentures Convertible debentures Liabilities to banks Other liabilities Deferred tax liability Liabilities in respect of employee severance benefits, net 15 16 16 16 16 17 18 114,308 6,119,812 17,548 77,496 20,189 27,264 4,165 6,380,782 -------------- 114,308 3,190,067 29,197 76,200 ** 20,469 3,657 3,474 3,437,372 ------------- Current liabilities Credit from banks and others Contractors and suppliers Other payables and credit balances 19 20 21 2,211,740 6,631 129,717 2,348,088 -------------- 950,722 5,936 * 900,645 1,857,303 ------------- 15,736,884 8,102,012 * ** Restated due to first-time application of accounting standard – see Note 1ZL(2). Reclassified. The accompanying notes to the financial statements are an integral part thereof. 6 Africa Israel Investments Ltd. Consolidated Statements of Operations In Thousands of Reported New Israeli Shekels Note Revenues Construction and real estate transactions Rental and operation of properties Operation of hotels Industry and textiles Earnings from affiliated companies, net Increase in fair value of real estate for investment Other income 23 4,293,196 498,740 368,361 1,862,931 110,359 2,040,010 3,715,559 12,889,156 -------------- 2,982,917 424,813 347,693 387,200 128,234 – 862,005 5,132,862 ------------- 2,795,995 305,013 283,030 429,337 220,312 – 261,979 4,295,666 ------------- 26 4,420,026 2,459,314 1,995,317 28 29 30 31 32 33 195,267 329,386 1,726,117 88,630 610,937 51,194 7,421,557 -------------- 219,416 308,779 360,771 65,262 424,933 59,663 3,898,138 ------------- 146,292 261,436 430,395 46,813 268,379 17,824 3,166,456 ------------- 5,467,599 1,234,724 1,129,210 24 4 25 Cost and expenses Construction and real estate transactions Maintenance, supervision and management of real estate and other properties Operation of hotels Industry and textiles General and administrative expenses Financing expenses, net Amortization of other assets and other expenses Earnings before taxes on income Taxes on income For the Year Ended December 31 2007 2006 2005 34 Earnings after taxes on income Cumulative effect of change in method Minority interest in earnings of subsidiaries, net (622,298) Earnings per share in NIS (189,738) 4,845,301 1,044,986 – – (591,436) Net earnings for the year * * (312,724) 816,486 (1,420) *(201,321) *(166,282) 4,253,865 843,665 648,784 85.47 – 85.47 17.42 – 17.42 13.79 (0.03) 13.76 82.54 – 82.54 15.49 – 15.49 11.05 (0.03) 11.02 35 Basic earnings per share Before cumulative effect of change in accounting method Cumulative effect of change in accounting method Net earnings Diluted earnings per share Before cumulative effect of change in accounting method Cumulative effect of change in accounting method Net earnings * Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 7 Africa Israel Investments Ltd. Company Statements of Operations In Thousands of Reported New Israeli Shekels Note Revenues Construction and real estate transactions Rental and operation of properties Earnings from investee companies, net Financing income, net Increase in fair value of real estate for investment Other income 23 Costs and expenses Construction and real estate transactions Maintenance, supervision and management of real estate and other properties General and administrative expenses Financing expenses, net Other expenses 24 32 4 25 99,171 4,700 4,448,558 – 9,165 57,923 4,619,517 ------------ 107,083 4,714 * 866,791 – – 67,813 1,046,401 ------------ 92,586 12,547 * 561,721 119,892 – 73,460 860,206 ---------- 26 88,957 74,348 87,265 28 31 32 33 5,133 70,432 171,993 29,137 365,652 ------------ 10,299 56,482 32,067 15,718 188,914 ------------ 15,205 42,374 – 742 145,586 ---------- 4,253,865 857,487 714,620 – (13,822) (65,836) 4,253,865 843,665 648,784 Operating earnings before taxes on income Taxes on income 34 Net earnings for the year * For the Year Ended December 31 2007 2006 2005 Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 8 Africa Israel Investments Ltd. Statements of Changes in Shareholders’ Equity In Thousands of Reported New Israeli Shekels Balance as at January 1, 2005 Net earnings for the year Conversion of debentures into shares Dividend paid Dividend proposed after the balance sheet date Adjustments deriving from translation of financial statements of autonomous investees Balance as at December 31, 2005 Net earnings for the year Classification of capital component of convertible debentures (see Note 1U) Issuance of shares Conversion of debentures into shares Dividend paid Capital reserve in respect of options to employees Dividend proposed after the balance sheet date Adjustment of balance of retained earnings in respect of new accounting standard (see Note 1G(5)(d)) Adjustments deriving from translation of financial statements of autonomous investees Balance as at December 31, 2006 Net earnings for the year Conversion of debentures into shares Dividend paid Capital reserve in respect of options to employees Dividend proposed after the balance sheet date Adjustment of retained earnings for new accounting standard (see Note 1ZL(3)) Adjustments deriving from translation of financial statements of autonomous investees Balance as at December 31, 2007 * Equity component of convertible debentures Dividend declared after the balance sheet date Share capital and premium Capital reserves Premium on shares Other Total 367,745 – 292,910 – 25,170 – 318,080 – – – 40 – 30,923 – – – 30,923 – – – – – – (200,000) – – – – – – – – 200,000 (200,000) – – – – – 95,999 – – 367,785 – 323,833 – 25,170 – 349,003 – – – 72,301 – 200,000 – – 195 – 386,018 – – – 386,018 1,375 – – – – – – – 1,375 386,213 69 – 49,524 – – – 49,524 – – – – (200,000) – – 49,120 (200,000) – – 6,995 6,995 – – – – – – – – – – 360,000 (360,000) – – – – – – – 3,397 – – – – – (260,123) – – 368,049 – 759,375 – 32,165 – 791,540 – 902 – (187,822) – 360,000 – 1,474,668 4,253,865 64 – 41,432 – – – 41,432 – (331) – – – – (360,000) – – – – 1,752 1,752 – – – – – – – – – – 400,000 (400,000) – – – – – – – 897,343 897,343 – – – – – (633,448) – – (633,448) 368,113 800,807 33,917 834,724 571 (821,270) 400,000 6,225,876 (473) – Translation adjustments (23,698) – 200,000 – Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 9 Retained earnings * 538,822 648,784 * 987,606 843,665 * Total * 1,400,949 648,784 30,963 (200,000) – 95,999 1,976,695 * 843,665 6,995 – 3,397 (260,123) 2,807,337 4,253,865 41,165 (360,000) 1,752 – 7,008,014 Africa Israel Investments Ltd. Consolidated Statements of Cash Flows In Thousands of Reported New Israeli Shekels For the Year Ended December 31 2006 2005 2007 Cash flows generated by operating activities Net earnings for the year Adjustments to reconcile net earnings to net cash flows generated by operating activities: Net increase in real estate Other (Appendix A) Net cash provided by (used in) operating activities 4,253,865 Cash flows generated by investing activities Acquisition of newly consolidated subsidiaries (including proportionately consolidated companies) (Appendix B) Company which ceased to be fully consolidated and is now proportionately consolidated (Appendix C) Proceeds from realization of investments in formerly consolidated subsidiary and sale of activities (Appendix D) Investment in affiliated and other companies Investment in subsidiary Proceeds from sale of shares of investee companies Acquisition of other assets Acquisition of fixed assets, real estate for investment and real estate for investment under construction Proceeds from sale of fixed assets, real estate for investment and real estate for investment under construction Repayment of loans to affiliated companies Investment in long-term deposits and loans Repayment of long-term deposits and loans Acquisition of marketable securities Sale of marketable securities Investment in short-term deposit Net cash used in generated by investing activities Cash flows generated by financing activities Dividend paid to shareholders Dividend paid to minority interest in subsidiaries Issuance of capital, net Issuance of shares to minority interest in subsidiaries Receipt of long-term loans and liabilities Repayment of long-term loans and liabilities Short-term credit, net Net cash provided by generated by financing activities Translation differences in respect of cash balances in autonomous investee companies Increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year * * 648,784 (720,489) (4,302,959) (769,583) -------------- (549,292) * 42,960 337,333 ------------- (142,919) (670,188) (164,323) ------------- (3,288,143) (355,096) (73,563) – 61,900 (96,286) (2,932,504) – 618,278 (41,524) (987) (250,593) (7,500) 6,633 (60,767) 280,399 (205,984) – 150,060 (112,542) (5,746,366) (1,454,817) (2,307,012) 1,405,690 – (743,121) 57,202 (3,806,644) 3,176,139 88,727 (11,308,552) -------------- 211,189 – (615,405) 30,536 (5,119,018) 4,454,116 38,589 (3,061,220) ------------- 84,076 49,641 (235,135) 338 (1,372,977) 1,440,595 (833,794) (3,135,898) ------------- (360,000) (81,615) – 5,634,216 11,168,304 (1,028,682) 204,330 15,536,553 -------------- (200,000) (43,714) 386,213 163,501 4,494,605 (1,862,276) 235,895 3,174,224 ------------- (200,000) (55,730) – 137,823 4,607,284 (600,304) (534,313) 3,354,760 ------------- (57,090) -------------- (19,835) ------------- 26,623 ------------- 3,401,328 1,204,069 4,605,397 430,502 773,567 1,204,069 Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 10 * 843,665 * – 81,162 692,405 773,567 Africa Israel Investments Ltd. Consolidated Statements of Cash Flows In Thousands of Reported New Israeli Shekels Appendix A – Adjustments to reconcile net earnings to net cash provided by (used in) operating activities For the Year Ended December 31 2006 2005 2007 Income and expenses not involving cash flows: Group’s net equity in earnings of affiliated companies less of dividends received, net Minority interest in earnings of subsidiaries, net Gain from decline in rate of holdings Increase in value of real estate for investment Depreciation and amortization Decline in value of investments Deferred taxes, net Increase (decrease) in liabilities in respect of employee severance benefits, net Capital gains, net Increase in value of marketable securities, net Adjustment differences in respect of – Long-term loans and other long-term liabilities Loans to affiliated companies Deposits and loans Benefit in respect of options to employees Changes in asset and liability items: Other inventory Construction work in progress and inventory of buildings held for sale, net Trade receivables and other receivables and debits Contractors, trade payables and other payables and credits (41,758) 591,436 (3,432,049) (2,040,010) 99,862 2,812 194,333 (5,083) 201,321 (425,236) – * 171,738 4,240 (112,148) (162,290) * 166,282 (223,316) – * 133,796 18,673 105,047 4,406 (178,935) (14,790) 3,816 (57,740) (37,715) (4,942) (20,390) (27,769) 101,967 (26,528) (8,339) 1,752 (4,745,841) -------------- 14,295 (24,683) 1,304 6,300 (259,591) ------------- 18,103 (26,983) (2,292) – (26,081) ------------- (103,054) (6,252) (1,779,202) 972,905 1,352,233 442,882 -------------- (352,538) 429,750 231,591 302,551 ------------- (4,302,959) * * * 42,960 Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 11 5,139 (111,471) (620,954) 83,179 (644,107) ------------* (670,188) Africa Israel Investments Ltd. Consolidated Statements of Cash Flows In Thousands of Reported New Israeli Shekels Appendix B – Acquisition of newly consolidated subsidiaries (including proportionately consolidated companies) For the Year Ended December 31 2006 2005 2007 Assets and liabilities of the companies at date of acquisition: Working capital (excluding cash) Other assets Fixed assets Long-term liabilities less current maturities Minority interest at acquisition date Appendix C – 473,203 78,522 3,373,196 (468,506) (168,272) 3,288,143 2,059 13,200 309,686 (1,741) 31,892 355,096 60,780 – 3,537 – 9,246 73,563 Company which ceased to be fully consolidated and is now proportionately consolidated For the Year Ended December 31 2006 2005 2007 Working capital (excluding cash) Fixed assets Deferred taxes Gain from decline in rate of holdings Appendix D – – – – – – 561,714 (151,868) 740 (472,486) (61,900) – – – – – Proceeds from realization of investments in formerly consolidated subsidiary and sale of activities For the Year Ended December 31 2006 2005 2007 Working capital (excluding cash) Fixed assets, net Long-term liabilities less current maturities Gain on sale of activities Appendix E – 146,194 (580,996) 338,516 – (96,286) 21,405 (15,596) – (4,822) 987 71,585 (166,460) – (185,524) (280,399) Material non-cash activities: For the Year Ended December 31 2006 2005 2007 Sale of fixed assets on credit Sale of real estate on credit Acquisition of fixed assets on credit Sale of shares of investee company Conversion of debentures into shares Conversion of debentures into shares in investee company – – 30,242 – 41,165 – 570,375 – 24,933 – 49,120 251,657 The accompanying notes to the financial statements are an integral part thereof. 12 17,220 34,491 59,878 77,482 30,963 – Africa Israel Investments Ltd. Company Statements of Cash Flows In Thousands of Reported New Israeli Shekels For the Year Ended December 31 2006 2005 2007 Cash flows generated by operating activities Net earnings for the year Adjustments to reconcile net earnings to net cash flows generated by operating activities: Net increase in real estate Other (Schedule A) Net cash used in generated by operating activities * 4,253,865 Cash flows generated by investing activities Investment in investee companies (including in capital notes) Proceeds from sale of investment in affiliated and other companies Acquisition of other assets Acquisition of fixed assets, real for investment and real for investment under construction Proceeds from sale of fixed assets, real for investment and real for investment under construction Repayment of deposits and loans Acquisition of marketable securities Sale of marketable securities Investment in short-term deposit, net Net cash used in generated by investing activities Cash flows generated by financing activities Issuance of capital, net Dividend paid to shareholders Receipt of long-term loans and liabilities Repayment of long-term loans and liabilities Short-term credit, net Balances with investee companies, net Net cash inflow generated by financing activities 843,665 * 648,784 (4,343) (4,682,852) (433,330) -------------- 5,865 (965,601) (116,071) ------------- (224,607) ------------- (1,605,549) (1,008,367) (1,127,096) 157,208 (8,512) – (1,013) – (3,645) (1,511) (3,101) (4,051) – (10,168) 15,542 (4,184) (1,456,862) -------------- 530 7,858 (520) 379 (103,083) (1,107,317) ------------- 79 189 (5,607) 20,743 (9,071) (1,128,459) ------------- – (360,000) 3,208,964 (513,920) 1,414,942 (1,925,789) 1,824,197 -------------- 386,213 (200,000) 2,292,025 (2,845) 237,500 (1,413,061) 1,299,832 ------------- – (200,000) 1,432,586 (151,399) (246,767) 484,376 1,318,796 ------------- 312 * (58,529) *(814,862) Increase (decrease) in cash and cash equivalents (65,995) 76,444 (34,270) Cash and cash equivalents at beginning of year 96,880 20,436 54,706 Cash and cash equivalents at end of year 30,885 96,880 20,436 * Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 13 Africa Israel Investments Ltd. Company Statements of Cash Flows In Thousands of Reported New Israeli Shekels Appendix A – Adjustments to reconcile net earnings to net cash used in operating activities For the Year Ended December 31 2006 2005 2007 Income and expenses not involving cash flows: Company’s equity in earnings of investee companies less dividends received, net Gain from decline in rate of holdings Depreciation and amortization Change in fair value of real estate investment Deferred taxes, net Increase (decrease) in liabilities in respect of employee severance benefits, net Capital gains on sale of fixed assets, net Decrease (increase) in value of marketable securities, net Adjustment differences in respect of – Debt and other long-term liabilities Loans to investee companies Deposits and loans Benefit in respect of options to employees Changes in asset and liability items: Inventory of buildings held for sale, net Trade receivables and other receivables and debits Contractors, trade payables and other payables and credits Appendix B – (4,439,034) (18,170) 722 (9,165) – * (798,407) – 1,274 – 6,174 691 * (457,505) – 3,671 – 19,111 1,122 (36) (8,632) (4,966) (8) (960) 116,556 (286,051) (1,097) (4,300) (4,639,740) ------------- 15,070 (154,339) 173 6,300 (931,301) ----------- 18,776 (338,985) (253) – (761,119) ----------- (30,897) (74,901) 62,686 (43,112) ------------- (8,602) 55,659 (81,357) (34,300) ----------- 2,267 (113,198) 57,188 (53,743) ----------- (4,682,852) *(965,601) *(814,862) – 108 Material non-cash activities: For the Year Ended December 31 2006 2005 2007 Acquisition of fixed assets on credit Conversion of debentures into shares * – 41,165 3,703 49,120 Restated due to first-time application of accounting standard – see Note 1ZL(2). The accompanying notes to the financial statements are an integral part thereof. 14 – 30,963 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 All amounts are presented in thousands of reported New Israeli Shekels unless indicated otherwise Note 1 – Significant Accounting Policies A. General These financial statements are prepared in accordance with the Securities Regulations (Preparation of Annual Financial Statements), 1993. Nonetheless, the financial statements are prepared while classifying the categories in the appropriate format, in Management’s opinion, based on the nature of the Company’s business, which is an investment and holding company, whose assets (investments, fixed assets and real estate) are not current assets. This format is different than the format required based on the Securities Regulations (Preparation of Annual Financial Statements), 1993, however, it is provided in accordance with Regulation No. 8 to the above-mentioned Regulations, which permits such a deviation. B. Definitions In these financial statements: 1. The Company – Africa Israel Investments Ltd. 2. The Africa Group – the Company and its investee companies, as detailed in the appendix – “List of Group Companies”. 3. Subsidiaries – companies whose financial statements are consolidated with the financial statements of Africa Israel Investments Ltd., except for proportionately consolidated companies. 4. Proportionately consolidated companies – companies, including joint ventures, whose financial statements are consolidated with those of the Company, by the proportionate consolidation method. 5. Affiliated companies – companies, excluding subsidiaries and proportionately consolidated companies, the Company’s investment in which is stated on the equity basis. 6. Investee companies – subsidiaries, proportionately consolidated companies and affiliated companies. 7. Related parties – as defined in Opinion 29 of the Institute of Certified Public Accountants in Israel. 8. Interested parties – as defined in Paragraph (1) of the definition of an “interested party” in a company in Section 1 of the Securities Law, 1968. 9. Controlling interests – as defined in the Securities Regulations (Presentation of Transactions between a Company and a Controlling Shareholder Therein in the Financial Statements) – 1996, and in Accounting Standard No. 23, “The Accounting Treatment of Transactions between an Entity and a Controlling Shareholder Therein” of the Israeli Accounting Standards Board. 10. CPI/Index – the Consumer Price Index published by the Central Bureau of Statistics. 11. Adjusted amount – the nominal historical amount adjusted for the index in respect of December 2003 in accordance with the provisions of Opinions 23 and 36 of the Institute of Certified Public Accountants in Israel. 12. Reported amount – an adjusted amount as at the transition date (December 31, 2003), with the addition of amounts in nominal values that were added after the transition date and less amounts eliminated after the transition date. 13. Nominal financial report – financial report based on reported amounts. 15 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) C. Financial Statements in Reported Amounts (1) In October 2001 the Israeli Accounting Standards Board (hereinafter – “the Standards Board”) published Accounting Standard No. 12, “Discontinuance of Adjustment of Financial Statements”. Pursuant to this Standard and in accordance with Accounting Standard No. 17 that was published in December 2002, the adjustment of financial statements was discontinued as of January 1, 2004. Up to December 31, 2003, the Company continued to prepare adjusted financial statements in accordance with Opinion No. 36 of the Institute of Certified Public Accountants in Israel. The Company has implemented the provisions of the Standard and has accordingly discontinued the adjustment as of January 1, 2004. (2) In the past the Company prepared its financial statements on the basis of historical cost adjusted for the changes in the Consumer Price Index (CPI). The adjusted amounts included in the financial statements as at December 31, 2003 constituted the starting point for the nominal financial report as of January 1, 2004. Any additions made during the period are included according to their nominal values. (3) The amounts of the non-monetary assets do not necessarily represent realization value or updated economic value but, rather, only the reported amounts of those assets. (4) The term “cost” in these financial statements means the reported amount of cost. (5) The financial statements of certain subsidiaries are presented based on the changes in rates of exchange of their relevant functional currencies. See E., below. D. Reporting Principles Balance sheets: (1) The book value of investments in investee companies is determined based on the financial statements of these companies in reported amounts or translated into shekels. (2) Non-monetary items (mainly, fixed assets, inventory of work in progress, investments presented at cost) are stated at reported amounts. (3) Monetary items are stated in the balance sheet at their nominal historical values as at the balance sheet date. Statements of operations: (1) The Company’s share in the results of investee companies and the share of the outside shareholders in the results of subsidiaries, were determined based on the financial statements of these companies in reported amounts. (2) Income and expenses deriving from non-monetary items (such as, depreciation and amortization, changes in inventory, prepaid income and expenses, etc.) or from provisions included in the balance sheet are calculated as the difference between the reported amount of the opening balance and the reported amount of the closing balance. (3) All other operating items are stated at their nominal values. Statements of changes in shareholders’ equity: A dividend declared in the period of the report is presented in nominal values. Company data in nominal historical values for tax purposes is presented in Note 39. 16 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) E. Effect of Changes in Exchange Rates of Foreign Currency Commencing from January 1, 2004, the Company applies Accounting Standard No. 13, regarding the “Effects of Changes in Exchange Rates of Foreign Currency”. The Standard deals with the translation of transactions in foreign currency and the translation of financial statements of foreign activities for purposes of the inclusion thereof with the financial statements of the reporting entity. The Standard provides principles for classification of foreign activities as an autonomous investee entity overseas or as an integrated extension based on the indicators enumerated in the Standard and the use of discretion, as well as the manner of translation of the financial statements of autonomous investee entities as stated. Transactions in foreign currency Transactions denominated in foreign currency are recorded at the time of their initial recognition based on the rate of exchange on the transaction date. Exchange rate differences arising during the period deriving from the payment of monetary items, or deriving from reporting the company’s monetary items at exchange rates different from those originally used to record the transaction or from those reported in prior financial statements, are recorded on the statement of operations. Foreign activities classified as autonomous investee entities The Company has investee companies operating overseas. Most of these companies operate autonomously. The financial statements of investee companies operating overseas as an “autonomous investee entity” of the Group, were translated as follows: (a) The monetary and non-monetary assets and liabilities of an autonomous investee entity overseas were translated based on the closing rate. The balance of goodwill created upon acquisition of an autonomous investee entity overseas is treated as an asset of that autonomous investee entity overseas and is translated based on the closing rate commencing January 1, 2004. (b) Items of income and expense were translated based on the rate of exchange at the time of execution of the transaction. (c) All exchange rate differences created were classified in a separate category in the shareholders’ equity section up to the time of realization of the net investment. In the past, the Company was in the practice of adjusting the financial statements of certain autonomous investee entity overseas. These companies do not meet the definition of a hyper-inflationary environment pursuant to Accounting Standard No. 12 and, therefore, their adjustment for inflation overseas has been discontinued as of January 1, 2004. A write down of the value an investment in an autonomous investee entity overseas does not constitute a partial realization and, therefore, no portion of the exchange rate differences is recorded on the statement of operations at time of such write down. 17 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) F. Length of Operating Cycle The Company engages in a broad range of operations (including those carried out through its investee companies) with respect to some of which, the regular operating cycle generally exceeds one year and may extend for as long as two to two and a half years, particularly regarding contracting and construction engagements. The regular operating cycle of the infrastructure segment generally exceeds one year and may extend for as long as five years. In consideration of the above, the “current assets” category includes items that are expected to be realized within the ordinary operating cycles of the different segments of operations. G. Consolidation of the Financial Statements (1) The consolidated financial statements include the financial statements of the Company, as well as those of companies over which the Company has control. Jointly controlled companies are consolidated by the proportionate consolidation method. The financial statements of inactive, non-material subsidiaries have not been consolidated. (2) A list of the companies whose financial statements are included in the consolidated financial statements as well as the rates of holdings and control therein, appear in the appendix to these financial statements. (3) For purposes of the consolidation, the amounts included in the financial statements of the subsidiaries were taken into account after making the adjustments necessary as a result of application of the uniform accounting principles applied by the Group. (4) (a) Regarding financial statements of subsidiaries that are adjusted based on the changes in foreign currency exchange rates – see 1E. (b) A subsidiary is included based on its financial statements, which are prepared for a date prior to the date of the Company’s financial statements and where such time difference does not exceed three months, based on principles provided in Opinion No. 57 of the Institute of Certified Public Accountants in Israel. (5) Commencing from January 1, 2006, the Company applies Accounting Standard No. 20 (Revised) regarding “The Accounting Treatment of Goodwill and Intangible Assets of an Investee Company” (hereinafter – “the Standard”). Pursuant to the Standard: (a) The excess cost of the acquisition of an investment in a subsidiary over the Company’s share in the fair value of its identifiable assets (including intangible assets) less the fair value of the identifiable liabilities (after allocation of taxes) at the date of acquisition, is recorded as goodwill. (b) Goodwill and intangible assets having an undefined useful life are not amortized on a systematic basis. Instead, the Company makes an examination of decline in value of the goodwill and intangible assets, as stated, deriving from acquisition of a subsidiary, once a year (at the latest on December 31, 2007) or more frequently if events occurred or changes took place indicating that there may have been a decline in the value of the assets. 18 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) G. Consolidation of the Financial Statements (Cont.) (5) (Cont.) (c) The excess cost attributed to the assets and liabilities are recorded in the appropriate balance sheet categories. The goodwill is presented in the consolidated balance sheet in the “other assets and deferred expenses” category. (d) The excess of the Company’s share in the fair value of the identifiable assets (including intangible assets) less the fair value of the identifiable liabilities (after allocation of taxes) over the acquisition cost of the investment in the subsidiary was deducted first from the Company’s share in the subsidiary’s intangible assets and the balance was deducted first from the Company’s share in the subsidiary’s other non-monetary assets, in proportion to the fair values of these assets. The balance of the excess created after the deduction, as stated, is negative goodwill, which was recognized in the statement of operations at the time of the acquisition. The effect of the initial application of the Standard amounted to an increase in retained earnings of NIS 3,397 thousand, as a result of recording the balance of the negative goodwill as at January 1, 2006 to the retained earnings. (6) Material inter-company balances and transactions between the consolidated subsidiaries have been eliminated, as was the profit on inter-company sales and transactions not yet realized outside the Group. (7) (a) The consolidated financial statements include the relative portion of assets, liabilities, revenues and expenses of proportionately consolidated companies based on the rates of holdings in those companies. Joint ventures are already included based on a proportionate consolidation in the financial statements of the relevant companies. (b) Income from sales of the investor company to the proportionately consolidated companies and joint ventures that have not yet been realized outside the Group – are eliminated based on the rate proportionate to the holding. (c) Income from sales of the proportionately consolidated companies and joint ventures to the investor company that have not yet been realized outside the Group – are eliminated based on the full share of the profit that relates to the investor company. H. Use of Estimates In preparation of the financial statements in accordance with generally accepted accounting principles, Company Management is required to make use of estimates and assessments regarding transactions or matters the ultimate impact of which on the financial statements cannot be precisely determined on the date they are made. Even though estimates and assessments are made based on Management’s, the ultimate impact of transactions or matters as stated may be different than the estimates or assessments made with respect thereto. 19 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) I. Investments (1) In investee companies – The investments in investee companies are included in the Company’s financial statements based on the equity method of accounting, that is, based on the cost of the shares plus earnings and less losses incurred and dividends distributed since the acquisition date and up to the balance sheet date, on the basis of the audited financial statements of the aforesaid companies as at December 31, 2007. Up to December 31, 2005, account was taken of the Company’s share in losses due to an expected realization of convertible securities issued by investee companies, if it is probable that those securities will be converted or realized. Commencing from January 1, 2006, the Company applies Accounting Standard No. 22, “Financial Instruments: Disclosure and Presentation”. Goodwill and intangible assets having an undefined useful life are not amortized on a systematic basis. Commencing from the first quarter of 2007, the Company includes its share in the results of Alon Israel Fuel Company Ltd. (an affiliated company, hereinafter – “Alon”) with a lag of three months due to the fact that Alon’s financial statements were not provided to the Company at the time required in order to present its investment in Alon on the equity basis. As a result of that stated above, the Company’s financial statements as at December 31, 2007 include the Company’s share in the results of Alon’s activities for the period from January 1, 2007 and up to September 30, 2007 and the investment in Alon is presented in the Company’s balance sheet on basis of Alon’s financial statements as at September 30, 2007. (2) In other companies – – Non-marketable shares are presented based on the lower of cost or realization value in accordance with the evaluation of Company Management. – Marketable securities that constitute a permanent investment are stated at cost, unless there has been a decline in their value that is not of a temporary nature. – Venture capital investments made by the Company are stated at cost. In cases where the fair value of the investment declines below the cost basis, and the decline is not of a temporary nature, a provision for decline in value of the investment is recorded. Gain on sale of the investments is recorded in the financial statements at the time of their sale. 20 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) I. Investments (Cont.) (3) Impairment in value of investments – From time to time, the Company examines whether there has been a decline in value that is not of a temporary nature with respect to its permanent investments. This examination is made when there are indications that there has been a decline in the value of permanent investments, including a decline in stock market prices, continuing losses of the investee, the field in which the investee operates and additional parameters. The reductions required in order to adjust the value of these investments, which in Management’s opinion are based upon all relevant aspects and considering their due weight, and which are not of a temporary nature, are reflected in the statement of operations. J. Fixed Assets 1. Fixed assets are stated at cost less accumulated depreciation and less losses from declines in value, if any. 2. Regarding capitalization of financing expenses to fixed assets – see Y., below. 3. The cost of assets in respect of which an investment grant was received, is stated net of the amount of the grant. 4. The cost of self-constructed assets includes the cost of materials, direct labor and any cost that can be directly allocated to bringing the asset to the state and position required in order that it will be able to function in the manner intended by management. 5. Fixed assets leased under capital leases are presented as property, based on the regular acquisition prices (without the financing component), and are depreciated using the depreciation rates customary for such assets. The lease fees payable in the upcoming years, after deduction of the implicit interest component, are included in the “liabilities” section. The interest relating to these amounts accrues on a current basis and is recorded on the statement of operations. 6. Improvements and enhancements are charged to the cost of the relevant assets whereas the cost of maintenance and repairs is expensed as incurred. 7. The Company depreciates separately every fixed-asset item having a cost that is significant in relation to the overall costs of the item. The depreciation is computed on the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the life of the lease, which does not exceed the economic life of the asset. % The annual depreciation rates are as follows: Buildings and various structures Plants, systems, construction and production machinery and equipment Vehicles Computers Furniture and general equipment Jet (scrap value – 50%) 21 1.5 – 10 (mainly 2%) 3 – 20 15 – 20 331/3 6 – 20 331/3 (mainly 20%) (mainly 6%) Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) J. Fixed Assets (Cont.) 8. Investments in leased buildings are depreciated over the term of the lease, which does not exceed the economic useful life of the asset. See Note 1ZL(2) below regarding the first-time application of Accounting Standard No. 27 regarding “Fixed Assets”. K. Real Estate for Investment See Note 1ZL(3) below, with respect to the first-time application of Accounting Standard No. 16 regarding “Real Estate for Investment”. L. Real Estate (1) Real estate designated for construction and sale is stated at cost (including development and infrastructure costs). Management writes down the value of real estate to its market value when, in its opinion, there has been a significant and non-temporary decline in its value. (2) In Management’s estimation, the cost of real estate as at the balance sheet date does not exceed its estimated realizable value. (3) See Section V(2) regarding application of combination transactions. M. Construction Work-In-Progress and Customer Advances Construction work-in-progress is stated at cost, including all identified direct expenses and joint indirect costs and expenses. Direct costs and expenses are allocated to the specific project for which they are incurred, whereas indirect costs and expenses are allocated to each project based on a ratio of the costs. The balance of the costs, which is included in the balance sheet in the “current assets” section, is net of those costs that have been recognized as expenses on the statement of operations on the basis of the percentage of completion, less the excess receipts from customers on account of performance of the work over the amount of the revenues recorded in the statement of operations. The advances received from the customers, after deduction of that part which was recorded on the statement of operations based on the percentage of completion method, are presented in the balance sheet in the “assets” or “liabilities” categories, as the case may be. Joint building ventures are included in the Company’s financial statements based on the proportionate consolidation method. 22 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) N. Inventory of Buildings Held for Sale The inventory of buildings held for sale in the “current assets” section includes the land constituting the relative portion of the area on which the construction work on the projects is performed, plus the cost of the work executed on the projects as well as other costs allocated thereto, less the cumulative amounts recognized as an expense up to the end of the period of the report, and less all receipts with respect to those projects which are in the framework of projects classified as a sale, where recognition of revenue from such projects has not yet commenced. Direct costs and expenses are charged to projects on a specific basis, whereas indirect costs and expenses are allocated among the jobs based on the relative proportion of the costs. Where the estimated expenses for a building project indicate that a loss is expected, an appropriate provision for such loss is recorded. Advances received from customers in projects wherein recognition of revenue has commenced, less amounts recorded as income in the statement of operations, are presented in the balance sheet as part of the assets or liabilities, as the case may be. Receipts with respect to transactions not classified as a sale, are stated under “current liabilities”. O. Other Inventory Inventories are stated at the lower of cost or market. Cost was determined is follows: Inventory of textile products (apparel and bathing suits in various stages of production) – at standard costs set for each type of product, based on the stage of completion. Inventories of building materials – on the moving average basis. Inventories of food, beverages and other materials – on the “first-in, first-out” basis. Inventories in the industrial sector Raw materials – On the moving average basis. Work in process and finished goods – Partly based on calculated production costs (including materials, labor, and other direct and indirect expenses, and partly based on the production expenses). Raw and auxiliary materials – on a weighted-average basis. Labor and indirect expenses – on the “first-in, first-out” basis. Purchased items – on a weighted-average basis. Maintenance and auxiliary materials and spare parts – Partly based on the moving average basis and partly on the “first-in, first-out” basis. See also Note 1ZL(1) below regarding the first-time application of Accounting Standard No. 26 regarding “Inventory”. 23 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) P. Other Assets and Deferred Expenses Other assets: (1) Rights to use a trade name that were paid for in connection with the acquisition of businesses, and goodwill relating to activities acquired are amortized at the annual rate of 10%–20%. (2) Regarding goodwill in respect of subsidiaries – see Section G(5) above. See also Note 1ZL(4) below regarding the first-time application of Accounting Standard No. 30 regarding “Intangible Assets”. Deferred expenses: Up to December 31, 2005, deferred expenses in respect of raising loans and issuing debentures were presented in the “other assets” category based on their cost less accumulated amortization. Such expenses were amortized using the straight-line method over the life of the liability. Commencing from January 1, 2006, upon the entry into effect of Accounting Standard No. 22, regarding “Financial Instruments: Disclosure and Presentation”, costs of issuing debentures as well as other financial liabilities are offset from the balance of the said liabilities and are amortized to the statement of operations based on the “effective interest” method. Costs of raising convertible debentures allocable to the capital component are offset from the capital component. Upon entry of the standard into effect, costs of raising credit and debentures, the amortized cost of which as at December 31, 2005 amounted to NIS 11,945 thousand, were offset from the balance of the liabilities as at that date. Q. Marketable Securities Marketable securities are stated at their market value as at the balance sheet date. Part of the amount of changes in the value of marketable securities is recognized on a current basis, and part thereof is included with the financing costs that are capitalized to qualifying assets in accordance with Accounting Standard No. 3 (see X., below). R. Monetary Balances presented based on Present Value The balance of a long-term receivable that does not bear interest is stated based on its present value calculated in accordance with the market interest rate prevailing at the time of its creation. S. Cash and Cash Equivalents Cash and cash equivalents include cash and bank deposits having an initial maturity, measured from the date of the deposit therein, not exceeding three months. 24 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) T. Allowance for Doubtful Debts The allowance for doubtful debts is calculated on the basis of specific identification of balances, the collection of which, in Management’s opinion, is doubtful. In determining the adequacy of the allowance, Management bases its opinion on, among other things, the estimated risk, in reliance on available information with respect to the debtor’s financial position and an evaluation of the collateral received. U. Deferred Taxes The Group companies create deferred taxes in respect of temporary differences. The temporary differences are differences in the value of assets and liabilities for tax purposes and for financial reporting purposes. Deferred tax balances (asset or liability) are calculated based on the tax rates that will apply when the deferred tax liability is utilized, or when the deferred tax asset is realized, based on the tax rates and tax laws enacted or the enactment of which has been effectively completed up to the balance sheet date. The main factors, in respect of which deferred taxes were not created, are as follows: (1) Temporary differences created upon the initial recognition of goodwill. (2) Temporary differences created upon the initial recognition of an asset or liability in a transaction that is not a business combination and where at the time of such initial recognition there is no impact on the accounting income or the taxable income (loss for tax purposes). (3) The deferred tax liability in respect of the adjustment component of non-monetary depreciable assets that were defined as a “protected asset” in the Income Tax Law (Adjustments for Inflation), 1982, that were acquired prior to the entry of this law into effect and their amortization period is at least 20 years from the date they were placed into service. (4) Investments in investee companies, since it is the intention of the Company to hold such investments and not to sell them. (5) Deferred tax assets in respect of temporary differences where the probability of realization of the deferred tax asset is doubtful. (6) Deferred taxes in respect of temporary differences relating to land that were created in business combinations that took place prior to January 1, 2005. The Group may be charged for additional tax in a case of distribution of a dividend between Group companies. This additional tax was not included in the accounts in light of the fact that the Group’s policy is not to distribute a dividend that triggers an additional tax to the Group in the foreseeable future. 25 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) U. Deferred Taxes (Cont.) Commencing from January 1, 2005, the Company applies Accounting Standard No. 19, “Taxes on Income” (hereinafter – “the Standard”). The Standard was implemented by means of a cumulative effect of a change in accounting method. The transition to Accounting Standard No. 19 amounted to a one-time effect on the income in 2005 of NIS 1.4 million, stemming from an increase in the liability for deferred taxes in respect of land. The tax benefits in respect of grants of equity instruments to employees, regarding which no expense was recognized, were recorded in shareholders’ equity in the period in which the deduction was allowed for tax purposes. The liability for deferred taxes in respect of temporary differences stemming from the separation of convertible debentures (see Note 1U) was recorded in shareholders’ equity in the period in which the equity instrument was separated from the financial liability. V. Debentures Convertible into Shares The debentures are convertible at the election of the holder thereof into a fixed number of the Company’s ordinary shares. Commencing January 1, 2006, upon adoption of Accounting Standard No. 22 regarding “Financial Instruments: Disclosure and Presentation”, separate presentation is made of the liability component (within long-term liabilities) and the equity conversion component (in the shareholders’ equity category) that are embedded in the convertible debentures. The fair value of the liability component is based on the interest rate prevailing on the issuance date for debentures having similar characteristics to those of the convertible debentures, which do not include a conversion option. The equity component is determined by means of subtracting the value of the liability component from the total proceeds from the convertible debentures. The costs of raising the money as well as other direct costs that can be attributed to the transaction are allocated to the components of the convertible debentures in proportion to their values. The portion allocated to the liability component is offset against the liabilities in respect of the convertible debentures and is taken into account for purposes of determining the effective interest rate of the component in respect thereof; the portion allocated to the equity component is deducted from the equity component recorded in the shareholders’ equity section. The Standard’s transitional rules provide that up to December 31, 2007, the conversion price of convertible liabilities stated in amounts linked to the CPI or foreign currency will be deemed a fixed cash amount and accordingly, upon initial application of the Standard an equity component was determined for convertible debentures issued in the past the value of which (net of fundraising costs), as at January 1, 2006, in the amount of NIS 1,375 thousand, was recorded in shareholders’ equity. 26 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) W. Recognition of Revenues (1) From Contracting Construction Work – Accounting Standard No. 4 regarding “Work Under a Performance Contract” is applied with respect to the construction contracting work. According to this Standard, income from contract work is recognized by the percentage of completion method, but not before the rate of completion of the work has reached 25%. The Standard is generally adopted on the basis of the engineering completion rate. In cases where the anticipated profit cannot be estimated, however it can be determined that recovery of the costs already incurred is expected, the full amount of the costs is recognized up to the amount of revenues received (“zero margin”). In cases where a loss on the contract is anticipated, a provision is recorded in respect of the full amount of the anticipated loss up to completion of the work. Regarding a partnership that is executing the Cross Israel Highway project, which is proportionately consolidated by a subsidiary – Standard No. 4 is being applied based on the percentage of completion of the project based on the actual cost incurred to the total projected cost of the entire Highway taken as a single unit. 2. Construction of Buildings for Sale – Accounting Standard No. 2, regarding “Construction of Buildings for Sale” is applied with respect to construction of buildings held for sale. According to this Standard, sales revenues are recognized by multiplying the sales proceeds by the percentage of completion of the project, but not before the sales proceeds of the project constitute at least 50% of the total anticipated revenues from the project and the percentage of completion of the project is at least 25%. Furthermore, Standard No. 2 provides rules for the presentation of “combination” transactions, according to which, when land is acquired in exchange for provision of building services, the cost of the land shall be stated at the anticipated amount of the costs of the building services, and concurrently a liability is to be recorded in the same amount. Buildings for sale are defined as projects in which the Company participated as a promoter, and which include construction work. Each project represents one building or a group of buildings. A group of buildings is considered one project when the buildings are located at the same building site, are being constructed according to one building plan and under one building license, and are offered for sale at the same time. 3. Rental and Operation of Properties – Revenues are recognized on the accrual basis. 4. Hotel Operations – Service revenues are recognized upon provision of the service. 5. Income from the sale of apparel is recognized upon delivery to the customer. 27 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) W. Recognition of Revenues (Cont.) (6) Telecommunications – a) Sale of products – (1) Revenues from sale of products are recognized upon delivery of the goods and transfer of the risks to the customer, provided collection of the proceeds is reasonably assured. Where the sales agreements provide that a significant part of the proceeds is conditional upon completion of the installation of the product or its acceptance by the customer, recognition of the full amount of the revenue is deferred at least until completion of the installation. In other cases, the sale is divided into two separate components according to the sales agreement, and only the income attributable to the installation (if at all) is deferred until the time the installation is completed, as stated. In the event that the value of the different components of the sale cannot be reasonably established, recognition of the full amount of the revenue is deferred until all the conditions with respect to both sale components are fulfilled. (2) Revenues from sales under long-term credit terms (lease–purchase) are recognized at their present value, where the difference between the sales price and the present value of the proceeds reflects the financing component included in such sales and the income therefrom is recognized over the period of the credit. b) Service income – Revenues from service and system maintenance agreements are recognized pro-rata over the period of the service contract. 7. From industry – Income from sales of merchandise is recognized when all the following conditions exist: (a) the significant risks and rewards deriving from ownership of the merchandise have been transferred to the customer; (b) the Group does not maintain effective control over the merchandise or continuing managerial intervention at a level that indicates ownership thereof; (c) the amount of the income can be reliably measured; (d) it is expected that the economic benefits relating to the transaction will flow to the Group; and (e) the cost incurred or to be incurred in respect of the transaction can be reliably measured. 8. From investee companies – Income is recognized on the equity basis, as explained above, and represents the Company’s equity in the annual results of operations of the investee company, after adjustments required by application of the uniform accounting principles of the Group. 9. Other income – Recognized on the earlier of the accrual basis or realization basis, as dictated by the circumstances. 28 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) X. Capitalization of Credit Costs The Group companies capitalize financing costs in accordance with Accounting Standard No. 3 – Capitalization of Financing Costs. Pursuant to this Standard, specific and non-specific financing costs are to be capitalized to qualifying assets, as they are defined in the Standard. Non-specific financing costs are capitalized to such investment, or portion thereof, which was not financed with specific credit, by means of a rate which is the weighted-average cost of the financing sources which were not specifically capitalized. Pursuant to the Standard, capitalized credit costs include a reduction where the credit cost is negative. The amount of the financing costs capitalized during the year totaled NIS 292 million. Y. Provision for Warranty In connection with construction contracting work, there is a contingent liability to customers as part of the usual warranty for the quality of construction as well as responsibility under the provisions of the Sales Law (Apartments), 1973, (including as part of joint ventures). The construction cost of the contracting work included in the statement of operations includes periodic charges to cover such warranty liability. Such charges are made considering the nature of the project, and the information accumulated in respect thereof over the course of the construction based on engineering evaluations. The charges are recorded over the period of the construction, considering the percentage of completion, and are updated as necessary, upon completion of the project and its delivery to the customers. Z. Issuance of Security Packages (1) The proceeds received from issuance of the package are allocated to the package’s various components based on their relative fair values. The fair values of the components are determined based on the market prices of the securities proximate to the time of their issuance. (2) Allocation of costs related to the issuance – directly identifiable costs are allocated to the securities issued on a specific basis, whereas joint costs are allocated to the securities issued based on their relative fair values, as stated in subsection (1) above. ZA. Share-Based Payments Commencing January 1, 2006, the Company applies Accounting Standard No. 24, “Share-Based Payments” (hereinafter – “the Standard”). Pursuant to the Standard the Company recognizes share-based payment transactions in the financial statements, including transactions with employees or other parties that are settled with equity instruments, cash or other assets. Share-based payment transactions wherein goods or services are received in exchange for the payment are recorded based on their fair values. Regarding transactions settled with equity instruments, the Standard applies to grants made after March 15, 2005 that did not fully vest by January 1, 2006. As at December 31, 2005, the Company had no share-based payments to which the Standard applies. 29 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZA. Share-Based Payments (Cont.) The Company records as salary expense, with a corresponding increase in the shareholders’ equity, the benefit created at the time of granting options to employees, based on the fair value of the options on the grant date, determined in accordance with the Black and Scholes Model. Pursuant to this policy, the benefit created is spread over the vesting period of the options, based on the Company’s estimate of the number of options expected to vest, aside from forfeitures resulting from non-compliance with market conditions. ZB. Fair Value of Financial Instruments The fair value of the financial instruments traded on active markets is based on the quoted prices as at the balance sheet date. The fair value of the financial instruments not traded on an active market is based on market prices of similar financial instruments, and in the absence of similar financial instruments based on a variety of other valuation methods. The valuation methods used include present value of cash flows and economic models for valuation of options, along with other customary valuation methods. ZC. Derivative Financial Instruments (1) The results of derivative financial instruments held as hedge for existing assets and liabilities, are recorded in the statement of operations in correspondence with the recording of the results of the hedged assets and liabilities. (2) The results of derivative financial instruments held as hedge with respect to firm commitments and anticipated transactions, are deferred and included in the statement of operations at the same time the results of hedged transactions are recorded. (3) Derivative financial instruments that are not earmarked for a specific hedge are presented in the financial statements based on their fair value. Changes in the said fair value are recorded in the statement of operations in the period incurred. The fair value of derivative financial instruments is determined based on their market values or quotes from financial institutions, and in the absence of market price or a quote from financial institution the fair value is determined according to a valuation model. ZD. Offset of Financial Instruments Financial assets and liabilities are presented on a net basis only where the Company has an enforceable legal right to offset and the intention exists to close out the asset and liability on a net basis or to sell the asset and pay off the liability concurrently. ZE. Segment Information Segment information is presented in accordance with Accounting Standard No. 11. The Standard requires inclusion of information with respect to business segments and geographical segments, and also provides guidelines for identification of business and geographical segments. 30 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZF. Decline in Value of Assets The Company applies Accounting Standard No. 15 – Decline in Value of Assets (hereinafter – “the Standard”). The Standard provides procedures which the Company must apply in order to ensure that its assets in the consolidated balance sheet (to which the Standard applies), are not presented at an amount in excess of their recoverable value, which is the higher of the net selling price or the realization value (the present value of the estimated future cash flows expected to be derived from use and disposal of the asset). The Standard applies to all assets in the balance sheet, except for inventory of buildings held for sale, tax assets and monetary assets (except for monetary assets which constitute investments in investee companies which are not subsidiaries). In addition, the Standard provides rules for presentation and disclosure with respect to assets whose value has declined. Where the value of an asset in the balance sheet is greater than its recoverable value, the Company recognizes a loss from decline in value equal to the amount of the difference between the carrying value of the asset and its recoverable value. The loss recognized, as stated, will be eliminated only if there has been a change in the estimates used in determining the amount of the recoverable value of the asset since the date on which the last loss from decline in value was recognized. In September 2003, the Israeli Accounting Standards Board published Clarification No. 1, regarding the accounting treatment of a decline in value of an investment in an investee company, which is not a subsidiary (hereinafter – “the Clarification”). The Clarification provides that in reporting periods subsequent to the period in which a provision for decline in value is initially recorded in respect of an investee company which is not a subsidiary, the investment in the investee company is to be presented at the lower of the amount of the recoverable value or the investment account based on the equity method, where the recoverable value is computed in every reporting period wherein there are indications that there has been a change in the recoverable value. Losses from a decline in value of an investment in an investee company which is not a subsidiary which was recognized or eliminated during the period is to be included in the category “Company’s equity in earnings (losses) of affiliated companies”. In February 2005, the Standards Board published Clarification No. 6 regarding the accounting treatment of a decline in value of an investee company that is not a subsidiary. The Clarification requires a determination of the recoverable value of each of the cashproducing units or the identified assets of the affiliated company, regarding which there are signs indicating a decline in value or signs indicating that a loss from decline in value, which was recognized in prior years, does not exist or decreased. A decline in value or an increase in value is to be examined from the standpoint of the holding company. 31 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZG. Earnings per Share The Company applies Accounting Standard No. 21, “Earnings per Share” (hereinafter – “the Standard”) published by the Israeli Accounting Standards Board. Pursuant to the Standard, the Company calculates the amounts of the basic earnings per share with respect to income or loss, as well as the amounts of the basic earnings per share with respect to income or loss from continuing operations, which relate to the ordinary shareholders. The basic earnings per share are calculated by the dividing income or loss allocable to the ordinary shareholders by the weighted-average number of ordinary shares outstanding during the period. For purposes of calculating the diluted earnings per share, the Company adjusted the income or loss allocable to the ordinary shareholders and the weighted-average number of ordinary shares outstanding, for the impact of all the dilutive potential ordinary shares (such as convertible debentures and options). The Company’s share in the earnings of investee companies was calculated based on its share in the earnings per share of those companies multiplied by the number of shares held by the Company. ZH. Dividend Declared Subsequent to the Balance Sheet Date Pursuant to Accounting Standard No. 7, “Events Occurring Subsequent to the Balance Sheet Date”, a liability relating to a dividend proposed or declared subsequent to the balance sheet date, is reflected in the financial statements only in the period declared. In addition, separate disclosure is given in the statement of changes in shareholders’ equity of the amount of the dividend intended for distribution, as stated, against a reduction of the balance of the retained earnings. ZI. Presentation of Transactions between a Corporation and a Controlling Interest Therein Up to December 31, 2006, transactions between the Company and the controlling shareholder therein were presented in accordance with the Securities Regulations (Presentation of Transactions between a Corporation and a Controlling Shareholder Therein), 1996. In accordance with the above, differences between the consideration received from sale of assets to the controlling shareholder and their carrying value on the Company’s books, were recorded in the shareholders’ equity section. Assets acquired from the controlling interest were recorded in the financial statements based on their carrying value on the controlling interest’s books at the time of their transfer to the Group, and the difference vis-à-vis the amount paid for them less the related tax effect, was recorded in the shareholders’ equity section. Commencing from January 1, 2007, the Company applies Accounting Standard No. 23, “The Accounting Treatment of Transactions between an Entity and the Controlling Interest Therein” (hereinafter – “the Standard”) to transactions between an entity and a controlling interest therein executed after January 1, 2007 and to loans granted or received from the controlling interest prior to the Standard’s commencement date starting from its commencement date. The commencement date Standard does not apply to business combination transactions under the same control. The decision of the Securities Authority as of January 1, 2007 is that business combinations of entities controlled by the same controlling interest are to be handled by means of a method similar to the “as pooling” method, and not using the “fair value” method. See also Note 1ZL(5) below regarding the first-time application of the Standard. 32 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZJ. Statement of Position – Arrangements for Construction and Operation of Public Property by the Private Sector In June 2005, the Israeli Accounting Standards Board (hereinafter – “the Standards Board”) published a statement of position regarding arrangements for construction and operation of public property by the private sector (hereinafter – “the Statement of Position”). The Statement of Position, which is based on the U.K. standard – FRS 5. Pursuant to the directives of the Statement of Position, a concessionaire that is a public company must initiate contact with the Securities Authority in order to receive its consent to the accounting treatment in accordance with the Statement of Position. The Statement of Position is intended to determine whether the concessionaire is to recognize property as a non-monetary asset or, alternatively, it is to recognize a financial asset that expresses a debt of the customer to it. Set forth below are the principles of the Statement of Position: The main principle is that the party that is to recognize the property as a non-monetary asset, is the party that is able to derive the main benefits stemming from the property and bears the main risks involved therewith. If this party is the customer, it will have, concurrently, a liability to pay the concessionaire amounts that cover the consideration for construction of the property. For purposes of making this determination, a number of tests have been provided that should be considered, while giving more weight to tests that have a greater chance of actually affecting the economic results (and ignoring factors or scenarios that have no genuine economic chance). The overall impact of the results of the tests must be evaluated in their entirety and, in addition, the position of the parties to the transaction must be taken into account, including, the expectations and motivating factors that led the parties to agree to the arrangement’s various conditions, as well as the manner and rate of the outside financing. Components relating solely to services during the operating period are not relevant to the determination of which party is to recognize the property as a non-monetary asset and, therefore, they should be ignored when examining the risks. The financial asset will accrue financing revenues while using the financial asset’s specific rate of return and will be repaid out of proceeds in respect of the property. The balance of the payments (the total payments less the principal and interest payments) will be recorded as operating income, parallel to the operating costs. Derech Eretz Highways (1997) Ltd. (an affiliated company, hereinafter – “Derech Eretz”) is a party to an agreement with the Government of Israel to plan, construct and operate the Cross Israel Highway, as described in Note 2I(5). Based on an overall evaluation of the tests, as well as on the position of the parties to the arrangement and the manner and rate of the financing, the proper accounting treatment of the property is as a financial asset in the financial statements of Derech Eretz. 33 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZJ. Statement of Position – Arrangements for Construction and Operation of Public Property by the Private Sector (Cont.) In February 2007, approval of the staff of the Securities Authority was received for treating Section 18 of Cross Israel Highway (see Note 2I(5)(M)) as a financial asset in accordance with the Statement of Position. Netivei Hayovel Ltd., (a subsidiary, hereinafter – “Netivei Hayovel”) won a tender for construction and operation of Highway 431 (see Note 2I(6), below). In February 2006, the Securities Authority gave approval stating that Netivei Hayovel Ltd.’s position was accepted, according to which the proper accounting treatment in Netivei Hayovel Ltd.’s financial statements will be pursuant to the Statement of Position, that is, the accounting treatment of the Highway 431 project shall be as a financial asset in Netivei Hayovel Ltd.’s financial statements and the related consequences on the company’s financial statements. Regarding the project for construction of student dormitories in Jerusalem that is being executed by Half Jubilee (a proportionately consolidated company, hereinafter – “Half Jubilee”), as described in Note 2I(2), the company has accepted the Securities Authority’s position that the project does not comply with the provisions of the Statement of Position. In addition, the Company, through investee companies, has entered into a number of PFI (private finance initiative) agreements to plan, construct, operate and manage a number of public projects that are in the initial construction stages and the construction costs accrued in respect thereof are not material. The Company is examining the impact of the Statement of Position on the accounting treatment of these projects. ZK. Foreign Currency and Linkage Assets and liabilities linked to the CPI and those in foreign currency or linked thereto, are stated as follows: (1) Balances linked to the CPI are adjusted to the index in respect of the month of the balance sheet date or in respect of the month preceding the month of the balance sheet date, pursuant to the contractual terms of each transaction (prior years – on a similar basis). (2) Balances in foreign currency or linked thereto are adjusted in accordance with the representative rates of exchange published by Bank of Israel as at the balance sheet date. 34 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZK. Foreign Currency and Linkage (Cont.) (3) Data in respect of changes in the CPI and rates of exchange are presented in the following table: 2007 Consumer Price Index – “in respect of the month” (in points) Consumer Price Index – “last known” (in points) U.S. dollar (in NIS) Swiss franc (in NIS) Euro (in NIS) Can$ (in NIS) 3.36 (0.09) 2.40 2005 120.90 116.93 117.04 120.19 3.846 3.420 5.659 3.923 116.93 4.225 3.466 5.564 3.641 117.27 4.603 3.498 5.446 3.964 Consumer Price Index In Last respect of known Year 2007 Year 2006 Year 2005 December 31 2006 2.79 (0.09) 2.7 Foreign Currency Exchange Rate U.S. Swiss dollar franc Euro Can$ % Change (8.97) (8.21) 6.8 (1.31) (0.91) (8.10) 1.71 2.17 (7.30) 7.75 (8.15) 10.8 (4) Exchange rate and linkage differences, resulting from the above adjustments, are partly recognized in the statements of operations and are partly included in financing costs capitalized to the cost of assets an/or cost of construction work in progress. ZL. First-Time Application of New Accounting Standards (1) Commencing from January 1, 2007, the Company applies Accounting Standard No. 26, “Inventory” (hereinafter – “the Standard”) of the Israel Accounting Standards Board. The Standard applies to all types of inventory, other than inventory of work in process that is subject to Accounting Standard No. 4, “Work Executed under a Performance Contract”, inventory of buildings held for sale that is subject to Accounting Standard No. 2, “Construction of Buildings for Sale” and financial instruments. According to the provisions of the Standard, the Company measures inventory at the lower of cost or net realizable value. The cost of the inventory is determined on the basis of the “first-in, first-out” (FIFO) method. The Standard also provides guidelines regarding the allocation of conversion costs to inventory and for determining impairment in value of inventory to net realizable value. In accordance with the Standard’s transitional provisions, it is to be adopted retroactively by restating the comparative data relating to prior periods. Application of the new Standard does not have a material impact on the Company’s results of operations and its financial position. 35 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZL. First-Time Application of New Accounting Standards (Cont.) (2) Commencing from January 1, 2007, the Company implements Accounting Standard No. 27, “Fixed Assets” (hereinafter – “Standard 27”) of the Israel Accounting Standards Board. Standard 27 prescribes rules for the recognition, measurement and elimination of fixed assets and for the disclosure required in respect thereof. Standard 27 provides that a fixed-asset item qualifying for recognition as an asset is to be measured at its cost at the time of its initial recognition. Standard 27 indicates that the cost of a fixed-asset item includes its acquisition cost (including non-refundable import and purchase taxes net of commercial discounts), costs that can be directly allocated to bringing it to its required location and condition so that it can function in the manner intended by Management, and an initial estimate of the present value of the costs required to dismantle and remove the item and to restore the site on which it is located (if the entity is required to bear such expenses). The cost of a fixed-asset item is the amount equal to its cash price on the recognition date. Accordingly, if the payment in respect of the asset is deferred beyond the regular credit terms, the difference between the amount equal to the cash price and the amount of the total payment is recognized as interest expense over the credit period. Subsequent to the initial recognition, Standard 27 permits an election between the cost method and the revaluation method as the accounting policy. Nevertheless, the same policy is to be applied in respect of all the fixed-asset items in the same group. According to the cost method, a fixed-asset item is to be stated at cost net of accumulated depreciation and any accrued impairment losses. Under the revaluation method, a fixed-asset item, the fair value of which can be reliably measured, is to be stated at its revalued amount, which is the fair value on the date of the revaluation less accumulated depreciation and any impairment losses accrued thereafter. An increase in the book value of a fixed-asset item deriving from the revaluation is to be included directly in the shareholders’ equity in a “revaluation reserve”. Nonetheless, such an increase in value will be included in earnings up to the amount that it cancels a previously recognized impairment loss in respect of that asset. Conversely, a decline in the book value of the asset as a result of the revaluation is to be recognized as a loss. Nevertheless, such a decline in value is to be included in the shareholders’ equity under a revaluation reserve up to the amount of any existing credit balance in a revaluation reserve in respect of the same asset. Standard 27 provides that in order to depreciate the fixed-asset item, the amount that was initially recognized in respect of the fixed-asset item is to be allocated between its significant components and each component is to be depreciated separately, although combining different components of the asset that have the same useful life and method of depreciation is permitted. According to Standard 27’s provisions, the residual value, useful life and depreciation method of the asset are to be examined at least once every fiscal year. In the event of a change in the forecasted pattern of using the future economic benefit embodied in the asset, the method of depreciation should be changed and the change shall be treated as a change in accounting estimate. 36 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZL. First-Time Application of New Accounting Standards (Cont.) (2) (Cont.) In April 2007 the Israel Accounting Standards Board published Accounting Standard No. 28, regarding “Amendment of the Transitional Provisions of Accounting Standard No. 27, Fixed Assets” (hereinafter – “Standard 28”). Standard 28 allows an entity that plans to adopt one or more of the exceptions in IFRS 1 regarding fixed assets, in financial statements for periods beginning on January 1, 2008, to implement them already in the financial statements for periods beginning on January 1, 2007. An entity choosing the relief of presenting the fair value of fixed assets as their deemed cost will not restate the comparative data, and is to provide disclosure of this fact and of the fair value as at January 1, 2007 of each item accounted for in this manner. Standard 28 is effective as from the same date as Standard 27, as stated above. The Company elected to continue to apply the cost model to the fixed-asset items. In accordance with the Standard’s transitional rules, the financial statements were restated due to application of the Standard’s provisions to hotel operating equipment that was previously treated as base inventory as part of the fixed assets and in accordance with the Standard’s provisions constitutes a depreciable asset. As a result of the restatement, the balance of the Company’s fixed assets as at December 31, 2006 decreased by about NIS 7.1 million, the minority interest in subsidiaries decreased by about NIS 1 million and the shareholders’ equity decreased by about NIS 6.1 million. The restatement did not have a material impact on the net income for the year ended December 31, 2006 or on the basic and diluted earnings per share for that period. (3) Commencing from January 1, 2007, the Company applies Accounting Standard No. 16, regarding “Real Estate for Investment” (hereinafter – “the Standard”). The Standard provides rules for recognition, measurement and elimination of real estate for investment and the required disclosure in respect thereof. The Standard provides, among other things, that real estate for investment is to be measured initially at cost plus transaction costs. In addition, the Standard provides that in subsequent periods, the entity must choose between measurement of all its real estate for investment based on cost less accumulated depreciation and less losses from declines in value, or measurement based on fair value, where an update of the fair value will be recorded on the statement of operations. Real estate for investment is real estate (land or building – or a part thereof – or both) held (by the company as owner or under a financing lease) for purposes of producing rental income or realizing a capital appreciation or both, and not for purposes of: 37 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZL. First-Time Application of New Accounting Standards (Cont.) (3) (Cont.) 1. Use in production or provision of goods or services for administrative purposes; or 2. Sale in the ordinary course of business. In addition, rented buildings, leased by the company under an operating lease are classified and treated as real estate for investment. Real estate under construction for future use as real estate for investment and which is to be measured based on fair value is treated as a fixed asset until completion of the construction or development, and on such date it is re-measured at its fair value and is classified as real estate for investment. Any gain or loss resulting from the re-measurement is recorded on the statement of operations. Where the use of real estate changes from use by the owners to real estate for investment, which is to be measured based on fair value, the asset is re-measured at its fair value and is classified as real estate for investment. Any gain resulting from the re-measurement is recorded directly to shareholders’ equity, whereas any loss is recorded on the statement of operations. In a transition from real estate for investment, measured at fair value, to fixed assets (real estate used by the owner) or inventory, the fair value is used as the cost of the fixed asset or inventory for purposes of the subsequent accounting treatment. In a transition from inventory to real estate for investment that is to be measured based on fair value, any difference between the fair value of the real estate at that date and its prior book value is to be recorded on the statement of operations. The Company decided to apply the fair value model with respect to real estate for investment. Pursuant to the Standard, real estate for investment under construction is recorded based on the cost method. First-time application as at January 1, 2007: The fair value of the real estate for investment in the consolidated balance sheet as at January 1, 2007 was set at about NIS 5.2 billion. The comparative data was not restated, however the depreciated cost of the real estate for investment as at December 31, 2006 was restated. The fair values were determined based on valuations performed by independent external appraisers having appropriate professional qualifications. 38 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZL. First-Time Application of New Accounting Standards (Cont.) (3) (Cont.) The valuations performed during the period were made mainly using the method of discounting the future cash flows anticipated to derive from the properties. The discount rates used by the appraisers in Israel are between 7.75% and 10% per year and they were determined based on the type of asset and its designation, the location of the asset and the quality of the lessees. In determining the value of office and commercial space, use was made of discount rates ranging between 7.75% and 9%, storage, industrial and parking areas were valued based on discount rates of 8.25% to 9.3%, whereas vacant areas or areas expected to be vacated in the upcoming months were valued using discount rates between 9% and 10%. The discount rates used by the appraisers outside of Israel are 6% to 9.25% for office and commercial space. Set forth below is detail of the impact of application of Standard 16 on the Company’s consolidated balance sheet as at January 1, 2007: In Millions of NIS (Unaudited) Increase in real estate for investment Increase in liabilities and credit balances Increase in provision for deferred taxes, net Increase in minority interest Total increase in retained earnings 2,224 (60) (542) (725) 897 Pursuant to Regulation 8B of the Securities Regulations (Period and Immediate Reports), 1970, the Company attached to its financial statements as at March 31, 2007 the valuations that are significant to the Group. For this purpose, the Company applied a quantitative test according to which an asset is considered significant if its fair value exceeds 10% of the total consolidated assets. Regarding assets the revaluation of which is recorded on the statement of operations, the extent of the significance is tested based on the revaluation recorded compared with the Company’s income for the period. (4) Commencing from January 1, 2007, the Company implements Accounting Standard No. 30, regarding “Intangible Assets” (hereinafter – “the Standard”) of the Israel Accounting Standards Board. The Standard explains the accounting treatment of intangible assets and defines how to measure the book value of these assets, as well as the disclosures that are required. 39 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZL. First-Time Application of New Accounting Standards (Cont.) (4) (Cont.) The Standard discusses the different cases in which the entity may recognize an intangible asset including: upon a separate acquisition, upon an acquisition as part of a business combination, upon an acquisition through a government grant, upon an exchange of assets and upon the creation of an internal intangible asset. Regarding the latter, the Standard provides that an intangible asset deriving from research shall not be recognized as an asset whereas an intangible asset deriving from development shall be recognized as an asset only if the entity can demonstrate compliance with a number of cumulative conditions as follows: the technical feasibility of its completion so that it will be available for use or sale, the entity’s intention to complete it, to use it or to sell it and its ability to do so, proof as to how the entity anticipates to generate future economic benefits, the existence of technical, financial and other resources for completion of the development and the use or sale of the intangible asset, and the entity’s ability to reliably measure the expenses that can be attributed to the intangible asset during its development. The Standard addresses the assessment whether the useful life of the intangible asset is finite or indefinite, as well as the amortization period, the amortization method and the residual value of an intangible asset having a finite useful life. In accordance with the Standard, the amortization period and the amortization method of an intangible asset having a finite useful life is to be reviewed at least at the end of each fiscal year. Furthermore, an intangible asset having an indefinite useful life shall not be amortized and an impairment examination shall be performed at least once a year, or more frequently if events or circumstances indicate a possibility that there has been a decline in its value. The Standard supersedes the provisions relating to intangible assets, other than goodwill, that derive from the acquisition of an investee company as provided in Accounting Standard No. 20 (Revised), regarding “The Accounting Treatment of Goodwill and Intangible Assets of an Investee Company”. In accordance with the Standard’s transitional provisions, it is to be applied retroactively, except as described below. Regarding business combinations, the Standard is to be implemented with respect to business combinations that took place on January 1, 2007 or thereafter. As a result of application of the Standard, the Company reclassified software that does not constitute an integral part of the related hardware having a depreciated cost of NIS 6,663 thousand as at December 31, 2006 from the “fixed assets, net” category to the “other assets, net” category. 40 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZL. First-Time Application of New Accounting Standards (Cont.) (5) Commencing from January 1, 2007, the Company applies Accounting Standard No. 23, regarding “The Accounting Treatment of Transactions between an Entity and the Controlling Shareholder Therein” (hereinafter – “the Standard”) of the Israel Accounting Standards Board. The Standard replaces the Securities Regulations (Presentation of Transactions between an Entity and a Controlling Shareholder Therein in the Financial Statements), 1996, and provides that assets and liabilities included in a transaction between the entity and its controlling shareholder are to be measured on the transaction date at fair value and that the difference between the fair value and the consideration from the transaction is to be included in shareholders’ equity. A debit difference is essentially a dividend and accordingly reduces the retained earnings. A credit difference is essentially an investment of the shareholder and, therefore, is to be presented under a separate item of shareholders’ equity called “capital reserve from transaction between an entity and the controlling shareholder therein”. The Standard discusses three issues relating to transactions between an entity and its controlling shareholder, as follows: the transfer of an asset to the entity by the controlling shareholder, or conversely, transfer of an asset from the entity to the controlling shareholder; the controlling shareholder assuming upon itself a liability of the entity to a third party, in whole or in part, indemnification of the entity by the controlling shareholder in respect of an expense, and a waiver by the controlling shareholder of the entity’s debt to it, in whole or in part; and loans that were granted to the controlling shareholder or loans that were received from the controlling shareholder. The Standard also details the disclosure to be made in financial statements regarding transactions between the entity and its controlling shareholder during the period. In accordance with the Standard’s transitional provisions, the Company applies the Standard to transactions with a controlling shareholder therein executed after January 1, 2007 and to loans granted or received from the controlling shareholder prior to the Standard’s commencement date beginning from its commencement date. The initial application of the Standard did not have a material impact on the Company’s results of operations or its financial position. ZM. Impact of New Accounting Standards in the Period Prior to their Application: In July 2006, the Israeli Accounting Standards Board published Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (IFRS)” (hereinafter – “the Standard”). The Standard provides that entities that are subject to the Securities Law, 1968 and that are required to report in accordance with this Law’s provisions, shall prepare their financial statements pursuant to IFRS Standards for periods commencing January 1, 2008. The Standard permits early adoption commencing with the financial statements published after July 31, 2006. That stated does not apply to entities subject to the Securities Regulations (Periodic and Immediate Reports of a Foreign Entity), 2000, whose financial statements are not prepared in accordance with generally accepted accounting principles in Israel. In addition, the Standard provides that entities that are not subject to the Securities Law and are not required to report in accordance with this Law’s provisions, may also prepare their financial statements in accordance with IFRS commencing with the financial statements published after July 31, 2006. 41 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 1 – Significant Accounting Policies (Cont.) ZM. Impact of New Accounting Standards in the Period Prior to their Application: (Cont.) Initial adoption of IFRS Standards is to be effected by means of application of the provisions of IFRS 1, “First-Time Application of IFRS Standards”, for purposes of the transition. In accordance with the Standard, the Company is required to include in a note to the annual financial statements as at December 31, 2007 the balance-sheet data as at December 31, 2007 and the income-statement data for the year then ended, after they have undergone application of the recognition, measurement and presentation rules of the IFRS Standards (see Note 41). The Company will apply the Standard commencing with its financial statements for the period beginning January 1, 2008. 42 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies A. Composition: As at December 31, 2007 Consolidated Balance Sheet Shares at cost Provision for decline in value of investments Company’s equity in reserves and retained earnings (losses), net Carrying value Loans Capital notes Company Balance Sheet Shares at cost Provision for decline in value of investments Company’s equity in reserves and retained earnings (losses), net Carrying value Loans Capital notes As at December 31, 2006 Consolidated Balance Sheet Shares at cost Provision for decline in value of investments Company’s equity in reserves and retained earnings (losses), net Carrying value Loans Capital notes Company Balance Sheet Shares at cost Provision for decline in value of investments Company’s equity in reserves and retained earnings (losses), net Carrying value Loans Capital notes Subsidiaries Proportionately consolidated companies Affiliated companies Other companies Total – – 1,012,224 71,587 1,083,811 – – (6,718) (15,572) (22,290) – – – – – – – – – – 150,764 1,156,270 367,616 9,105 1,532,991 (40,931) 15,084 507 – 15,591 109,833 1,171,354 368,123 9,105 1,548,582 1,186,424 24,081 21,184 1,376,668 (32,638) – 144,979 – (6,014) (38,652) 6,663,560 7,817,346 5,217,981 312,911 13,348,238 (3,190) 20,891 129,161 8,141 158,193 (41,677) 103,302 283,372 9,105 395,779 – 15,170 507 – 15,677 6,618,693 7,956,709 5,631,021 330,157 13,917,887 – – 606,691 72,653 679,344 – – (6,718) (15,522) (22,240) – – – – – – – – – – 127,986 727,959 371,447 9,105 1,108,511 (40,931) 16,200 8,887 – 25,087 805,789 24,081 (32,638) – (2,924) 21,157 119,390 8,141 148,688 *2,008,425 2,781,576 3,854,843 312,911 6,949,330 144,979 – (63,212) 81,767 301,194 9,105 392,066 * Restated due to first-time application of accounting standard – see Note 1ZL(2). 43 87,055 744,159 380,334 9,105 1,133,598 22,274 997,123 (5,990) (38,628) – 16,284 507 – 16,791 1,942,289 2,900,784 4,275,934 330,157 7,506,875 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies B. The movement in investments in affiliated companies in 2007 was as follows: Balance as at beginning of the year Consolidated Company 1,133,598 *7,506,875 Movement during the year: Investment in shares Sale of investments Effect of first-time application of Standard No. 16 Equity in earnings, net Entry into consolidation Dividends Adjustments from translation of financial statements of autonomous investee companies and other capital reserves Movement in loans and capital notes Balance as at end of the year C. 518,124 – (20,528) 110,359 (93,179) (68,601) 430,129 (46,734) 861,571 4,448,558 – (9,524) (18,980) (12,211) (628,075) 1,355,087 13,917,887 1,548,582 Goodwill The investments in investee companies include balances of excess of cost (original differences), deriving from their acquisition and which were not attributed to specific assets, as follows: Original Cost December 31 2006 2007 In respect of subsidiaries and proportionately consolidated companies In respect of affiliates D. 156,363 62,610 110,449 64,136 Balance December 31 2007 2006 108,592 3,010 61,859 4,537 Securities registered for trading December 31, 2007 Book Market value value Shares 2,670,000 44 4,159,661 December 31, 2006 Book Market value value 1,778,125 3,872,167 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies E. Loans and capital notes – linkage bases and interest (1) Composition of loans to investee companies – * Subsidiaries Consolidated Linked to the CPI, non-interest bearing Linked to the CPI, bearing interest of 3% Linked to the CPI, bearing interest of 5.2%–6.3% Linked to the CPI, bearing interest of 6.5% Linked to the CPI, bearing interest of 8% Linked to the dollar Linked to the dollar, bearing interest of 5% – 10% Linked to the euro bearing eurobar interest of 1.8%–2.5% Company Linked to the CPI, non-interest bearing Linked to the CPI, bearing interest of 4% Linked to the CPI, bearing interest of 5.8%–6.5% Linked to the CPI bearing interest of 8% Linked to the dollar Linked to the dollar, bearing interest of 6% – 6.5% Linked to the dollar, bearing interest of 6.5%–8.5% Linked to the dollar, bearing interest of 14% Linked to the Can$, non-interest bearing December 31, 2007 Affiliated Other companies companies Total * Subsidiaries December 31, 2006 Affiliated Other companies companies Total – 17,818 507 18,325 – 16,476 2,789 19,265 – 28,373 – 28,373 – 25,768 – 25,768 – 52,468 – 52,468 – 53,531 – 53,531 – 3,947 – 3,947 – – – – – 247,437 1,529 – – 247,437 1,529 – – 261,419 – – – 261,419 – – 4,731 – 4,731 – 14,253 6,098 20,351 – – 11,313 367,616 – 507 11,313 368,123 – – – 371,447 – 8,887 – 380,334 1,853 507 262,654 210,710 1,759 507 212,976 – 2,019,601 1,794,326 – – 1,794,326 260,294 2,019,601 – – – 27,823 – 27,823 – 22,185 – 22,185 – – 247,437 1,528 – – 247,437 1,528 – – 261,419 – – – 261,419 – – 4,731 – 4,731 15,831 – 34,768 28,203 – – 28,203 2,968,291 – – 70,753 5,347,142 – 283,372 – 507 18,937 – – – – 2,968,291 1,883,179 – – 1,883,179 70,753 5,631,021 67,081 3,974,233 – 301,194 – 507 67,081 4,275,934 * Includes NIS 129,161 thousand (December 31, 2006 – NIS 119,390 thousand) to proportionately consolidated companies. (1) The capital notes are unlinked, do not bear interest and are not intended to be repaid in the near future. 45 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies F. Company’s share in financial-statement categories of proportionately consolidated subsidiaries: December 31 Fixed assets Current assets Long-term liabilities Current liabilities Total revenues Total expenses G. 2007 2006 1,077,283 1,570,547 1,313,352 473,816 767,381 765,607 1,152,314 218,051 674,033 368,147 481,407 450,275 Convertible securities in investee companies (1) In September 2004, Africa Israel Properties Ltd. issued 1,000,000 registered options (Series 1), exercisable up to December 31, 2007 for ordinary shares of NIS 1 par value, such that every option (Series 1) is exercisable for one ordinary share against a cash payment of the exercise premium of NIS 130, linked to the CPI (subject to adjustments). Up to December 31, 2007, all the options (Series 1) were exercised for 987,945 ordinary shares of NIS 1 par value, except for 12 thousand options that expired. In addition, in December 2004, Africa Properties issued to 15 employees 235,500 non-marketable options (hereinafter – “the Options”) exercisable for 235,500 ordinary shares of NIS 1 par value each of Africa Properties (subject to adjustments) (hereinafter – “the Exercise Shares”). In any case of exercise of the Options, the full amount of the Exercise Shares will not be issued but, rather, only that quantity of shares that reflects the benefit component of the Options exercised, as will be calculated on the exercise date of such Options. The Options may be exercised during a period of three years, beginning at the end of three years from the date of their issuance and up to the end of six years from the date of their issuance. Up to the signing date of the financial statements, 134,800 were forfeited due to termination of the employer–employee relationship. As at the balance sheet date, the Company holds 67.88% of the shares of and voting rights in Africa Properties. If all the Options are exercised for shares, the rate of the Company’s holdings will drop to 67.39%. (2) Pursuant to the concession contract covering the Cross Israel Highway, the State was granted options to acquire participation certificates conveying the right to 49% of every dividend distribution or subordinated debt repayment – see Note 2G(4)(h). 46 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies G. Convertible securities in investee companies (Cont.) (3) In June 2006, the Board of Directors of Africa Israel Residences Ltd. approved a plan for issuance of options to employees pursuant to which 345,200 options were issued to a number of employees exercisable for shares of Africa Residences at the rates and in the periods determined but not before August 2009. As at the balance sheet date, the balance of the options is 334,800 options exercisable for 334,800 shares of NIS 1 par value of Africa Residences. As at the balance sheet date, the Company holds 74.95% of the shares of and voting rights in Africa Residences. If all the aforesaid options are exercised for shares, the rate of the Company’s holdings will drop to 74.32%. (4) AFI Development PLC (the subsidiary handling the Group’s activities in Russia, hereinafter – “AFI Development”) granted 2,623,632 options for deposit certificates to directors, officers and other employees convertible into 2,626,635 deposit certificates representing shares constituting (assuming exercise of all such options) about 0.5% of AFI Development’s issued share capital. The exercise price of each option is $14 (subject to adjustments), which is the price determined per deposit certificate as part of the issuance of AFI Development. As at the balance sheet date, the Company holds 71.7% of the shares of and voting rights in AFI Development. If all the aforesaid options are exercised for shares, the rate of the Company’s holdings will drop to 71.3%. (5) On August 1, 2007, the Board of Directors of Danya Cebus made a decision with respect to an employee stock option plan pursuant to which a number of senior employees in Danya Cebus and in its subsidiaries, including the CEO will be granted 580,335 options, constituting 2.91% of Danya Cebus’ issued share capital. As at the balance sheet date, the Company holds 74.82% of the shares of and voting rights in Danya Cebus. If all the aforesaid options are exercised for shares, the rate of the Company’s holdings will drop to 72.64%. H. Convertible securities in investee companies (1) Previously consolidated companies Set forth below is data previously included in the consolidated financial statements: On the date of discontinuance of the consolidation Balance sheet Working capital (not including cash and cash equivalents), net Fixed assets Long-term liabilities less current maturities 47 (146,194) 580,996 (338,516) Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies H. Convertible securities in investee companies (Cont.) (2) Initially consolidated companies (including a company previously proportionately consolidated and now fully consolidated) On the date of entry into the consolidation Balance sheet Working capital (not including cash) Fixed assets Other assets Minority interest on the acquisition date Long-term liabilities (less current maturities) I. 473,203 3,373,196 78,522 (168,272) (338,516) Additional Information (1) Foreign Real Estate Activities (a) Real Estate Activities in the United States (a1) The Company’s activities in the United States are executed through subsidiaries and together with local partners. The activities in the United States are focused in New York, Miami, Los Angeles and Las Vegas, and include building of residential units held for sale and for rent and construction of commercial space and offices. As at the balance sheet date, the Company had inventories of land and work in progress and fixed assets, real estate for investment and real estate for investment under construction in the United States in the aggregate amount of NIS 7.7 billion (2006 – NIS 4.9 billion). (a2) In 2002, a memorandum of understanding was signed between the Company (by means of an investee company in which it holds a 100% interest) and the Boymelgreen Group that is a business partner of the Company (hereinafter – “the Boymelgreen Group”) in its real estate development activities in the United States. In the framework of the memorandum of understanding, the parties agreed that every property in the United States shall be owned by a separate holding company that will be held 65% by the Company and 35% by the Partner, except for certain cases wherein the parties reached different specific agreements. The share of the Boymelgreen Group in the capital required for acquisition of the said properties will be provided on its behalf, if necessary, by the Company, by means of a loan. In addition, the parties reached agreement regarding management fees at the rate of 5% that the will be paid by the Company to the Boymelgreen Group. 48 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a2) (Cont.) In April 2007, the memorandum of understanding came to an end and Company reached an agreement in-principle with the Boymelgreen Group pursuant to which the holdings’ structure of a number of companies held jointly by the parties that are executing various projects will be changed. As part of that stated above, the parties signed a document of principles, the highlights of which are as follows: 1) The parties will continue development of residential areas in the “84 Front”, “15 Broad”, “85 Adams” and “20 Pine” in full (hereinafter, together – “the Remaining Projects”), as a joint venture of the parties on the basis of the principles detailed in the Joint Cooperation Memorandum, subject to the following: (a) the rate of the rights in the parties in the “20 Pine” project will be 50% to each side; (b) in any case of a dispute in connection with the Remaining Projects that is not settled within 30 days, each party will be entitled to sell its rights in the project in dispute to the a third party subject to the existence of a “tag along” right and a “drag along” right; (c) distributions deriving from the Remaining Projects are to be distributed based on the following order of priority: (i) repayment of loans to banks; (ii) repayment of loans of the company group to the project company; (iii) repayment of investments of shareholders’ equity of each of the parties; (iv) payment of the balance of the management fees to the Boymelgreen Group; and (v) the remaining balance is to be distributed in accordance with the rights of the parties in the project, as such rights shall be at the relevant date. 2) The Boymelgreen Group will transfer its rights to the company group in the joint companies that own the following real estate/projects: (a) “23 Wall St.” in New York; (b) the commercial portion of the “15 Broad” project in New York; (c) “Gowanus Village” in New York; (d) “88 Leonard” in New York; (e) the commercial portion (including parking facilities) in the “W Squared” project in New York; and (f) all real estate/projects in Miami. 3) In exchange for transfer of the rights as described in Section 2, above, the company group will transfer to the Boymelgreen Group all its rights in the joint companies that own the following real estate/projects: (a) Atlantic Court”; (b) 10 Chelsea”; (c) Beachfront Community; (d) the commercial portion in the “84 Front” project; and (e) the commercial portion (including parking facilities) in the “85 Adams” project. 49 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a2) (Cont.) 4) The parties will endeavor to sign a detailed agreement and accompanying agreements on the basis of the summary set forth above and to complete it by September 15, 2007 (hereinafter – “the Closing Date”). Completion of the transaction will be contingent solely on obtaining approval from each of the relevant financing institutions to release the transferring party from any liability (as these terms are defined in Section 5, below). If such approval is not obtained by November 4, 2007, the party that is intended to receive all the rights in the project company will be required to execute a refinancing of the loans taken out by the relevant company, at its own expense, in such a manner that after the refinancing, as stated, the transferring party will be released from any liability. 5) Up to the Closing Date, each side to which the holdings of the other side were transferred from any of the joint companies (hereinafter – “the Releasing Party”) will make efforts to obtain the release of the other party (hereinafter – “the Transferring Party”) from any liability, guarantee or lien the Transferring Party provided as part of financing the project executed by the relevant joint company (hereinafter, together – “the Liability”) in which the Releasing Party is designated to hold all the rights. If the Releasing Party is unable obtain a release, as stated, up to the Closing Date, this shall not delay completion of the transaction and the Releasing Party shall indemnify the Transferring Party for any loss or expense it incurs due to the Liability, as stated. 6) A calculation is to be made with respect to the balance of the management fees due to the Boymelgreen Group, and the Boymelgreen Group’s investment account in the “20 Pine” project will be credited for such amount. If it becomes clear that the Boymelgreen Group was paid excess management fees, the investment account of the company group in such project will be credited for the said overpayment. 7) All additional financing of the Remaining Projects is to be made in accordance with the relative proportions of the parties in the remaining project companies. 8) On the Closing Date, a calculation is to be made with respect to the loans standing to the credit of each of the parties in each parties in each of the companies being transferred, in such a manner that the total balance of all the said loans will be zeroed out, with no debit or credit balance to any of the Transferring Parties. 50 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a2) (Cont.) 9) The agreed-to items set forth above shall constitute a settlement of all the open matters and contentions of each side against the other in connection with the joint cooperation between the parties from the beginning and up to completion of the detailed agreement to be signed. On November 22, 2007, a detailed agreement was signed between the parties for implementation of the provisions of the agreement in-principle. The detailed agreement defines an outline for transfer and/or receipt of the rights in various companies, as part of arrangement of the succeeding/concurrent transactions that, subject to receipt of the approval of the various financing parties, will be completed by April 30, 2008. As part of the detailed agreement, certain indemnification arrangements were provided, including, an obligation on the part of the Boymelgreen Group to indemnify the Company based on Boymelgreen’s proportionate share (35%), in respect of liabilities (if any) in connection with a project in Florida having a cumulative scope in excess of $15 million, where the cause of action arose prior to the signing date of the detailed agreement, as well as a mutual undertaking on the part of each of the parties for indemnification of other party in respect of liabilities imposed on the other party relating to a company transferred by it to the other party, where the cause of action arose subsequent to the signing date of the detailed agreement. In addition, the parties reciprocally waived vis-à-vis each other, every contention or claim, subject to certain customary exceptions, such as the malicious causing of damage, deception, etc. (a3) During 2004, the Company, through a subsidiary, together with other partners (including a company owned by Mr. Lev Leviev, the Company’s controlling shareholder, and the Boymelgreen Group) entered into a series of agreements for acquisition of real estate properties in Las Vegas, in connection with a real estate development project in the area of Las Vegas Blvd., on a total area of 65 dunams and at an aggregate cost of $505 million. The share of the Company and of Mr. Lev Leviev in the transaction is 16% each. 51 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a3) (Cont.) Pursuant to a letter of intent signed in February 2007 between the Company and the Boymelgreen Group, the Boymelgreen Group will sell and transfer to the Company its holdings in companies holding joint properties in Las Vegas. In exchange, the Company will release the Boymelgreen Group from responsibility in connection the loans relating to these companies and, in addition, the Boymelgreen Group will pay the Company the amount of $10 million as payment of the accrued interest on the loans (this amount will be added to the amount of US$1.3 million already paid by the Boymelgreen Group to the Company and it will deposited in trust for the Company out of the amounts that were due to the Boymelgreen Group in connection with joint projects of the partiers in New York). In addition, it was provided, among other things, that in a case where the Company does not acquire the interests of other partners in the projects (such shares equaling 50%) and even sells its holdings in these projects, within 12 months of the signing date of the letter of intent, the Boymelgreen Group will be entitled to a proportionate part of the gain realized by the Company from the sale as stated, up to a maximum amount of $11.3 million. Pursuant to the approval of the Company’s Audit Committee and its Board of Directors in May 2007, in July 2007 the Company entered into an agreement pursuant to which a holding company (that is held, indirectly, at the rate of 67.5% by the Company and 32.5% by Mr. Lev Leviev) will sell its holdings in the Las Vegas projects, in exchange for a consideration of about $160 million. As part of this transaction, all the shareholders’ loans made by the Company and the Partner in connection with the Las Vegas projects were repaid and the Company was released from all its obligations relating to these projects. Upon completion of the transaction, the Company recorded a net gain (after taxes) in its financial statements of about NIS 54 million. (a4) In March 2006, the Company, through a subsidiary (in which the Company holds a 65% interest) completed a transaction for sale of its rights in a real estate property located in New York, in exchange for a consideration of $45 million. As a result of completion of the transaction, the Company recorded an after-tax gain in its financial statements in the amount of $7.4 million. 52 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a5) In May 2006, the Company entered into an agreement, through a subsidiary (hereinafter – “the Seller”), for sale of 6 adjacent parcels of real estate located in Miami in the United States. In December 2006, the discussions between the Seller and the purchaser were discontinued, the sale transaction was cancelled, and the Seller foreclosed on a deposit of $6 million the purchaser deposited as liquidated damages in the event of a breach of the sale agreement by the purchaser. The foreclosed deposit was recorded as other income in the “other income” category. (a6) In January 2007, the Company, through an investee company, signed an agreement for sale of all its holdings in an office building located at 14 Wall St. in the Wall St. complex in New York, including lease agreements with lessees in the building and other agreements relating to the building. The consideration for the sale was set at US$325 million. In light of the entry into effect of Accounting Standard No. 16 on January 1, 2007, and presentation of the said property at its fair value while recording the revaluation increment to the opening balance of the retained earnings, no capital gain was recorded in connection with sale of the property. (a7) In March 2007, the Company, through a subsidiary (hereinafter – “the Subsidiary”), entered into an agreement with respect to acquisition of 50% of the rights in the “Apthorop” building, a residential building located on the “Upper West Side” of Manhattan, New York (hereinafter – “the Property”). The Property is an historical building including, among other things, 163 apartments held for rent on an aggregate area measuring about 32,000 sq.m. About 2,600 sq.m. constitutes commercial areas and about 1,250 sq.m. constitutes parking areas. The Property also has additional unutilized building rights in the overall scope of about 6,000 sq.m. As at the balance sheet date, the annual rentals from the Property amount to about $11.7 million. Set forth below are the highlights of the transaction: a) A foreign company owned by a number of local parties (hereinafter – “the Property Company”) entered into an undertaking for acquisition of the Property in exchange for a consideration of US$426 million. b) The Subsidiary signed an agreement pursuant to which it will acquire 50% of the rights in companies that will hold (indirectly), in the aggregate, all of the rights in the Property Company. 53 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a7) (Cont.) c) The total acquisition price of the Property is US$426 million. The sum of US$114 million out of the above-mentioned amount will be invested as shareholders’ equity of the Property Company while the balance of the purchase price will be covered by bank loans, as detailed below. d) The Subsidiary committed to provide 50% of the amount required as an investment of shareholders’ equity as stated above, that is, about $57 million. In addition, the Subsidiary committed to provide 50% of an amount up to $55 million (that is, up to $27.5 million) for purposes of financing the future operating and/or financing expenses of the Property Company, and 50% of an amount up to $10 million (that is, up to $5 million) for purposes of financing construction additions to the Property. The Property Company intends to renovate the Property and turn it into a luxury apartment building held for sale. In addition, the Property Company intends to act to obtain approvals for expansion of the Property pursuant to the additional building rights, as stated above. In the estimation of the Property Company, the period required for development, renovation and sale of the Property is about 5 years. The extent of the additional investment included in the Property is estimated at $95 million (not including investments with respect to the additional construction rights). In light of the fact that the Property is an historical building, the Property Company may enjoy significant tax benefits in connection with certain amounts it invests in the Property. For purposes of financing the transaction, the Property Company signed financing agreements with foreign banks. Pursuant to these agreements, the foreign banks will make loans to the Property Company in order to provide the balance of the amount required for acquisition of the Property and financing the transaction expenses (beyond the investment of shareholders’ equity as stated above), in the total amount of about $343 million. Furthermore, the banks committed to provide in the future an additional amount of about $177 million, most of which will serve to cover financing expenses and development and renovation of the Property. 54 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a7) (Cont.) Of the above-mentioned amount of $343 million: – One loan in the amount of about $218 million will be made for a period of 4 to 6 years, bearing annual interest at the rate of Libor + 1.85%. The loan is secured by various collaterals as is customary for similar transactions, including a mortgage on the Property. – An additional loan in the amount of about $125 million (which constitutes a mezzanine loan) will be made for a period of 4 to 6 years, bearing annual interest at the rate of Libor + 6.6%. The loan is secured by various collaterals as is customary for similar transactions, including a lien on the shares of the Property Company. The Subsidiary has guaranteed to the banks repayment of the loans by the Property Company. Nonetheless, since one of the other shareholders of the Property Company was required to guarantee to the banks repayment of the loans by the Property Company, the Subsidiary committed to indemnify 50% of every amount it is required to pay to the banks due to realization of the guarantees as stated. The Subsidiary indemnification obligation will be limited to the amount of its investment in shareholders’ equity, that is, $57 million in the first stage and up to an additional amount of $32.5 million. (a8) In March 2007, a Company subsidiary entered into a series of agreements with a foreign company controlled by B.S.R. Projects Ltd., a public company whose securities are publicly traded, for establishment of a joint company, in equal shares, which will hold real estate on an area measuring about 24 dunams, located in the city center of Phoenix, Arizona. As at the date of the report, the real estate is vacant, (except for a small part thereof that serves as a temporary parking facility). The parties intend to develop the real estate in order to construct thereon 3 luxury apartment towers, which will include a total of 900 to 1,000 residential units, as well as about 3,000 sq.m. of commercial space. The scope of the subsidiary’s initial investment in the joint company amounts to US$15 million. (a9) In April 2007, a wholly owned subsidiary of the Company (indirectly), signed an agreement for acquisition of all the rights in “The New York Times Building”, a building which includes office and commercial space, located in Times Square, in Manhattan, New York. 55 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a9) (Cont.) The subsidiary signed an agreement in connection with acquisition of all the rights in foreign companies that hold all the rights in the property, for a consideration of US$525 million, plus fees, charges, taxes transaction costs and other expenses. The property is a building including office and commercial space located in Times Square, in Manhattan, New York. In 2001, part of the building was declared a “landmark” preservation building. The property is situated on a land site measuring about 4,700 sq.m. and includes built-up areas of 725,000 sq.m. The subsidiary intends to develop and renovate the property, and thereafter to lease it out as office space and commercial areas. At the signing date of the financial statements, based on the subsidiary’s estimation, the development and renovation period will last about 14 months. At this stage, the total additional investment in the property is estimated at about U.S.$250 million. The subsidiary joined additional investors to the transaction, and a foreign provided the financing for the transaction. The additional investors provided $7.5 million (of which the amount of $6 million was provided a loan by a subsidiary of the Company) and they own about 27% of the property. The bank financing for the acquisition and renovation of the property, in the aggregate amount of $711 million, was provided by a foreign bank in a number of frameworks, including a first priority mortgage, in the amount of $475 million. The loan will bear interest at the rate of Libor plus 2.5%, for a period of three years. As a hedge against wide fluctuations in the Libor interest rate, a hedge transaction on the Libor rate was executed. The loan proceeds were used to pay the balance of the acquisition price and are expected to finance about 90% of the renovation work and the financing-related expenses. The loan is primarily secured by a first priority lien on the property as well as by liens on the rights of the subsidiary and the various property companies. (a10) In May 2007, the Company, through a wholly owned subsidiary (indirectly), signed an agreement for acquisition of all the rights in “The Clock Tower” building, a building located in Manhattan, New York (hereinafter – “the Property”). 56 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a10) (Cont.) The subsidiary entered into an agreement in connection with acquisition of all the rights in the Property, for a consideration of $200 million plus fees, charges, taxes transaction costs and other expenses. The Property is a building including office space located in Manhattan, New York, which has been declared a “landmark” preservation building. The property is situated on a land site measuring about 590 sq.m. and includes built-up areas of 26,000 sq.m. that are not leased out. The subsidiary intends to develop and renovate the property, and thereafter to convert it into luxury apartments. Since the Property constitutes an office building, the subsidiary must obtain the required approvals for purposes of its conversion into luxury apartments, as stated. In the subsidiary’s estimation, the development and renovation period will last about two years. The total additional investment in the property is estimated at this stage at about $180 million. In June 2007, the transaction was completed and the rights in the Property were transferred to the subsidiary. As part of completion of the transaction, the subsidiary provided the amount of $126 million out of its own sources (in addition to the deposit of $20 million), and also transferred the amount of $65 million to complete the consideration and to cover the transaction costs, out of the loan monies it received from a foreign bank, in the overall amount of $88 million (of which the amount of $23 million is designated for financing planning and preliminary work with respect to renovation of the Property and its conversion into a luxury apartment building). The loan is for a period of one year and it bears interest of Libor plus 1.4%. (a11) In June 2007, a wholly owned (indirectly) subsidiary of the Company (hereinafter – “the Subsidiary”) signed an agreement in connection with acquisition of rights in a real estate property in Las Vegas in the United States. Pursuant to the agreement signed between a foreign company (hereinafter – “the Seller”) and the Subsidiary and other companies (hereinafter, together – “the Purchasers”), the Purchasers will acquire land from the Seller on an aggregate area measuring about 60 acres (about 240 dunams) in Las Vegas that is located adjacent to the Hard Rock Hotel and Casino (hereinafter – “the Land”), for a total consideration of $625 million, plus fees, impositions, taxes and additional transaction costs. 57 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a11) Out of the total purchase price, the amount of $196 million (including the amount of the aforesaid advance deposit) is to be provided as an investment of shareholders’ equity of the Purchasers, while the balance is to be provided by means of a bank loan. Out of the total purchase price, the amount of $25 million is to be paid at the end of three years from the closing date of the transaction (subject to possible reductions from this amount, in the overall amount of about $2.6 million). The Purchasers intend to set up a joint company (hereinafter – “the Joint Company”) in which the share of the Subsidiary will be about 49%. The significant decisions of the Joint Company will require approval of the rights’ holders therein holding at least 60% of the rights in the Joint Company. The Subsidiary was granted a right (limited to a period of five years) to acquire from the partners in the Joint Company (each one according to its proportionate share) an additional 2% of the rights in the Joint Company (that is, to increase its holdings in the Joint Company to 51% of the rights therein), in exchange for an amount determined on the basis of the cost of the investment in the transaction as stated above. Each of the Purchasers committed to provide its share in the amount required as an investment of shareholders’ equity as stated above, in accordance with its proportionate share in the rights in the Joint Company as aforesaid. Accordingly, the Subsidiary committed to provide 49% (that is, about $96 million, including its share in the above-mentioned advance deposit) of the amount required as an investment of shareholders’ equity as stated above. The Joint Company intends to develop the Property and to construct a project thereon that will include, among other things, a number of hotels, conference halls, commercial areas and a casino (hereinafter – “the Project”). It is hereby clarified that preliminary preparations only are involved and, therefore, the composition and final scope of the Project will be determined in the future taking into account, among other things, the market and the Joint Company’s business decisions. In the Subsidiary’s estimation, as at the date of the financial statements the development and construction of the Project will take about 5 years. At this stage, the amount of the additional investment in the Project is not known. 58 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a11) (Cont.) On August 1, 2007, the transaction was completed and the rights in the land were transferred to the Joint Company (as defined above). For purposes of financing the transaction, a bank from the Credit Swiss group (which is one of the companies in the group of purchasers) provided financing in the aggregate amount of $524 million, which is composed of two loans bearing annual interest at the 30-day Libor rate plus an addition at the average rate of about 5.65%. The financing was provided for a period of one year (along with four options to extend the financing period by nine months each time). The proceeds of the financing were used pay the balance of the acquisition price, as stated above, and are expected to finance the first part of the land’s development expenses. The financing is secured primarily by a lien on the rights in the land. The Company is not a guarantor with respect to repayment of the aforesaid financing. A subsidiary of the Company provided a loan to one of the partners in the Joint Company, in the amount of $17.8 million, for a period of 3 months bearing interest at the annual rate of 10% (the borrower has one option to extend the period of the loan by an additional month, at interest at the annual rate of 20%). The loan was used to provide part of that partner’s share of the amount required as an investment of shareholders’ equity as stated above. The loan is secured by, among other things, a lien on the partner’s rights in the Joint Company. (a12) In December 2007, the Company, through foreign subsidiaries, entered into an agreement for sale of their rights in an undeveloped real estate project in Miami, in the United States, known as “Block 42”, for an aggregate consideration of about $88.7 million, subject to possible adjustments on the closing date of the transaction. The amount of $8 million was paid on account of the consideration and, in addition, the purchaser made a deposit of $8 million. The amount of the deposit will not be returned unless the sellers violate their obligations to transfer ownership of the property. The closing date of the transaction, on which the balance of the consideration is expected to be paid against transfer of ownership of the property being sold, is set for September 30, 2008. 59 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (a) Real Estate Activities in the United States (Cont.) (a12) (Cont.) Nonetheless, the purchaser is entitled to give notice of postponement of the closing date of the transaction to no later than March 31, 2009 (each time by one month), subject to the condition that each time the purchaser gives notice of postponement of the closing date of the transaction it will add an additional amount to the deposit with the sellers (in the first three months – the amount of $1 million for each month of postponement and in the second three months – the amount of $2 million for each month of postponement). The amount of the additional deposits will not be returned unless the sellers violate their obligations to transfer ownership of the property. In this context it was provided, as is customary in the United States for these types of transactions, that due to the difficulty in estimating the sellers’ damages in a case of breach of the sale agreement, the amount of the deposit constitutes a reasonable estimate by the parties regarding their potential damages and, therefore, should the agreement be breached by the purchaser, the sellers’ remedies will be limited to forfeiture of the deposit as pre-agreed damages. If and when the transaction is closed, the Company is expected to record a pre-tax capital gain in its books of about $39 million. (b) Activities in Russia (b1) The companies operating in Russia operate in an unstable environment, both politically and economically and, therefore, are exposed to operating risks that are not characteristic of other countries. The financial statements of those companies reflect management’s evaluations regarding the effect of such instability on the operating results. It is noted, that the actual results may significantly differ from such evaluations. In addition, the insurance system in Russia is still being developed and insurance coverage as is customary in other places throughout the world does not yet exist in Russia. Regarding the companies operating in Russia, there is no insurance coverage with respect to their assets and operations. (b2) In 2000, the Company signed (by means of a subsidiary) an agreement in-principle with a foreign company that covers, mainly, joint cooperation in transactions involving acquisitions of real estate and investments in real estate projects in Russia and in the former Soviet Union. 60 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (b) Real Estate Activities in Russia (Cont.) (b2) (Cont.) The agreement in-principle provides, among other things, that the parties will enter into undertakings with rights holders for acquisitions of rights in real estate through joint companies that they will set up, in which the share of the subsidiary will be 80% and the share of the foreign company will be 20%. As part of the preparatory activities in contemplation of a decision whether to make an issuance with respect to the activities of the Company’s group in Russia, in November 2006 the foreign subsidiary signed agreements arranging the continued cooperation in the real estate area in Russia and the Commonwealth of Nations with another foreign company controlled by the Company’s local partner in connection with its activities in Russia (hereinafter – “the Partner”). Pursuant to the agreements signed, the rates of holdings of the Subsidiary and the Partner in the holding company that is managing most of Group’s activities in Russia (hereinafter – “the Joint Company”) will be changed by means of a transfer of shares in exchange for their par value, and will be set at 88% for the Subsidiary and 12% the Partner (instead of 80% for the Subsidiary and 20% the Partner). It was also agreed that the Partner will not be required to provide financing to the Joint Company, that the Joint Company will repay to the Partner the amounts it provided to the Joint Company up to now (in the total amount of $6 million), and that until additional financing is provided to the Joint Company in the amount of about $140 million, which is to be provided by the Company should it decide to provide it, based on its discretion, the Partner’s share will not be diluted to less than 12%. Furthermore, the Partner’s employment conditions as manager of the Joint Company were arranged in the agreements. As a result of the aforementioned proceedings, in 2006 the Company realized negative goodwill in the amount of NIS 61 million, which was recorded on the statement of operations in accordance with the accounting standards. (b3) In May 2007, AFI Development PLC (the subsidiary that manages the Group’s activities in Russia, hereinafter – “AFI Development”) issued global deposit certificates (GDR), which represent shares of AFI Development in the ratio of one deposit certificate for each share, which after their issuance constitute 19.2% of its issued share capital (without taking into account exercise of the underwriters’ option, as defined below), in exchange for a price of $14 for each deposit certificate (hereinafter – “the Issuance Price”). The global deposit certificates were registered for trading on the main stock exchange in London (LSE). 61 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (b) Real Estate Activities in Russia (Cont.) (b3) (Cont.) In addition, the issuance underwriters were granted an option to acquire an additional quantity of deposit certificates, constituting 10% of the number of deposit certificates offered in the issuance of AFI Development as stated, at the Issuance Price (hereinafter – “the Underwriters’ Option”). In June 2007, the Underwriters’ Option expired without having been exercised. The Issuance Price reflects to AFI Development a company value (after the issuance and without taking into account exercise of the Underwriters’ Option) of $7.33 billion. As part of the issuance, AFI Development raised $1.4 billion, without taking into account the issuance expenses and the Underwriters’ Option. AFI Development intends to use the amounts raised in the issuance for financing development of the projects in its existing properties’ portfolio, as well as for acquisition of rights in new projects in Moscow, in the Moscow district and in additional major cities in Russia. As a result of issuance of the securities of AFI Development, the Company recorded a capital gain in its financial statements (less the estimated issuance expenses) in the aggregate amount of NIS 3.4 billion. As a result of issuance of the securities as stated, the rate of the Company’s holdings in AFI Development declined from 88% to 71.2% of AFI Development’s issued share capital. In June 2007, the Company acquired shares of AFI Development in the amount of about NIS 47 million and, as a result, the Company holdings in AFI Development, directly and indirectly, rose to about 71.4%. As a result of the issuance of AFI Development and pursuant to a decision of the Board of Directors in April 2007, AFI Development granted 2,623,632 options for its deposit certificates of AFI Development convertible into 2,626,635 deposit certificates to its directors and officers and to other officers and employees in the Group, representing shares constituting (assuming exercise of all such options) about 0.5% of AFI Development’s issued share capital as at the date of the prospectus. The exercise price of each option is $14 (subject to adjustments), which is the price determined per deposit certificate as part of the issuance of AFI Development. 62 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (b) Real Estate Activities in Russia (Cont.) (b3) (Cont.) The exercise period of the options is as follows: one-third of the number of options may be exercised beginning from the end of two years from the effective date (April 13, 2007), one-third of the number of options may be exercised beginning from the end of three years from the effective date and the balance equal to one-third of the number of options may be exercised beginning from the end of four years from the effective date. All the options may be exercised beginning from the date they vest up to the end of ten years from the effective date. The options were granted in three increments, as described below: 1. In May and June 2007, the Company issued 2,202,785 options to employees. The average fair value of each option was calculated based on the Black and Scholes formula, according to which average economic value of each option is $5. The basic assumptions that served as the basis for calculation of the economic value, as stated, are: share price of $13.1, exercise price as noted above, annual discount rate 4.63%, annual standard deviation about 34%. The estimate of the anticipated expiration of the options was based on the Company’s estimate of the expected exit rate of the recipients of the options. Based on the assumptions detailed above, the entire expense over the full vesting period of the options is about $6 million. As at the signing date of the financial statements, 339,079 options were forfeited due to termination of the employment of a number of employees. 2. In July 2007, after approval by the General Meeting, 169,540 options were issued to the daughter of the Company’s controlling interest. The average fair value of each option was calculated based on the Black and Scholes formula, according to which average economic value of each option is $3.6. The basic assumptions that served as the basis for calculation of the economic value, as stated, are: share price of $10.7, exercise price as noted above, annual discount rate 4.63%, annual standard deviation about 34%. Based on the assumptions detailed above, the entire expense over the full vesting period of the options is $0.6 million. 63 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (b) Real Estate Activities in Russia (Cont.) (b3) (Cont.) 3. In July 2007, after approval by the General Meeting, 254,310 options were issued to a Company director who is also an employee of a company controlled by the Company’s controlling interest and who also serves as a director of AFI Development. The average fair value of each option was calculated based on the Black and Scholes formula, according to which average economic value of each option is $3.6. The basic assumptions that served as the basis for calculation of the economic value, as stated, are: share price of $10.7, exercise price as noted above, annual discount rate 4.63%, annual standard deviation about 34%. The estimated expiration of the options is based on the Company’s estimate of the expected attrition rate of the option recipients. Based on the assumptions detailed above, the entire expense over the full vesting period of the options is $0.9 million. (b4) In June 2006, AFI Development signed an agreement for sale of all its holdings in a company that holds real estate rights in Russia, in exchange for a consideration of $22 million. In respect of this sale, the Company recorded a net gain (after taxes and minority interest) in the amount of NIS 35 million. (b5) In September 2006, AFI Development, through a foreign subsidiary (held, indirectly, at the rate of 80%, hereinafter – “the Subsidiary”) entered into an agreement with a foreign company for sale of half of the Subsidiary’s holdings in another wholly owned subsidiary (hereinafter – “the Property Company”). The Property Company is the owner of rights in a land area measuring about 27 dunams, located in Moscow, Russia, which is intended primarily for offices and residences on a total built-up area of about 135 thousand square meters. Construction of the project on the property has commenced and is presently in various different stages. In exchange for half of the rights in the Property Company, the purchaser committed to pay the Subsidiary $150 million plus half of the costs and expenses invested during the construction period up to the closing date of the transaction. In respect of this transaction, the Company recorded a gain (after taxes and minority interest) in the amount of NIS 390 million. 64 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (b) Real Estate Activities in Russia (Cont.) (b6) In April 2007, AFI Development signed a memorandum of understanding with a third party, which is a foreign company, for acquisition of 74% of the lease rights for 49 years in a parcel of land on which office buildings are situated on an area measuring about 12,000 sq.m. in the City of Moscow. The seller owns the balance of the rights. If the transaction is closed, AFI Development intends to renovate and develop the real estate together with the seller in such a manner that after its development and along with the existing buildings there will be about 70,000 sq.m. of office space. The purchase price is about $37 million. (b7) In May 2007, AFI Development entered into an undertaking with a third party, which is a foreign company, for acquisition of 95% of the ownership rights in a parcel of land on which buildings are presently situated. The balance of the rights is held by the seller. If the transaction is closed, AFI Development and the seller intend to demolish the existing buildings and to construct on the site a built-up area of about 10,000 sq.m. intended for commercial and office space. The cost of the acquisition is about $113 million. (b8) In May 2007, AFI Development completed an undertaking with a third party (hereinafter – “the Seller”) in an agreement for acquisition from the Seller of 100% of its shares in two Russian companies. The Russian companies hold all the leasehold rights in a site having an area measuring 103 dunams, including three office buildings having a built-up area of about 116,700 sq.m. and located on Kosinskia Street in the eastern part of the City of Moscow. AFI Development intends to perform renovation and adaptation work with respect to the real estate on an area of about 111,000 sq.m. out of the total built-up area in order that such area will be ready to receive tenants during the fourth quarter of 2007. In addition, AFI Development intends to make efforts to receive additional building rights in such a manner that will allow it to construct another built-up area of about 70,000 sq.m. on the real estate, zoned for commercial use. The amount of the total investment in the acquisition and in the renovation and adaptation work is estimated by AFI Development at $234 million. (b9) In July 2007, AFI Development signed an agreement with a third party, which is a foreign company, for acquisition of a property on a built-up area of 24 thousand sq.m. located in Moscow. In addition, the company acquired land on an area measuring about 30 dunams including the building rights for construction of a built-up area zoned for mixed uses, on an aggregate area of 232 thousand sq.m. The company intends to construct a hotel, residential units and offices on the land. 65 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (b) Real Estate Activities in Russia (Cont.) (b9) (Cont.) The acquisition price was set at about $104 million and, at this stage, the scope of the investments in development of the project is estimated by AFI Development at about $465 million. In October 2007, AFI Development acquired an additional 22 dunams for the project for a price of $37 million. (b10) In July 2007, AFI Development 90% of the ownership rights in a parcel of land in Moscow zoned for residential purposes for a consideration of about $60 million. The company intends to construct about 700 residential units on the land having a built-up area of about 73,000 square meters. (b11) In October 2007, AFI Development acquired all the share capital of a Russian company having an undertaking with the City of Wolgograd, Russia, in an agreement for construction of a multi-use building on a total built-up area of 150 thousand square meters that is expected to include commercial and office areas, a hotel and parking facilities. In exchange for the shares, AFI Development paid $17 million. (c) Real Estate Activities in Eastern Europe (c1) As part of the centralization of the activities of the Africa Israel Group in Europe in 2006, AFI Europe N.V. (in its former name – AIIP FIN B.V.), a foreign subsidiary of the Company (heretofore and hereinafter – “AFI Europe”) entered into a transaction with Africa Israel International Investments (1997) Ltd., an Israeli subsidiary of the Company (hereinafter – “the Seller of the Shares”), and with Africa Israel (East Europe) Investments B.V. a foreign subsidiary of the Company (hereinafter – “the Seller of the Loans”), whereby AFI Europe acquired from the Seller of the Shares full ownership of three companies registered in the Czech Republic: Nova Rokytka s.r.o., Nova Modrany s.r.o., and Africa Israel Investments s.r.o., and two companies registered in Bulgaria: Vitosha Gardens Limited EOOD and Malina Gardens EOOD, which own the rights and/or signed agreements for acquisition of the rights in projects in the area of residential housing in Prague and in Sophia (hereinafter – “the Acquired Companies”). 66 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c1) (Cont.) Set forth below are the highlights of the undertaking pursuant to the purchase agreement: – On the closing date of the transaction, AFI Europe acquired from the Seller of the Shares full ownership of the Acquired Companies for the amount of about €14 thousand (hereinafter – “the Consideration for the Shares”). – On the closing date of the transaction, AFI Europe acquired from the Seller of the Loans all of the rights in the shareholders’ loans made to the Acquired Companies, in exchange for about €8,199 thousand, in exchange for the amount of the additional shareholders’ loans made to the Acquired Companies up to the closing date of the transaction (if any), in the maximum amount of an additional €100 thousand for each company, and a maximum total of an additional €500 thousand for all the Acquired Companies (hereinafter – “the Consideration for the Loans”). (c2) AFI Europe is continuing its preparations for making an offering of its shares to the public and/or to institutional investors and for listing the shares for trading on the stock exchange in London. The issuance date will be determined based on the market conditions as well as on additional factors, including completion of the readiness of Africa Properties to execute such an offering. As part of the preparations for the issuance, as stated, all the share holdings in the companies in Eastern Europe (the Czech Republic, Rumania, Bulgaria, Serbia) were transferred to AFI Europe in exchange for an issuance of shares. For this purpose, the Company has received an advance ruling from the Tax Authorities covering the above-mentioned transaction and the related tax aspects. The Tax Authorities approved transfer of the above-mentioned companies in accordance with the provisions of Section 104A of the Income Tax Ordinance with a deferral of tax. (c3) In March 2007, a number of agreements were signed between AFI Europe N.V. (a subsidiary of the Company, hereinafter – “AFI Europe”), on the one side, and a company from the BSR Europe Ltd. Group (hereinafter – “BSR”) and another party (hereinafter, together – “the Sellers”), in accordance with and further to a letter of intent signed in January 2007 and as revised on February 28, April 1, May 21, and June 12, 2007 (hereinafter – “the Letter of Intent”). 67 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c3) (Cont.) a) In the framework of the these agreements, in March 2007, AFI Europe acquired from the Sellers all of the rights (100%) in companies holding two projects in Bergia, Latvia – the Soleville Project and the Metropolia Project – for an aggregate consideration of about €37 million. The aforesaid consideration, except for an amount of about €4.6 million (hereinafter – “the Deferred Amount”), was paid by AFI Europe on March 29, 2007 (including by means of the offset of an advance deposit made by AFI Europe to BSR upon the signing of the Letter of Intent). According to the agreements, the Deferred Amount will be paid to BSR within 12 months, plus annual interest at the rate of Eurobar + 1.5%. Africa Properties is a guarantor of AFI Europe’s liability for payment of the Deferred Amount, and such guarantee will be cancelled upon the occurrence of certain events provided, including a public issuance of AFI Europe. In addition, BSR Europe Ltd. is a guarantor for the liabilities of BSR for indemnification under certain conditions as provided in the agreements. The following construction projects are being executed by the companies acquired: b) (1) The Soleville Project, a construction project on land having an area measuring about 104 dunams, on which the construction of about 2,050 residential units is planned on an overall area of about 195 thousand sq.m., along with about 35 thousand sq.m. of commercial and public areas. (2) The Metropolia Project, a construction project on land having an area measuring about 22.5 dunams, on which the completion of about 550 residential units is planned (with respect to about 520 residential units sale’s contracts have already been signed) on an overall area of about 45 thousand sq.m. In April 2007, AFI Europe acquired from BSR all of the rights (100%) in the company holding the Lagera project in Sophia, Bulgaria, in exchange for an aggregate consideration of €8.3 million. The aforesaid consideration, except for €2 million (hereinafter – “the Deferred Amount”), was paid by AFI Europe on April 18, 2007. In accordance with the agreements, the Deferred Amount is to be paid to BSR within 12 months, together with annual interest at the rate of Eurobar + 1.5%, however, payment of about half of the Deferred Amount is contingent on and subject to the fulfillment of certain conditions. 68 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c3) (Cont.) b) (Cont.) Africa Properties is a guarantor of the liabilities of AFI Europe for payment of the Deferred Amount. It is noted that this guarantee will be cancelled upon the occurrence of certain events provided including a public issuance of AFI Europe. In addition, BSR Europe Ltd. is a guarantor for the liability of BSR for indemnification under certain conditions as provided in the agreements. The Lagera project in Sophia is a construction project on a land site measuring about 15.8 dunams, on which the construction of about 570 residential units is planned on an overall area measuring 47 thousand sq.m., along with 2.5 thousand sq.m. of commercial space. Completion of the projects and/or the scope thereof may change due to, among other things, unplanned delays in the construction work and/or changes in the real estate market in Bulgaria. c) In May 2007, AFI Europe acquired from BSR all of the rights (100%) in companies holding the Osiedle Europejskie project, in Krakow, Poland (hereinafter – “the Project”). The aggregate consideration to be paid to the sellers in the framework of the transaction is about €35 million, with the addition of annual interest at the rate of Eurobar + 1.5%, which will run from the signing date of the agreements up to the date of actual payment (hereinafter – “the Agreed Interest”). After obtaining all the required approvals in order to close the transaction, in September 2007 AFI Europe paid the amount of about €35 million. The Osiedle Europejskie project, in Krakow, is a construction project on a land site measuring about 144.5 dunams, on which completion of the construction of 2,400 residential units is planned (some of which have already been built) in about 25 buildings having 5–8 stories, on an overall area 144.5 thousand sq.m., as well as about 2 thousand sq.m. of commercial areas (which have already been built and are ready to be leased out). Completion of the projects and/or the scope thereof may change due to, among other things, unplanned delays in the construction work and/or change in the real estate market in Poland. 69 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c3) (Cont.) d) In June 2007, AFI Europe, through a wholly owned foreign subsidiary, acquired 30% of the rights in a foreign company that holds the Wilanow project, a residential construction project on land having an area measuring about 194 dunams in Warsaw, Poland, and 100% of the rights in a foreign company engaged in project management (hereinafter – “the Project Company”). In addition, the subsidiary and AFI Europe entered into a shareholders’ agreement with two companies owned and controlled by the Macquarie investments’ fund, which holds the balance of the rights in the Project. The aggregate consideration to be paid to the sellers as part of the transaction comes to about €39 million. Of the above-mentioned consideration, €30.3 million was paid at the signing of the agreement. In addition, €86 thousand, plus interest at the annual rate of Eurobar + 1.5%, which will apply from the signing date of the agreement and up to the actual execution of the payment (hereinafter – “the Agreed Interest”), is to be paid to the sellers within 12 months (hereinafter – “the Deferred Amount”), and the amount of €8.6 million, plus the Agreed Interest for the period from the signing date of the agreement and up to December 18, 2008, is to be paid to the sellers if and to the extent during the next three years there are certain changes in the Urban Planning Scheme applicable to the project that will permit an increase of the residential building rights (hereinafter – “the Contingent Amounts”). For purposes of securing payment of the Deferred Amount and the Contingent Amounts, a bank guarantee and a guarantee of Africa Properties were issued, and it was provided that the guarantee of Africa Properties will be cancelled upon the occurrence of certain stipulated events, including a public issuance of AFI Europe. In addition, BSR Europe Ltd. is a guarantor for the liability of BSR for indemnification under certain conditions as provided in the agreement. (c4) In February–March 2007, a wholly owned foreign subsidiary (indirectly) of Africa Properties acquired land on an aggregate area measuring about 17.3 dunams in Bucharest, Romania, for a consideration of about €18 million. The foreign subsidiary intends to construct about 900 residential units on the land. (c5) In March 2007, a subsidiary of AFI Europe entered into agreements with two companies from the Czech Republic for acquisition of land in Prague, in the Czech Republic, for an aggregate consideration of about €21 million. 70 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c5) (Cont.) The land has a total area measuring about 140 dunams and it includes construction rights for about 138 thousand sq.m., zoned for residential, office, commercial and hotel use. In addition, in May 2007 the subsidiary acquired land (located adjacent to the aforementioned land) on an area measuring about 13 dunams, for a consideration of about €1.5 million. (c6) In April 2007, AFI Europe signed a memorandum of understanding with a foreign company registered in Bulgaria and with a foreign company registered in the Channel Islands, for acquisition of all the holdings of another foreign company registered in Bulgaria that owns the rights in a rental real estate project in Borna, Bulgaria. In August 2007, all the preconditions were fulfilled and the agreements with the sellers were completed. The project includes a number of office buildings, on an overall area measuring about 40,000 sq.m. – one building the construction of which was completed and which is rented out (hereinafter – “the First Building”), a second building which is in the advanced stages of construction and which is rented out (hereinafter – “the Second Building”), and an additional building that is under construction (hereinafter – “the Third Building”) – having different zoning designations (offices, commercial and warehouses). The additional building rights in this project are estimated at an overall area of at least 160,000 sq.m. The consideration for the shares being acquired is €50.5 million, which is to be paid as follows: a) AFI Europe will pay about €35.5 million, against transfer of the shares being acquired into the name of AFI Europe. b) The amount of about €15 million is to be paid to the sellers at the end of construction of the second and third buildings in two payments (the above-mentioned two payments will be referred to below as (the above-mentioned two payments will be referred to hereinafter as – “the Deferred Amount”). 71 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c6) (Cont.) The project company has two main obligations, as follows: a) An agreement with a contractor company relating to completion of the construction of the Second Building and construction of the Third Building (hereinafter – “the Construction Agreement”) and in consideration thereof the project company is to pay the amount of about €9 million (non including VAT) to the contractor company upon completion of their construction; and b) Bank financing provided to the sellers from a lending bank, in the amount of about €15 million (hereinafter – “the Bank Financing”). For purposes of securing payment of the Deferred Amount and the payment to the contractor, AFI Europe provided a documentary letter of credit and appropriate bank guarantees, which were transferred to a trustee who is to transfer these documents to the seller upon fulfillment of certain conditions detailed in the agreement. As part of the rental agreement with the lessee of the Second Building, the lessee was granted an option (for a limited period) to acquire the building. (c7) In May 2007, AFI Europe entered into an agreement with a foreign company registered in Bulgaria, for acquisition of 75% of the issued share capital of another foreign company registered in Bulgaria (hereinafter, in this section – “the Project Company”), which owns the rights in real estate whereon it intends to construct a logistics center. The consideration for the shares being acquired, as stated, is about €2.6 million. In addition, AFI Europe is to lend the Project Company about €1.7 million. (c8) In September 2007, AFI Europe acquired, through a wholly owned foreign subsidiary, 5 real estate parcels on an aggregate area of about 156 thousand square meters in Bucharest, Romania, in exchange for total amount of about €78 million (the payment currency is the Romanian Leu, as will be calculated based on an adjustment mechanism provided on the basis of the changes in the exchange rate of the euro against the Romanian Leu) and was/is to be paid in the following manner: a) The amount of about €50 million was deposited in trust and was paid after registration of the real estate rights in the subsidiary’s name in October 2007. b) The amount of about €5.5 million, which will be paid to the seller by May 18, 2008. 72 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c8) (Cont.) c) The balance, in the amount of about €22.5 million is to be paid to the seller upon vacating about 75,000 square meters out of the total area of the real estate that will be held by it for a period of 18 months and no later than March 19, 2009 (with an option for an additional 6 months and no later than September 19, 2009) and the transfer thereof to the subsidiary. In order to secure payment of the balance, as stated, AFI Europe committed to provide the seller a company guarantee, commencing from the signing date of a detailed acquisition agreement covering the real estate and up to the time the property is fully vacated by the seller, as detailed above. (c9) In November 2007, AFI Europe signed an agreement for acquisition of 50% of the shares of a foreign company registered in Hungary (hereinafter – “the Project Company”), which is held by a company registered in the Netherlands, in 50% partnership with S.B.I.R.E.D. B.V., which is controlled by Housing and Construction Holdings Ltd., for a consideration of about €9.1 million. The Project Company holds all the rights in real estate on an area measuring about 500 duanms that is used as vacation and recreation site known as “Club Aliga” located in the Bolton Basin in Hungary. The Project Company intends to plan and construct on the site residential units, commercial areas and a hotel with a built-up area estimated at about 200 thousand square meters. (c10) In November 2007, AFI Europe acquired all the holdings (100%) in two foreign companies registered in Hungary that are wholly owned and controlled by a foreign company that is also registered in Hungary, in exchange for a consideration of about €6 million, which will be updated in accordance with an adjustment mechanism detailed in the agreement. The consideration is to be paid in the following manner: At the time of the closing, AFI Europe will deposit the full amount of the consideration in a trust account, where the amount of the consideration, as stated, will be transferred to the seller upon fulfillment of a number of conditions, including, registration of AFI Europe as the owner of the companies being acquired at the end of 90 days from the date of the closing and where the property under its ownership is free and clear of any third-party right. If transfer of the holdings from the seller to AFI Europe is not executed within 90 days of the date of the closing, the transaction will be cancelled. 73 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c10) (Cont.) The companies being acquired own, each one separately, two adjacent land parcels located proximate to the Nepliget Park, in Section 10 in Budapest, Hungary on an aggregate area (both parcels) measuring about 19 dunams, which are zoned for construction of residential units. The companies being acquired intend to construct a residential project on the property that will include about 500 residential units, on an estimated built-up area of about 40,000 square meters (gross). (c11) In November 2007, AFI Europe entered into an agreement with a third-party foreign company for acquisition of all its holdings, directly and indirectly, in a foreign company registered in Romania (hereinafter – “the Romanian Company”), which was also held indirectly by AFI Europe. After completion of the transaction, the rate of AFI Europe’s holdings (directly and indirectly) will increase to about 98.43% of the ownership and control of the Romanian Company. The Romanian Company owns a lot having an area measuring about 125 dunams located in central Bucharest, where on part of the lot construction is planned of a project including a shopping mall, the construction of which has already commenced, along with areas designated for offices and other uses. The consideration pursuant to the agreement amounts to about €79 million, of which about €59 million is to be paid in respect of acquisition of the holdings and the balance is against assignment to AFI Europe of shareholders’ loans due to the seller. As part of the agreement, the Romanian Company will acquire an additional site measuring about 1,500 square meters located adjacent to the lot for a price of about €1.1 million for purposes of set up and construction a transformation station (substation) required for purposes of construction and operation of the project. AFI Europe agreed as part of the agreement to convert a right of first refusal it was granted in respect of an area measuring about 40,000 square meters bordering on the lot’s area in the framework of an agreement signed between it and the seller for acquisition of the first half of the rights in the project (hereinafter – “the Additional Area”). As part of the said conversion, AFI Europe will be entitled to receive proceeds from sale of the Additional Area that are equal to half of the difference between €500 per square meter (lot) and the price per square meter (lot) actually paid by the purchaser of the Additional Area. 74 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c11) (Cont.) The parties to the agreement set December 14, 2007 (or an earlier date that will be mutually agreed to) as the closing date, which will be executed subject to registration of the holdings being acquired in the name of AFI Europe pursuant to the trust arrangements agreed to. If the closing does not take place as detailed in the agreement, the trustee will return the amount of the consideration to AFI Europe against return of the shares to the seller. In addition, in November 2007, the Romanian Company entered into an agreement with a foreign company registered in Romania (hereinafter – “the Contractor”), which is a wholly owned and controlled subsidiary of Danya Cebus, for performance of construction work in connection with construction of a shopping center in Romania (hereinafter – “the Romanian Agreement”). The shopping center will be located on a lot wholly owned by the Romanian Company in Bucharest, Romania, and will include a 4-story building (of which 2 floors will be underground), construction of a parking area, landscaping and arrangement of the public areas. The duration of execution of the project was set at 23 months from the signing date of the agreement. In exchange for performance of the work, the Romanian Company will pay about €158 million (a fauschly price), plus VAT as per Romanian law, to the extent applicable, which will be paid in rons (the Romanian currency) based on the euro–ron currency exchange rate published by the Central Bank of Romania on the payment date. The payment will be made on the basis of current month + 20 up to 35 days based on the quarterly progress report with respect to execution of the work. The Romanian Company has the right to execute part of construction through subcontractors that it will choose, up to a cumulative amount not in excess of €30 million (which will be offset against the price determined with the Contractor). The subcontractors will be employed by the Contractor at a price agreed to with them by the Romanian Company, where the Contractor will be entitled to a payment constituting 12% of the value of such work based on the value thereof in the fauschly offer as stated. 75 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c11) (Cont.) The Romanian Company is permitted to demand that the Contractor make changes in the work. Changes exceeding 10%, on a cumulative basis, of the price of the Romanian Agreement will require approval by the parties’ competent authorities. The Romanian Company is entitled to make deductions from the payments to the Contractor, in accordance with that stipulated in the Romanian Agreement, up to the time of transfer of the project to it and issuance of a transfer certificate for the project to the Contractor. The Contractor was given the possibility of releasing the amounts deducted by means of provision of an autonomous bank guarantee in an amount equal to the amount released. In addition, the Contractor will provide an autonomous bank guarantee as a performance guarantee at the rate of 5% of the price of the Romanian Agreement and a guarantee of Danya Cebus Ltd. for execution of the work and fulfillment of the Contractor’s obligations in connection with performance of the work, up to an aggregate amount of 10% of the price of the Romanian Agreement. An additional guarantee is to be provided by the Contractor for a period of 24 months after completion of the construction work covering the examination period. Delinquency on the part of the Contractor with respect to completion of the project will trigger the payment of liquidated damages in respect of the delay, in the amount of €83 thousand for every day of delay in the first month, and afterwards €45 thousand for every day of delay up to a total of €8 million. Insurance for all the work in the project is to be taken out by the Romanian Company, where the cost thereof will be deducted from the proceeds to the Contractor. The transaction is a transaction between a company and its controlling shareholder in accordance with the Securities Regulations, 2001, and it was approved by the Audit Committee at its meeting held on October 29, 2007, and by the Company’s Board of Directors on the same date. In addition, on December 23, 2007, the transaction was approved by the General Meeting of the Shareholders of Africa Properties. 76 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (c) Real Estate Activities in Eastern Europe (Cont.) (c12) In December 2005, a subsidiary signed an memorandum of understanding with a foreign company (hereinafter – “the Seller”), which is controlled by a U.S. investment fund that makes investments in the real estate area in Europe, in connection with acquisition (directly or indirectly through a joint company) of 50% of the Seller’s shares in a Romanian company (hereinafter – “the Acquired Company”), which holds real estate on an area of 120 dunams in central Bucharest, Romania (hereinafter – “the Lot”). As at the signing date of the memorandum of understanding, the Seller held 98% of the rights in the Acquired Company. The consideration for the rights in the Acquired Company was set at €9 million. A real estate project may be constructed on the Lot with different designations, and regarding this matter it was determined that the designation of the Lot will be determined by means of agreement of the parties later on. In the estimation of the subsidiary, various different projects may be constructed on the Lot with a total area of 150,000 sq.m. It was also agreed that a right of first refusal will be conveyed to the Acquired Company for acquisition of an additional area measuring 40 dunams located adjacent to the Lot. The transaction was completed in the beginning of 2006. (c13) In October 2006, a foreign subsidiary that is wholly owned (indirectly) by Africa Properties, acquired land in North Bucharest in Romania, in exchange for a consideration of €10 million. The subsidiary intends to construct a project including 2,700 residential units, along with public areas and commercial space on an area measuring about 5,000 square meters. (c14) In October 2006, the Company, through an investee company, signed an agreement for acquisition of a real estate property in the area of the Melnova Dulna neighborhood in Sophia, Bulgaria (hereinafter – “the Real Estate Property”), on a total area measuring approximately 39,000 square meters, in exchange for an aggregate consideration of €5.2 million (not including transaction costs). The Real Estate Property is in the approval process with respect to an Urban Planning Scheme for residential construction, where the amount of the consideration is expected to pass to the seller against registration of ownership of the land in the name of the purchaser. The transaction was financed from the Company’s own internal sources. (d) Real Estate Activities in the Ukraine In March 2007, the Company, through a subsidiary, entered into an agreement with a third party that is a foreign company, for acquisition of all of the rights in a land section on a area measuring 46 dunams (ownership rights with respect to about 22 dunams and leasehold rights for a period of 49 years with respect to about 24 dunams) in the Ukraine (hereinafter – “the Property”). The acquisition price was set at about $22 million. 77 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (d) Real Estate Activities in the Ukraine (Cont.) The subsidiary intends to construct a project on the Property having about 150,000 sq.m. of built-up areas with different zoning designations: offices, commercial and luxury residential housing. The aggregate investment in development of the Property and the timetables for performance of the construction work on the project have not yet been determined. (e) Real Estate Activities in the Philippines (e1) In February 2006, a subsidiary of Africa Properties entered into an agreement with Cyberzone Properties, Inc., a foreign company registered in the Philippines (hereinafter – “the Project Company”), for acquisition of 40% of the Project Company’s issued share capital (hereinafter – “the Shares”). The Project Company holds (directly or indirectly) the lease rights in a project involving construction an office building complex for companies engaged in the information technology area in metropolitan Manila in the Philippines (hereinafter – “the Project”). Set forth below is a brief description of the highlights of the transaction: The subsidiary signed an agreement with the Project Company for acquisition of the Shares by means of an issuance (hereinafter – “the Investment Agreement”) for an aggregate consideration of about US$10 million. The Investment Agreement provides that the investment is to be executed in three stages, as detailed below: On the signing date of the Investment Agreement, shares of the Project Company will be issued to the subsidiary such that after the issuance the subsidiary will hold 25% of the Project Company’s issued share capital. This is in exchange for a consideration of about US$5.1 million. In September 2006, shares of the Project Company will be issued to the subsidiary such that after the issuance the subsidiary will hold 35% of the Project Company’s issued share capital. This is in exchange for a consideration of about US$3 million. In February 2008, shares of the Project Company will be issued to the subsidiary such that after the issuance the subsidiary will hold 40% of the Project Company’s issued share capital. This is in exchange for a consideration of about US$2 million. As at the balance sheet date, 6 finished buildings are situated on the Project’s site. 78 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (e) Real Estate Activities in the Philippines (Cont.) (e1) (Cont.) At the present time, the seventh building in the project is under construction. After completion of construction of the seventh building, construction of the eighth building is expected to begin. Upon completion of construction of the project, the total number of buildings is expected to reach 20. The rights in the land were leased from a company owned by a party related to the other shareholders in the Project Company, such that the Project Company will be entitled to rent in respect of each building for a period of about 15 years, and afterwards the rights in the land together with buildings thereon will be transferred to the lessor. Based on the estimation of the Project Company, the final completion date is planned to be in 2012 and the total investment in the Project is estimated, at this stage, at US$136 million. (e2) In September 2006, an agreement was signed between a wholly owned foreign subsidiary (hereinafter – “the Subsidiary”) and Filinvest Land Inc., a foreign company registered in the Philippines (hereinafter – “Filinvest”), pursuant to which the parties will cooperate in the framework of a joint venture company (hereinafter – “the Project Company”), which will develop real estate for residential purposes in the area of San Mateo, Rizal in the Philippines, located about 35 kilometers northeast of the capital, Manila. The project constitutes part of the area known as “Timberland Heights”. Pursuant to the agreement, the Subsidiary will acquire 40% of the share capital of the Project Company, to which Filinvest will transfer lands on a total area measuring about 582 dunams, for an aggregate consideration in pesos equivalent to about US$6.3 million. The Project Company will act to develop the project area, which includes about 620 lots for construction of village-type residences and, in addition, a health and fitness center is to be constructed along with an appropriate transportation infrastructure. Some of the lots in the project are expected to be sold for independent construction. 79 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (e) Real Estate Activities in the Philippines (Cont.) (e2) (Cont.) As at the date of the report, based on the Subsidiary’s assessment, the construction and marketing period of the project will last about five years. At this stage, the total investment in the project (not including land, marketing and selling expenses, administrative and general expenses and taxes) is estimated at US$25 million. Accordingly, the Subsidiary’s share in the said project investment is expected to reach about $10 million. In addition to acquisition of the rights in the project as stated above, the Subsidiary was given an option in connection with development of additional lands that are presently owned by Filinvest and that constitute another part of Timberland Heights, on a total area of up to about 5,550 dunams (hereinafter – “the Option”). The Option will be exercisable once only, during a period of 54 months from the closing date of the transaction relating to the project. If and when the Option is exercised by the Subsidiary, Filinvest will transfer the lands covered by the Option to the Project Company or to a new company in which the rate of holdings of the Subsidiary and Filinvest will be the same as the rate of their holdings in the Project Company. The price to be paid for exercise of the Option, should it be exercised, is about $42 million. In consideration of receipt of the Option and as an advance deposit on account of its exercise price, should it ultimately be exercised, the Subsidiary is to pay Filinvest an amount in pesos equivalent to about US$1.25 million. At this stage, the Company is unable to estimate the construction period and the anticipated investment in connection with the lands covered by the Option, if and when the Option is exercised by the Subsidiary. (f) Real Estate Activities in Germany In April 2007, AFI Europe signed an agreement for acquisition of 70% of the issued share capital of 4 holding companies incorporated in Germany that are owned by two Israeli entrepreneurs, and two companies registered in Israel – each one of which is owned by one of the said entrepreneurs. Several months ago, the German holding companies signed an agreement for acquisition of 35 real estate properties in Germany (most of them rental properties) (hereinafter – “the Portfolio”), and they are endeavoring to complete the agreement (hereinafter – “the Properties Acquisition Agreement”). 80 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (f) Real Estate Activities in Germany (Cont.) Pursuant to the share acquisition agreement, with respect to acquisition of the holdings of the German holding companies, AFI Europe is to pay to the Israeli entrepreneurs and/or the Israeli companies they own the amount of €17,500 for the holdings in each German company (summing to a total of €70,000), which will be invested in full as shareholders’ loans by the entrepreneurs, in each of the four German holding companies. The consideration for the Portfolio as provided in the Properties Acquisition Agreement is about €97 million, plus accompanying expenses of about €7.1 million. Shortly after the undertaking of the parties in the agreement for acquisition of the shares, as stated above, a foreign bank provided bank financing at the rate of about 94% of the aggregate acquisition price of the properties making up the Portfolio, that is, about €91 million. The bank financing, as stated, is spread over a period of 7 years bearing fixed annual interest of 5.5% and on terms agreed to with the bank. For purposes of securing the bank financing, the German holding companies placed first-priority liens of the Portfolio properties. In addition, shares of the German holding companies were pledged to the bank. As part of the share acquisition agreement it was also provided that AFI Europe is to provide the entrepreneurs (and/or the Israeli companies they own) a loan for purposes of providing the required shareholders’ equity based on the rate of their holdings in the German holding companies, on the same terms as the terms of the bank financing. At the time of repayment of the shareholders’ loan, 80% of the amount of the repayment of the shareholders’ loan received by the entrepreneurs (and/or the Israeli companies they own) will be transferred directly to AFI Europe until the said loan is fully repaid for purposes of provision of shareholders’ equity to the entrepreneurs and/or to the Israeli companies. The composition of the Portfolio includes, among other things, buildings in Berlin and in other areas in western Germany, a lot measuring about 6 dunams (designated for hotels), and another lot measuring about 0.5 dunam having an overall area of about 150,000 sq.m. of built-up areas, of which about 44,000 sq.m. serve as residential areas and about 106,000 sq.m. are used for commercial and industrial purposes. As at the signing date of the share acquisition agreement, the total annual rental revenues from the Portfolio properties is about €7.8 million, and the total vacant space comes to about 20,500 sq.m. 81 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (g) Real Estate Activities in Panama In August 2007, a wholly owned and controlled subsidiary of the Company (hereinafter – “the Subsidiary”) signed several agreements (hereinafter – “the Agreements”) with a group of sellers (hereinafter – “the Sellers”) the significant terms of which are set forth below: The Subsidiary acquired from the Sellers 50% of the shares of a foreign company (hereinafter – “the Shares” and “the Project Company”, respectively) which holds all the rights in a land site measuring about 3,700 sq.m., located in Panama City, Panama, situated proximate to the beach and the city center and close to the “Old City” (hereinafter – “the Real Estate”). The balance of the shares in the Project Company will continue to be held by the Sellers. The Project Company and the Sellers intend to develop the Real Estate through the Project Company and to construct thereon a 73-story building with a built-up area of 100,000 sq.m., which will include, among other things, about 359 residential units, parking facilities, a swimming pool, fitness rooms, banquet halls and commercial areas (hereinafter – “the Project”). Pursuant to the Agreements, the aggregate consideration for the Shares is about US$10 million, of which about US$7 million was paid at the signing of the Agreements, whereas about US$3 million was deposited in trust and will be transferred to the Sellers at the time of commencement of performance of the construction work on the Project. In the estimation of the Company and the Sellers, the development period of the Project will last about 36 months, and the total investment in the Project was estimated by the Sellers, at this stage, at about US$86 million. The parties intend to act to obtain bank financing for purposes of the additional investment in development of the Project. (h) Hotel Operations Overseas (h1) In May 2007, Africa Israel Hotels Ltd. (a subsidiary, hereinafter – “Hotels”) signed an agreement with a foreign company for acquisition of a 3-star hotel located in the City of Sweiberding, near the City of Stuttgart in Germany. Pursuant to the agreement, Hotels acquired the rights in the hotels’ real estate and the built-up areas thereon, for a consideration of about €3.66 million. After receipt of the hotel, Company management decided to upgrade it and conform it to the standards of the Best Western chain, with which a concession agreement was signed. The cost of the upgrade and conformance of the hotel is estimated at €1 million. The hotel was opened to the general public in August 2007. 82 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (h) Hotel Operations Overseas (Cont.) (h2) In July 2007, Africa Hotels acquired, through a foreign subsidiary, in a tender issued by the City of Gelzenovodask, in Kwakez, Russia, lease rights for 49 years in land located in the City of Gelzenovodask on an aggregate area of about 9.52 dunams on which there are two existing buildings on a total built-up area of about 8,419 sq.m. designated as a rehabilitation hotel (hereinafter – “the Hotel”). The aggregate consideration set for acquisition of the rights in the Hotel is about $4 million. Africa Hotels intends to renovate and develop the Hotel in a manner that will conform to the standards of a 3-star hotel and will also include a fitness center. The cost of the renovation and development, as stated, is expected to amount to about $8.5 million. Based on Africa Hotels’ estimation, the renovation and development of the Hotel will last about two years. (h3) In September 2007, Africa Hotels, through a wholly owned subsidiary registered in Cyprus, signed a framework agreement and accompanying agreements relating to its execution, with a company registered in Cyprus (hereinafter – “the Additional Company”), in connection with acquisition and management of four hotels in Bucharest, Romania. The Additional Company is controlled by shareholders of companies registered in Romania that hold four hotels in Bucharest, one of which is under construction, that include about 300 hotel guest rooms. As part of the framework agreement, it was agreed that the subsidiary and the Additional Company will set up a holding company registered in Romania that will acquire from the sellers the rights in three hotels and will also acquire 100% of the shares of the company holding the hotel under construction. The proportion of the holdings in the holding company will be 60% – Africa Hotels and 40% – the Additional Company. Furthermore, a management company is to be set up held in the same proportion (where the subsidiary itself is the owner of 60% therein) that will rent the hotels from the holding company and will operate them for hotel purposes. Africa Hotels committed that the consideration to be paid to the sellers and/or the companies they control in respect of transfer of the rights in the properties being sold will amount to about €19 million. In the estimation of the parties the fourth hotel will be completed within about 18 months. The total investment for purposes of construction of the fourth hotel is estimated at about €9 million. 83 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (h) Hotel Operations Overseas (Cont.) (h4) In November 2007, Africa Hotels signed a letter of intent with a foreign company for examination of the possibility of acquiring a 4-star hotel named “Hotel Astoria Essen” located in the City of Essen in Germany. The hotel is privately owned and includes 97 rooms. The hotel is situated on land having an area of about 2,700 square meters. Pursuant to the letter of intent, the company was granted a right to perform a legal due diligence examination with respect to the hotel and, thereafter, the parties will sign a final agreement covering acquisition of the hotel, based on Africa Hotels’ discretion, for a total consideration of about €3.8 million. (h5) In September 2006, Africa Israel Hotels Ltd. (a subsidiary, hereinafter – “Hotels”), through its wholly owned subsidiary, acquired from a Russian company a real estate property in the City of Kislovodisk in Russia for a price of about US$5.5 million. The property is a complex intended for development by the company as a sanatorium having 800 to 1,000 beds and that includes a group of buildings on a total built-up area of 39,000 sq.m. (after completion) the construction of which is not yet finished. (h6) In November 2006, Africa Hotels, through its wholly owned foreign subsidiary, entered into an agreement with a third party for acquisition of a real estate property on an area measuring about 6 dunams in the City of Kislovodosk in Russia, for a consideration of about US$3.53 million. Africa Hotels intends to examine possibilities for changing the property’s zoning and for development of a sanatorium having about 110–120 beds. (i) Activities of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) Overseas (i1) Danya Cebus is engaged, through a subsidiary (hereinafter – “Danya Russia”), in construction, management and supervision of projects in the construction sector in Russia. As at the date of the report, all of Danya Russia’s activities are concentrated in projects for companies in the Africa Israel Group (hereinafter – “AFI Development”). The main projects underway that have reached various stages of completion by Danya Russia are as follows: 84 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (i) Activities of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) Overseas (Cont.) (i1) (Cont.) – Danya Russia entered into an agreement with AFI Development and with a local company in the Faram District in Russia, covering joint cooperation with respect to construction-project initiations in this district. The interest of Danya Cebus in the joint company set up is about 20% and the interest of AFI Development therein is about 30%. The current project involves construction of about 1,000 residential units and about 20,000 square meters of commercial space in the City of Faram with an estimated aggregate investment of about US$400 million. In addition, Danya Russia is carrying on negotiations regarding execution of the contractor work in the project, in whole or in part. In March 2008, the Audit Committee and Board of Directors of Danya Cebus approved an undertaking for sale of Danya Russia’s share in the joint company (including its rights to receive loans it provided) to AFI Development for a consideration of about US$11 million. The undertaking is subject to approval of the General Meeting of Danya Cebus’ shareholders in accordance with Section 275 of the Companies Law. – Udinzubu Project – undertaking with AFI Development (hereinafter – “the Customer”) in a framework agreement for construction of a residential neighborhood including about 6,200 residential units on a total built-up area of about 650,000 square meters. Construction of the project is planned to be executed in two main stages over a period of about 6 years from the commencement date of the work. The total anticipated proceeds in respect of construction of the residential neighborhood project on a built-up area of about 650,000 square meters (if the parties reach agreement as to execution of the entire project by Danya Russia and assuming there are no changes in the price per square meter determined for construction of Koruna) amount to about 13.3 billion rubles including VAT (estimated value of about US$547 million including VAT). Projects for the RIG Company – Danya Russia entered into agreements with a foreign company that is a wholly owned subsidiary of RIG (Russian Investment Group) (not from the Africa Israel Group) for execution of planning work in four projects in the municipal district in the City of Moscow in Russia. 85 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (i) Activities of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) Overseas (Cont.) (i1) (Cont.) – The projects are on an overall area of about 185 thousand square meters, under the “shell and core” method, for construction of offices in the City of Istora (on an area of about 6 thousand square meters) and in the City of Udinzubu (on an area of about 13.5 thousand square meters), a commercial center in the City of Dubna (on an area of about 16 thousand square meters), and a residential neighborhood in the City of Waliaminovu (on an area of about 150 thousand square meters). The aggregate consideration for execution of the planning work in all four projects was set at about US$11 million (including VAT). In addition, the parties are carrying on negotiations in the framework of which Danya Russia will perform the contracting work with respect to construction of the projects, as the general contractor, in an estimated scope of about US$195 million. It is noted that the planning agreements include a condition whereby if at the end of 45 days from the signing date thereof agreements have not been signed for execution of the contractor work, the planning agreements will be cancelled unless extension of the period is agreed to by both parties in writing. As at the date of the report, the parties signed an addition to the agreement that extends the period for signing the agreements covering performance of the contractor work by an additional 90 days. (i2) In the third qurarter of 2007, Danya Cebus, through a foreign investee company (hereinafter – “Danya Rumania”), commenced activities in Rumania. As part of these activities, Danya Cebus is engaged in construction for foreign companies from the Africa Israel Group (hereinafter – “Africa Rumania”) as well as for outside customers. Set forth below are details in connection with undertakings in the main projects of Danya Rumania. Kotrozin Park – in October 2007 Danya Rumania entered into an agreement with AFI Rumania (hereinafter – “the Customer”) for construction of a shopping and amusement center to be located in the sixth quarter in the City of Bucharest, Rumania, on an estimated area of 215,000 sq.m., of which 80,000 square meters constitute parking areas. The Kotrozin project is to include a 4-story building, of which 2 floors are underground and 2 floors are above ground. The Kotrozin project will also include development of the surrounding area, including construction of parking areas, landscaping and arrangement of the public areas. 86 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (i) Activities of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) Overseas (Cont.) (i2) (Cont.) The duration of the construction work pursuant to the agreement was set at 23 months from its signing date. In consideration for execution of the construction work on the Kotrozin project, Danya Rumania is entitled to a fauschly price of about €157.7 million, plus VAT as per Rumanian law, to the extent applicable. Danya Rumania will provide a bank guarantee at the rate of 5% of the agreement price, which will serve to secure performance of its obligations under the agreement (a performance bond). The performance bond will be valid for the entire execution period of the Kotrozin project. In addition, during the warranty period, which will be 24 months from the date of entry of tenants into the shopping center, Danya Rumania will provide an autonomous bank guarantee (declining) at the rate of 5% of the agreement price, which will serve to secure performance of the required repair work during a period of 12 months from the date of entry of tenants into the shopping center and at the rate of 2.5% of the agreement price during an additional 12-month period. This guarantee will be provided on the earlier of: (a) the date of completion of the construction work, or (b) entry of tenants into the shopping center and is in place of the performance guarantee. Danya Cebus has guaranteed fulfillment of Danya Rumania’s obligations under the agreement up to an amount equal to 10% of the agreement price. If Danya Rumania does not comply with the timetables for completion of the Kotrozin project it will be subject to the payment liquidated damages in respect of the delay in the amount of €2.5 million for the first month and in the succeeding period at the rate of 0.7% of the agreement price for each month of delay, up to a total of 5% of the agreement price. As at the report date, a delay in the timetables has occurred and talks are also being held between the parties with respect to Danya Rumania’s request for additional payments due to the delay in the timetables, as well as in connection with additions and changes. 87 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (1) Foreign Real Estate Activities (Cont.) (i) Activities of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) Overseas (Cont.) (i2) (Cont.) It is noted that the Kotrozin Park project has a particularly large financial scope compared with similar projects executed by Danya Cebus in the past in the construction sector and, therefore, the impact on Danya Cebus’ operating results is expected to be very significant. The large scope of the project and the timetables for its execution, along with the fact that Danya Cebus’ activities in Rumania require it to deal with economic conditions with which it has no prior experience and which expose it to various macro and risk factors different than those associated with its prior undertakings, constitute an additional risk factor to Danya Cebus’ activities. A failure on the part of Danya Cebus to adhere to its business plan for this project, particularly with respect to budgets and timetables, could have a significant adverse effect on it. (2) Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (a) In July 2004, an options’ agreement was signed between the Company, Africa Properties and Bank Leumi L’Israel Ltd. pursuant to which Africa Properties granted an option to Bank Leumi, exercisable up to July 22, 2007, to acquire an amount of shares of Africa Properties that will constitute 5% of every type of means of control of Africa Properties. In December 2005, Bank Leumi exercised the option and, as a result, the Company recorded a gain from issuance to a third party, in the amount of about NIS 25.7 million. (b) In September 2004, the Board of Directors of Africa Properties decided to set a dividend policy pursuant to which once every calendar year a dividend will be distributed at the rate of 50% of the lower of the following two amounts: i) Africa Properties’ net income in the calendar year preceding the year in which the dividend is distributed; or ii) Africa Properties’ cash flows from operating activities based on the consolidated statement of cash flows for the calendar year preceding the year in which the dividend is distributed. That stated above, is subject to the provisions of all law and in particular, the existence of distributable earnings in accordance with the Companies Law, 1999, discharge of liabilities to third parties as they will exist from time to time, the cash flow requirements of Africa Properties and its sources at any time, and is subject to specific decisions of Africa Properties’ Board of Directors in respect of every distribution and any other decision the Board of Directors is authorized to make from time to time, including regarding the earmarking of Africa Properties’ earnings and a change of this policy. 88 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (2) Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.) (c) In July 2007, Africa Properties completed the transaction for acquisition of all the holdings of Minrav Holdings Ltd. (hereinafter – “the Partner”), Africa Properties’ partner (in equal shares – 50% each side) in Half Jubilee Ltd., in such a manner that upon completion of the transaction Africa Properties holds all the rights in Half Jubilee. In consideration for the acquisition, Africa Properties paid the Partner for the rights acquired NIS 95 million. In addition, the acquisition agreement provides that Half Jubilee will repay the shareholders’ loans made by the Partner to it and which at the signing date of the agreement amounted to about NIS 70 million. For purposes of receipt of the approvals and consents from Bank Hapoalim Ltd. and Hebrew University in Jerusalem (hereinafter – “the Third Party”), Africa Properties agreed that to the extent necessary it will provide its guarantee to the Third Party, for purposes of securing compliance with the debts and obligations of Half Jubilee to the Third Party, and to the extent necessary it will act to provide a guarantee as stated by the Company, which as at the signing date of the acquisition agreement guaranteed half of the debts and obligations of Half Jubilee to the Third Party. (d) Africa Properties, through Half Jubilee, constructed an office building having 37 floors. 25 floors in the office building constructed by Half Jubilee and part of the parking areas serve as a district government office complex for a period of 20 years. As part of the lease agreement signed by Half Jubilee with the Government, the Government has been given an option to acquire all or part of the premises from Half Jubilee commencing from the end of the fifth year and up to the end of the nineteenth year of the lease period. The consideration for acquisition of the premises is a function of various components relating to such premises, pursuant to a formula provided in the agreement. (e) In 2002, Half Jubilee entered into an agreement with Hebrew University, for the planning, construction, operation and management of student dormitories having a total of 1,500 beds in several buildings on the Mt. Zofim campus in Jerusalem. Pursuant to the agreement, the project will be constructed, managed and operated on land to be leased from the University for a period of 24 years and 11 months. At the end of the lease period, the project will be delivered to the University for no consideration. The University has the right to prematurely end the lease beginning from the end of the fifth year of the project, at the dates provided, in consideration of an amount of compensation based on a formula provided in the agreement. The University committed to certain minimum occupancy rates, and in the absence of the occupancy rates undertaken, the University will pay a minimum rental. 89 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (2) Africa Israel Properties Ltd., a subsidiary (hereinafter – “Africa Properties”) (Cont.) (e) (Cont.) In October 2006, construction of seven buildings was completed and the rental thereof was commenced. Construction of the other two buildings was completed in October 2007. (f) In December 2004, Africa Properties issued 235,500 non-marketable options (hereinafter – “the Options”) exercisable for 235,500 ordinary shares of NIS 1 par value each of Africa Properties (subject to adjustments) (hereinafter – “the Exercise Shares”) to 15 of the Company’s employees holding senior positions with Africa Properties (of which 5 serve as directors of Africa Properties and 2 serve as officers of Africa Properties) or that provide it services, and an employee of its subsidiary. In any case of exercise of the Options, the full amount of the Exercise Shares will not be issued but, rather, only that quantity of shares that reflects the benefit component of the Options exercised, as will be calculated on the exercise date of such Options. The Options may be exercised during a period of three years, beginning at the end of three years from the date of their issuance and up to the end of six years from the date of their issuance. The Plan includes provisions with respect to exercise of the Options in cases of termination of the employer-employee relationship. At as the signing date of the financial statements, 134,800 expired as a result of termination of the employer-employee relationship. (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (a) In June 2006, Africa Residences made an initial public offering pursuant to a prospectus: – 2,600,000 ordinary registered shares of NIS 1 par value. The proceeds from the issuance amounted to NIS 239 million and after allocation of the issuance expenses the net proceeds amounted to NIS 229 million. – 260,000,000 registered debentures (Series A) of NIS 1 par value each. Regarding the terms of the debentures – see Note 16D(2)(1). The proceeds allocated to the debentures amounted to NIS 281 million and after allocation of the issuance expenses the net proceeds amounted to NIS 269 million. The effective interest on the debentures as at the issuance date is 5.31% per year. 90 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (a) (Cont.) Allocation of the issuance proceeds was calculated in accordance with the relative weight of the fair value of the securities issued to the total fair value of all the securities issued. The fair values of all the securities issued were determined pursuant to the average price of the security on the stock exchange in the first three trading days after the issuance. As a result of the public offering of Africa Residences as stated above, the Company recorded a gain from issuance to a third party in the amount NIS 110 million. As part of the preparations for the issuance, Africa Residences executed a number of transactions and signed a number of agreements, as detailed below: (a1) Transfer of all of the holdings of Africa Residences in the shares of Danya Cebus Ltd. (hereinafter – “Danya Cebus”) to Africa Israel Trade and Agencies Ltd. (a company wholly owned by the Company, hereinafter – “Trade”). Transfer of the shares to Trade was made for no consideration and with a tax deferral pursuant to the provisions of Section 104B(f) of the Income Tax Ordinance and the Income Tax Regulations (Conditions for Tax-Free Transfer between Sister Companies), 1994. Transfer of the shares as stated above was approved by the Income Tax Authority in April 2006 and it was conditioned on registration of the shares of Africa Residences for trading on the stock exchange, compliance with the conditions stipulated in the said Section and Regulation, and completion of the share transfer by July 27, 2006. The deferred tax will be paid by Africa Investments, based on the mechanism provided in the Regulation, at the time of sale of the company’s shares it holds. On July 20, 2006, transfer of the shares from Africa Residences to Trade was completed. 91 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (a) (Cont.) (a2) In June 2006 the Board of Directors of Africa Residences approved a plan for issuance of options to the Company’s employees. Pursuant to the plan, Africa Residences will issue to the Company’s employees who hold positions with Africa Residences or provide services to it (in the framework of the Management Agreement between the Company and Africa Residences (as detailed below), or that are slated to be employed by Africa Residences in the future (based on the appendix to the Management Agreement (as detailed below) (hereinafter – “the Offerees”) 345,200 options exercisable for 345,200 shares of Africa Residences. The options’ plan will enter into effect up registration of the shares of Africa Residences for trading on the stock market (hereinafter – “the Effective Date”) and it is subject to obtaining the approvals required pursuant to Section 102 of the Income Tax Ordinance. The exercise periods of the options are as follows: one-third (1/3) of the total options may be exercised commencing with the end of three years from the Effective Date, an additional one-third (1/3) of the options may be exercised commencing with the end of four years from the Effective Date, and the balance of one-third (1/3) of the total options may be exercised commencing with the end of five years from the Effective Date. All of the options may be exercised beginning with the commencement date of the relevant exercise period and up to the end of six years from the Effective Date. The exercise price will be used solely to determine the amount of the benefit and will not actually be paid. Regarding every exercise of options, the full amount of the exercise shares will not be issued but, rather, only that quantity of shares that reflects the benefit component embedded in the options exercised, as will be calculated on the exercise date of those options. The options were granted on two dates as described below: 1) In August 2006, Africa Residences issued 307,200 options to employees. The exercise premium for each option is NIS 82.67, which constitutes 90% of the average opening prices per share of Africa Residences on the stock market in the 30 trading days beginning with the registration of the shares of Africa Residences for trading on the stock market. The said exercise premium is linked to the Consumer Price Index (based on the “known” index) and is subject to various adjustments. 92 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (a) (Cont.) (a2) (Cont.) 1) (Cont.) The average fair value of each option was calculated based on the Black and Scholes model, and accordingly the average economic value of each option is NIS 40. The main assumptions that served as the basis for calculation of the economic value as stated are as follows: price per share is NIS 94.8, exercise prices as detailed above, annual discount rate ranging between 3.7% and 3.8%, expected life of the option ranging between 4.5 years and 5.5 years, and an annual standard deviation in the range of about 34%. The estimate of the expected expiration of the options was based on the estimate of the managers of Africa Residences regarding the resignation rate of the option recipients. Based on the assumptions described above, the total expected expense over the entire vesting period of the options is about NIS 6.1 million. As at the signing date of the financial statements, 49,500 options were forfeited due to termination of the employer-employee relationship in such a manner that the persons no longer serve as employees of the Company or of Africa Residences. 2) In October 2006, Africa Residences issued 38,000 options to the daughter of Company’s controlling interest. The issuance price of the options, as determined by the Company’s General Meeting, is the average of the closing prices of the shares of Africa Residences on the stock exchange during the 30 days preceding the General Meeting, and it amounted to NIS 96.63. The exercise premium is linked to the Consumer Price Index (based on the “known” index) and is subject to various adjustments. The average fair value of each option was calculated based on the Black and Scholes model, and accordingly the average economic value of each option is NIS 47. The main assumptions that served as the basis for calculation of the economic value as stated are as follows: price per share is NIS 107.5, exercise prices as detailed above, annual discount rate of 3.8%, expected life of the option of 6 years, and an annual standard deviation in the range of about 34%. Based on the assumptions described above, the total expected expense over the entire vesting period of the options is about NIS 1.8 million. 93 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (a) (Cont.) (a3) As part of the issuance of Africa Residences, a number of management, financing and underwriting agreements were signed between the Company and Africa Residences. For details of the agreements – see Note 36. (b) In February 2007, Africa Residences, together with a company from the Alrov (Israel) Ltd. (hereinafter – “Alrov”) Group, entered into an agreement with a third party (hereinafter – “the Purchaser”) for sale of the real estate rights that are owned jointly by Africa Residences and Alrov, in the residential area of the Mamilla project (Kfar David) in Jerusalem. In exchange for its rights in the property, the Purchaser is to pay Africa Residences about $21 million and the Company’s gain (after taxes and minority interest) as a result of sale of the rights in the real estate amounted to about NIS 24 million. (c) In February 2007, Africa Residences and a third party, Africa Residences’ partner in equal shares, entered into an agreement for acquisition of real estate on an area measuring about 3,250 sq.m. located on HaRav Kook St. in Jerusalem for a consideration of about $28 million. (d) In May 2007, Africa Residences signed an agreement for sale of the balance of its rights in the “Savyonei Hasharon” project in Ramat Hasharon, for a consideration of about NIS 17 million, including a reimbursement of expenses, in the amount of NIS 1 million. As a result of the sale, Africa Residences recorded an after-tax gain in its financial statements, in the amount of about NIS 5 million. (e) In June 2007, Africa Residences signed an agreement of intent with third parties (hereinafter – “the Sellers”) pursuant to which, and subject to its completion, Africa Residences will acquire the Sellers’ rights, by virtue of their winning a tender for granting permission to plan and an option for acquisition of rights in real estate, which was published by the Israel Lands Administration (hereinafter – “the Administration”). In 1995, the Sellers, together with another company (hereinafter – “the Partner”) won the aforementioned tender published by the Administration according to which, among other things, an option was granted (hereinafter – “the Option”) for acquisition of rights in real estate located on Derech Hevron in Jerusalem, based on an agreement signed between the Sellers and the Partner, on the one side, and the Administration, on the other side. 94 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (e) (Cont.) The agreement of intent provides that subject to its completion, the Sellers will sell and transfer to Africa Residences their rights in the Option, that is, two-thirds (since one-third of the aforementioned rights are held by the Partner), for an aggregate consideration of about NIS 33.7 million, linked to the Consumer Price Index. The consideration is to be paid to the Sellers on the dates and conditions, as will be determined in a detailed agreement to be signed, if in fact signed, between the parties. Completion of the agreement of intent and sale of the Sellers’ rights in the Option, as stated above, to Africa Residences, are contingent on fulfillment of the following preconditions: (a) signing by the parties of a detailed agreement within 45 days of the signing date of the agreement of intent, (b) publication to take effect of an Urban Planning Scheme covering the real estate, which is in the final stages of approval, and (c) receipt of approval from the Administration for transfer of the Sellers’ rights in the Option, from the Sellers to Africa Residences. The agreement of intent provides that its validity is contingent on fulfillment of the preconditions within 18 months of the signing date of the agreement of intent. In July 2007, Africa Residences signed the detailed agreement and in September 2007 the Urban Planning Scheme was published to take effect. Upon completion of the agreement of intent and acquisition of the Sellers’ rights in the Option, Africa Residences will be permitted to exercise the Option for acquisition of the rights in the real estate, subject to it paying to the Administration (in respect of acquisition of the rights in the real estate pursuant to a capitalized development agreement) the aggregate amount of about NIS 105 million (as at the date of the agreement of intent), linked to the Consumer Price Index. As at the date of the report the real estate is vacant. Subject to completion of the agreement of intent and exercise of the Option by Africa Residences for acquisition of the rights in the real estate, Africa Residences intends to construct on the real estate, together with the Partner, and pursuant to the provisions of the Urban Planning Scheme, a residential project with a total scope of about 400 residential units. As at the date of the report, in the estimation of Africa Residences the aggregate investment in the project is estimated, at this stage, at about $60 million (in excess of the amount Africa Residences will pay for acquisition of the Sellers’ rights in the Option and in connection with exercise of the Option). Africa Residences’ share in the investment in the project, as stated, is expected to total about $40 million, while the Partner will bear the balance of the said investment. 95 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (f) In July 2007, Africa Residences signed an agreement with third parties (hereinafter – “the Sellers”) pursuant to which Africa Residences will acquire the Sellers’ rights in real estate located at 25 Ahaliav Street in the Romeyma neighborhood in Jerusalem. In exchange for the real estate rights, Africa Residences is to pay the Sellers NIS 92.6 million, to be paid as follows: 20% of the total consideration (which was paid to the Sellers on the signing date of the agreement), and the remaining 80% (which was paid within 30 days of the signing date of the agreement, at the time of conveyance of the interest). The Betterment Assessment in respect of plans approved up to January 1961 will apply to the Sellers. Any other Betterment Assessment will apply to Africa Residences and is to be paid by it. As at the date of the report, a banquet hall and parking facility are constructed on the property, which are rented out. Africa Residences intends to initiate a new Urban Planning Scheme for the property with residential zoning. As at the date of the report, based on the estimation of Africa Residences at this stage, the amount of the total investment in the project will be between NIS 242 million and NIS 265 million. (g) In December 2007, the Board of Directors and Audit Committee of Africa Residences, and on January 27, 2008, the General Meeting of the shareholders of Africa Residences approved an undertaking in a number of agreements in connection with Project Semel, in which Africa Residences holds rights. 1) An agreement between Africa Residences and Ram-Nach Ltd. (hereinafter – “Ram-Nach”) and its shareholders for acquisition of 575 ordinary shares of Ram-Nach constituting 57.5% of its issued share capital in exchange for a consideration (in cash and by means of undertaking liabilities) in the aggregate amount of about NIS 78.5 million, subject to possible adjustments. 2) An agreement between Africa Residences and Sumail Towers Ltd. (hereinafter – “Sumail Towers”) and its shareholders for acquisition by means of an issuance of 1,000 ordinary shares of Sumail Towers, constituting 50% of its issued share capital in exchange for a consideration (in cash and by means of undertaking liabilities) in the aggregate amount of about NIS 32.4 million, subject to possible adjustments. 3) A joint venture agreement between Africa Residences and Ram-Nach, Sumail Towers and Afriram Ltd. (a company in which the Company holds about 40% of the issued share capital) covering joint cooperation between the parties in connection with construction of the “Semel Project” on real estate located at the corner of Arlozorov and Ibin Gvirol Streets in Tel-Aviv. 96 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (3) Africa Israel Residences Ltd., a subsidiary (hereinafter – “Africa Residences”) (Cont.) (g) (Cont.) The scope of the aggregate investment of Africa Residences in the Semel Project (beyond the acquisition cost of the shares and including through Ram-Nach and Sumail Towers) will come to an amount of up to about NIS 240 million. Based on the Urban Planning Scheme on deposit, execution of the project is contingent on, among other things, clearing off the site and granting validity to a detailed Urban Planning Scheme under the authority of the Local Planning Board. It was agreed that up to the time of granting validity to the Urban Planning Scheme on deposit only, the parties in the entire site will be viewed as parties in the joint venture, and the voting rights on the steering committee of the joint venture will be in accordance with their proportionate shares in the existing parcels as follows: the proportionate share of Ram-Nach in the joint venture (with respect to the entire site) will be 22.55%; the proportionate share of Afriram in the joint venture (with respect to the entire site) will be 33.81%. As part of the agreement between Ram-Nach, Sumail Towers and Afriram and Africa Residences it was provided, among other things, that the project will be managed by Africa Residences in exchange for management fees. The joint venture will carry on negotiations with Danya Cebus Ltd. regarding an undertaking in an agreement for performance of the construction work on the project. The holders of the rights on the steering committee, except for the representatives of Africa Residences, will carry on negotiations on behalf of the joint venture in connection with the price for performance of the construction work and the related conditions. To the extent the parties reach agreement regarding performance of the construction work, as stated, the agreement will be brought for approval as required by Section 275 of the Companies Law. (4) Danya Cebus Ltd., a subsidiary (hereinafter – “Danya Cebus”) On August 1, 2007, the Board of Directors of Danya Cebus made a decision with respect to an employee stock option plan (hereinafter – “the Options Plan”) pursuant to which a number of senior employees in Danya Cebus and in its subsidiaries, including the CEO (hereinafter in this section – “the Employees”) will be granted 580,335 options, constituting about 2.91% of Danya Cebus’ issued share capital, of which the CEO is entitled to 193,445 options (constituting about 0.97% of Danya Cebus’ issued share capital as stated), and the balance of 338,529 options are divided among 10 officers (including 2 CEOs of subsidiaries of Danya Cebus) in equal shares between them (constituting about 1.7% of the issued share capital) and 48,361 options for future offerees (constituting about 0.24% of the issued share capital). The effective date of the Options Plan is the date of the decision of the Board of Directors to adopt the Options Plan, that is, August 1, 2007. 97 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (4) Danya Cebus Ltd., a subsidiary (hereinafter – “Danya Cebus”) (Cont.) Danya Cebus will issue to a trustee the full number of the options (580,335) subject to completion of all the necessary actions and receipt of all the required approvals under law, including Section 102 of the Income Tax Ordinance. The exercise price of each option at every exercise date will be as follows: – In respect of a grant of options to an offeree, which is approved within 30 days of the approval date of the Plan, the exercise price will be NIS 55.8 per share. This price was determined based on a calculation of 90% of the share price on the date of the decision by the Board of Directors, which was NIS 62 per share. – The exercise price to future offerees, to whom the options are granted after 30 days of the approval date of the Plan, will be 90% of the average of the opening price of the share for trading on the stock exchange in the 30 days preceding the decision to make the grant. The exercise price is linked to the Consumer Price Index. The consideration to be paid by the employees to the Company in respect of the exercise is solely in an amount equal to the par value of the shares actually issued to them on the exercise date and the exercise price does not represent an amount that is actually paid to the Company but, rather, is used only for purposes of determining the actual number of shares to be issued based on the mechanism spelled out in the agreement. The options may be exercised up to the end of nine years from the Effective Date. The exercise periods are as follows: – For the officers and future offerees: at the end of two years from the Effective Date – 25% of the number of options, at the end of three years from the Effective Date – an additional 25%, at the end of four years from the Effective Date – an additional 25%, at the end of five years from the Effective Date – an additional 25%. – Regarding the company CEO: 25% of the options on December 31, 2007, 25% of the options on December 31, 2008, 25% of the options on December 31, 2009, and 25% of the options on December 31, 2010. The value of the benefit embedded in the options issued, as stated, based on their fair value on the date of their issuance, came to an aggregate amount of NIS 11,859 thousand. 98 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (4) Danya Cebus Ltd., a subsidiary (hereinafter – “Danya Cebus”) (Cont.) The average fair value of each option was calculated based on the Black and Scholes formula and, accordingly, the average economic value of each option (except for the CEO) is NIS 23.94, and the average economic value of CEO’s option is NIS 22.23 per option. The main assumptions that served as the basis for calculation of the economic value, as stated, are: a share price of NIS 62; exercise price as described above; the options will be exercised in the middle of the period between the end of the restriction period of the options and their expiration date; and an annual standard deviation in the range of about 36%. The estimated expected expiration of the options is based on the company’s estimate of the expected rate at which the option recipients will leave the company. The options have not yet been issued to the offerees. In addition, no options will be issued to the exiting CEO of Danya Cebus due to termination of the employer– employee relationship. Regarding operations of Danya Cebus outside of Israel – see Note 2I(1)(i). Regarding operations of Danya Cebus in connection with Highway 431 – see Note 2I(6). (5) Cross Israel Highway a) In February 1998, a Concession Contract was signed between the Government of Israel (hereinafter – “the State”) and Derech Eretz Highways (1997) Ltd. (hereinafter – “Derech Eretz” or “the Concessionaire”) (an affiliated company) for construction of the Cross Israel Highway (hereinafter – “the Highway” or “the Project”) having a length of 86 kilometers. The Contract defines, among other things, the conditions for granting the concession and its validity, the rights and obligations of the Concessionaire, the rights and obligations of the State, the construction and establishment, operation of the Highway including rights to collection of a toll charge, and traffic enforcement and management. On October 28, 1999, an appendix to the Concession Contract was signed (the Contract and the Appendix will be referred to together below as – “the Concession”). 99 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) a) (Cont.) In October 1999, the set of agreements (hereinafter – “the Financial Close”), relating to the Project was completed, in the framework of which the financing agreements for the Project, agreements with the State, the Construction Agreement, the Operating Agreement, and the accompanying agreements were signed by the parties involved, which are required for execution of the Project (hereinafter – “the Agreements”). Upon the existence of certain conditions provided in the Concession Contract, the Concessionaire will be required to widen the Highway. Some of the Agreements were made between Derech Eretz and various third parties, where the shareholders (including the Company) are not a party to thereto, whereas some of the Agreements were made between the shareholders (including the Company or entities related thereto) and Derech Eretz and/or third parties. In most of the Agreements signed between the shareholders or entities related thereto, the responsibility of shareholders or the related entities to the other party is joint and several. The concession period for operation of the Highway is 30 years, commencing from July 19, 1999, which was set as the determining date. At the end of the concession period, Derech Eretz is required to transfer the Highway to the State for no consideration. In the Concession Contract signed between the State and the Derech Eretz, there is a commitment on the part of the State to ensure the receipts from the toll fees, which is reflected by a mechanism stabilizing the income from the toll fees, based on the State’s forecast of the number of motor vehicles that will use the Highway which constituted the basis for the Financial Close (hereinafter – “the State’s Forecast”) as follows: – If the actual number of motor vehicles that use the Highway is lower than the State’s Forecast, the State shall pay to the Concessionaire approximately 72% of the difference in the income from the toll fees. – If the actual number of motor vehicles that use the Highway is higher than the State’s Forecast, the Concessionaire shall pay to the State approximately 51% of the difference in the income from the toll fees. – The toll fees shall be updated every three years according to the number of motor vehicles that use the Highway. 100 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) b) As at December 31, 2007, the shareholders in Derech Eretz are as follows: Name of Shareholder The Company Housing and Construction Holdings Ltd. Canadian Highways Investment Corporation CHIC Singapore Holding Pte Ltd. c) Rate of Holdings in Share Capital % Rate of Holdings in Subordinated Debt % 37.5 37.5 25.0 – 37.5 37.5 – 25.0 The Project’s planning and construction work was executed by a partnership named Derech Eretz Construction Joint Venture (hereinafter – “CJV”), which was registered in October 1999, by its component members: Danya Cebus Ltd. (a subsidiary of the Company, hereinafter – “Danya”); Solel Boneh Ltd. (hereinafter – “Solel Boneh”) – a subsidiary of Housing and Construction Holdings Ltd.; Solel Boneh – Development and Roads Ltd. (hereinafter – “Solel Boneh Development”) – a company 100% controlled by Solel Boneh; and Canadian Highways Investment International Corporation Pte. Ltd. (hereinafter – “CHIC International”) – a Singapore company from the CHIC Group (all of the above companies, hereinafter – “the Contractor”). The rates of ownership of the aforementioned four companies in the Partnership and the Contractor are as follows: Danya – 33.3%, Solel Boneh and Solel Boneh Development (jointly and severally) – 33.3%, and CHIC International – 33.3%. The Contractor undertook all the liabilities of Derech Eretz relating to the planning and construction of the Cross Israel Highway. d) The Company holds a 24.5% interest in the share capital of Derech Eretz Highways Management Corporation Ltd., the company which is responsible for operating and maintaining the Cross Israel Highway during the concession period under the operation and maintenance agreement between it and the holder of the concession (hereinafter – “the Operating Company”). The other shareholders in the Operating Company are Housing and Construction Holdings Ltd. (24.5%) and Canada Israel Highways Management Ltd., an Israeli company in the CHIC Group (51%). 101 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) d) (Cont.) The Operating Agreement is for the period of the Concession (subject to prior exit dates as defined therein). Pursuant to the Operating Agreement, the Operating Company will collect the toll monies and other payments in respect of special services (as defined in the Operating Agreement) from the users of the Highway on behalf of the Concessionaire. In consideration for preparation of the Highway for operation and provision of operating and maintenance services during the period of the Operating Agreement, the Operating Company will receive from the Concessionaire amounts as determined in the Operating Agreement. Based on the Operating Agreement and as a result of approval of the substantial completion by the Appointed Authority, commencing from completion of the construction, the payment made by the Concessionaire to the Operating Company will be adjusted, in accordance with the actual scope of the traffic. At the end of 2004, the Operating Agreement was updated. At the beginning of 2006, approvals were received for an arrangement different than the Operating Agreement with respect to 2006. (e) In April 2004, Derech Eretz received a completion certificate and approval for operation of the entire Highway (substantial completion) and the stabilization mechanism went into effect. As of this date, Derech Eretz records the results of its operations on the statement of operations. The Concessionaire presented a final completion certificate that was approved by the lenders and its technical advisor, with effect from October 2004. (f) The total investment in the Project is $1.2 billion (including interest up to the date of the substantial completion). (g) In April 2004, the shareholders of Derech Eretz invested NIS 11.2 million in the share capital and NIS 550.4 million in subordinated loans, linked to the Consumer Price Index, bearing annual interest of 8% and the repayment dates of which have not yet been determined. Of the aforementioned amounts, NIS 5.4 million was paid to the shareholders on account of return of the investments and accountings in accordance with the agreements. In the period of the report, shareholders’ loans of about NIS 165 million were repaid. In December 2007, a subordinated loan agreement was signed between Derech Eretz and its shareholders whereby the shareholders transferred to Derech Eretz about NIS 68.6 million, of which Derech Eretz transferred about NIS 68 million to a contractor in full satisfaction of the liabilities of Derech Eretz to the contractor in respect of certain costs the contractor incurred. 102 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) h) Pursuant to the provisions of the Concession Contract, an agreement was signed between the State, Derech Eretz and the shareholders of Derech Eretz (including the Company), under which Derech Eretz granted to the State, at no cost, 49 options for certificates conveying the right to participate in profits (hereinafter – “the Options”) which give their holders the right to acquire certificates conveying a 49% share of every dividend distribution made by Derech Eretz and a 49% interest in every repayment of principal and interest with respect to the subordinated debt. The exercise period of the options begins one year after completion of the construction and runs up to the end of the Concession period. The exercise price for the Options is to be determined based on NIS 147 million, linked to the Consumer Price Index of April 1996 and bearing interest at the annual rate of 8%. The State is entitled to sell, to a third party, every Option and every participation certificate, subject to a right of first refusal by Derech Eretz. Where a participation certificate is not held by the State, a government corporation or a trustee of the State, the holder thereof may convert it at any time, at no additional cost, into securities of Derech Eretz. As a result of provision of long–term subordinated loans by the shareholders, in April 2004, in the total amount of about NIS 545 million, and due to the fact that exercise of the options is expected, Derech Eretz recorded on that date a liability to the State, which was updated in the fourth quarter of 2004, in the amount of about NIS 523.6 million, constituting the total liability to the State in respect of its right to receive 49% of the interest and principal in respect of the subordinated debt, this being against the financial asset. The amount the State is required to pay (about NIS 222 million) if the option is exercised, bears interest at the annual rate of 8%, as noted above, whereas the amount of the difference between the amount to be invested by the State and the total liability is additional cost that Derech Eretz will have to bear, in the framework of the agreements signed as part of the Financial Close, bears interest at the annual rate of the yield provided on the financial asset (9%). The liability to the State in the above-mentioned amount is linked to the Consumer Price Index, bears interest at the annual rate of 8%, and its repayment date has not yet been determined (the same as for the subordinated loans of the shareholders). i) As part of the Financing Agreements, the shekel lenders in the Project were granted an option to acquire from the present shareholders between 17% of the share capital of Derech Eretz and the rights in the subordinated shareholders’ loans (hereinafter – “the Rights”), in exchange for payment of about $20 million (subject to adjustments). The exercise period of the option is 18 months, commencing from the date of the substantial completion. 103 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) i) (Cont.) In February 2006, the Company and Housing and Construction signed an agreement with five Israeli financial institutions that financed the project, to relinquish their right to exercise the Rights. In March 2006, CHIC gave notice that it is joining the agreement with the financial institutions. In exchange for relinquishment of the rights, the companies paid the aggregate amount of $5 million. The Company’s share in the consideration amounts to about $1.9 million. In addition, the Company, together with Housing and Construction, provided CHIC a loan with respect to CHIC’s share of the consideration. j) In January 2006, a second appendix to the Concession Contract (hereinafter – “the Second Appendix”), was signed between the State and Derech Eretz, pursuant to which the Concession Contract will also include an additional section of the Highway (hereinafter – “the Section 18”) and Derech Eretz undertakes to construct, operate and maintain Section 18 (the Concession Contract and the Second Appendix, as amended on February 6, 2007 will hereinafter be referred to as – “the Expanded Concession Contract”). For this purpose, Derech Eretz set up a wholly owned subsidiary named Derech Eretz Highways Section 18 (2007) Ltd. (hereinafter – “Section 18 Company”), which assumed all of the concessionaires liabilities to the State under the Expanded Concession Contract in connection with execution of the Section 18 project. On June 24, 2007, the financial close for the Section 18 project took place where the financing agreements were signed along with additional accompanying agreements and documents for purposes of entry of the Second Appendix into effect (hereinafter – “the Financial Close”). k) Section 18 is located north of the main section, between the Irone Stream (Highway 65) the Tut Stream (Highway 70) having a length of 18 kilometers. Based on the said appendix, Derech Eretz will finance, construct, operate and maintain Section 18 (in the format of a BOT project) and, in exchange, it will be entitled to collect and receive a fee for travel over Section 18 up to the end of the present concession period of the main section of the Highway. The State will assist Section 18 Company in the Section 18 project by means of, among other things, an income assurance mechanism (which is not the same as for the main section), delivery of Section 18, execution of the State’s work (including planning of the Section and performance of part of the construction work), clearance of the infrastructures on the Section 18 site, and a construction grant. Section 18 Company undertook to complete the work executed by the State and to fully execute the work in the main part of Section 18 the execution of which by the State had not yet started. In addition, at the financial close, agreed-to principles were signed for execution of additional work as a change order, stemming from the engineering solution formulated for the findings (graves) matter that were discovered in the Section 18 site. The date for the substantial completion of Section 18 is 33 months from the date of the financial close. 104 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) k) (Cont.) In addition, the Second Appendix provides that operation and maintenance of Section 18 is to be performed by the operator of the main section and for this purpose, in June 2007 a second addition was signed to the present operation agreement. l) As part of the financial close it was decided, among other things, to provide a mezzanine loan to the company in the amount of about NIS 380 million, of which about NIS 169 million served as a repayment of shareholders’ loans provided to the concessionaire and for expenses of raising the mezzanine loan. As a result, on the amount of about NIS 169 million out of liability to the State, the terms of mezzanine loan will apply. m) For purposes of construction of the Section 18 project, Section 18 Company entered into an agreement with a new partnership called “Derech Eretz Joint Venture 18, which was set up between Danya Cebus (50%), and Solel Boneh and Solel Boneh Development (50%) (hereinafter – “JV18”) whereby JV18 will undertake all the liabilities of Section 18 Company under the Expanded Concession Agreement (hereinafter – “the Construction Agreement”) in all that related to construction of Section 18. It is noted that the planning in the Section 18 project is being performed entirely by the State, where JV18 assumes the full liability for it. n) In July 2007, Derech Eretz received a letter from the Appointed Authority wherein it contends that in certain sections of the main section of the Highway the test conditions for expansion as defined in the Concession Contract have been fulfilled and, therefore, the concessionaire is required to expand the Highway by means of the addition of a third lane in the sections wherein the said test conditions have been met. Derech Eretz has commenced negotiations will CJV for performance of the planning and construction of the expansion work in parts of the Highway’s main section. As at the signing date of the financial statements, it was decided that the planning will be performed by CJV, while commencement of the expansion work is expected to take place in the second quarter of 2008. Regarding the concessionaire’s obligation to perform the expansion work of the Highway and performance of certain expansion work by the contractor – see also Note 5. 105 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) o) In January 2008, the Appointed Authority instructed Derech Eretz in accordance with the Concession Contract to operate and maintain Section 19 of the Highway, for a period of 8 months for a consideration of about NIS 1.3 million. Travel on Section 19 during this period will not require payment. The provisions of the Concession Contract will apply to the company with the required changes except for an obligation for extensive restoration, warranty defects, warranty repairs and landscaping repairs. Operation and maintenance of Section 19 will be performed by the operator of the main section and for this purpose on January 28, 2008 a third appendix to the present operating agreement was signed. Pursuant to the third appendix, the operator undertakes, on a “back-to-back” basis, the company’s rights and obligations pursuant to the said instruction and the company will transfer to the operator the amounts it receives from the State in respect of operation of Section 19. p) As part of the agreements signed, the shareholders of Derech Eretz (including the Company) undertook various obligations, both direct liabilities as well as in the form of guarantees, including the following (some of the agreements mentioned below are linked to the Consumer Price Index and/or the U.S. dollar in accordance with the provisions of the various agreements): – The shareholders of Derech Eret undertook to invest in Derech Eretz an amount equivalent to 10% of the cost of the Project, as determined at the end of the construction period (hereinafter – “the Equity Investment Date”). 2% of the amount shall be invested in share capital and 98% thereof is to be invested in subordinated loans. The investment of the shareholders is to be in proportion to the rate of their holdings in the Company. – The shareholders in Derech Eretz, including the Company, placed a fixed, first priority lien on their shares and rights in Derech Eretz, as well as on their rights with respect to the subordinated loans which will be provided by them to Derech Eretz as well as every asset or right related thereto, this being for the purpose of securing all the liabilities of the shareholders and/or Derech Eretz to the lenders in the Project. It is noted, that Derech Eretz placed a lien on all its assets including its rights pursuant to the construction agreement and other agreements signed in connection with the agreements, to the benefit of the lenders. – An addendum to the Concession Contract was signed between the shareholders and the State, which defines the obligations of the shareholders to the State in respect of the Concession Contract, including their obligation to invest in the equity capital and subordinated loans of Derech Eretz. – The shareholders in Derech Eretz, including the Company, provided a perpetual and revolving bank guarantee in order to back up a bank guarantee provided by Derech Eretz to the State, to secure the liabilities of Derech Eretz under the Concession Contract, in the amount of $30 million per year. The Company’s share in the aforesaid guarantee is about $10 million. 106 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) p) (Cont.) – The shareholders of the Operating Company issued their own, perpetual and revolving guarantee to Derech Eretz, in an amount not to exceed $10 million per year, to guarantee performance of the work defined in the Operating Agreement. The Company’s share of the aforesaid guarantee is $3.5 million. – In addition, the Operating Company undertook to provide Derech Eretz with a revolving bank guarantee, which renews on an annual basis, in the amount of 20% of the Operating Company’s budget, commencing on the date of issuance of the first interim license. In 2002, such a guarantee was issued and as at December 31, 2007, the amount of the guarantee came to U.S.$4.7 million. – Shareholder agreements were made between the shareholders of Derech Eretz and the Operating Company, and, in addition, a partnership agreement was made between the partners in CJV. – An agreement was prepared between the Company, Housing and Construction, CHIC and three companies that are the ultimate parent companies of CHIC which arranges their rights and obligations as well as those of the companies related thereto which are involved in the Project, in the event of the invoking of collaterals, guarantees or commitments given by them as part of the various agreements signed in connection with the Project and which have been defined as establishing their obligations jointly and severally. – As part of the Agreements, Alon entered into an agreement with Derech Eretz covering the construction and operation of filling stations along the course of the Highway in accordance with the Concession Contract. – The shareholders of the Concessionaire undertook toward the State and the Appointed Authority regarding various representations in connection with Section 18 and, among other things, they are guarantors toward the State of, each on the basis of his relative share in the “share capital of Derech Eretz” for the commitment of Derech Eretz to invest the amounts of the subordinated loans in connection with the Section 18 Project. This guarantee shall be in place until such time that the independent expert confirms in writing that the Concessionaire invested the funds of the said loans. In addition, they undertake to pay the State all amounts due to the State in connection with the performance of the commitments of Derech Eretz or the Section 18 Company under the Expanded Concession Agreement and up to the guaranteed amounts. 107 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) p) (Cont.) – Collection Guaranty 18 – a guarantee given jointly and severally by the shareholders of the Operator. In the Operation Agreement, the Operator undertakes toward Derech Eretz to pay it as a fixed compensation and not as a penalty the shortfall from the turnover of the tolls, should such shortfall exist (up to a stipulated maximum amount), in relation to each calendar year, until the expiration of the agreement or until an earlier date stipulated for its conclusion. – Shareholders’ guarantees by virtue of the Construction Agreement – guarantees of shareholders and/or the controlling interests in the Contractor to perform work and fulfill the Contractor’s commitments under the Construction Agreement, in favor of the Section 18 Company and the Section 18 lenders (through the trustee): a. Performance guarantee – 10% of the construction costs (estimated at NIS 72 million). b. Advance guarantee – 15% of the costs of construction (estimated at NIS 108 million). c. Retention guarantee – 5% of the payment made by the Section 18 Company against the progress of the construction (estimated at NIS 35 million). The amount of the guarantee will be reduced after the substantial completion. Each of the shareholders is a guarantor on the basis of his relative share in the Contractor. – Shareholders’ guarantees by virtue of the Second Appendix to the Concession Contract – a. Interim guarantee – in an amount of about NIS 9.6 million (linked to the index set out in the Second Appendix) – the guarantee was provided to the State upon the signing of the Second Appendix and will be in effect until up to 60 days after the end of the relevant period (a period that commences when the completion certificate is granted and ends at the earlier of (i) the end of the warranty period or (ii) 30 months after the granting of the completion certificate). 108 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) p) (Cont.) b. Section 18 guarantee – in an amount of about NIS 70 million (linked to the index set out in the Second Appendix) – a guarantee provided to the State at the financial close of Section 18. The guarantee is in effect until 60 days after the end of the aforementioned relevant period, however, within 60 days following the granting of the completion certificate, the amount of the guarantee will be reduced and will amount to NIS 50 million. c. Continuous guarantee / Section 18 – in the amount of NIS 31 million (linked to the index set out in the Second Appendix) – the guarantee will be provided to the State on the date of substantial completion of the construction of Section 18 and will remain in effect until the end of the Concession period. q) In July 2007, Danya Cebus Ltd. (hereinafter – “Danya Cebus”, a related company) reached agreement with Derech Eretz regarding performance of work at the Nesharim interchange (connection between the Cross Israel Highway and Highway 431), the expected scope of which is about NIS 150 million. The consideration to Danya Cebus in the project will be determined in accordance with the unit prices of the subcontractors who will be employed in the project plus an overhead factor of 11.52%, less an amount at the rate of 2% plus the amount of NIS 15 thousand per month to be paid by Danya Cebus to Derech Eretz in respect of various services to be provided by Derech Eretz in connection with the project and, therefore, the ultimate scope of the work may change. The completion date of the work was set at May 2009. Danya Cebus will be entitled to a bonus for compliance with the timetable set and/or the shortening thereof. r) In June 2005, the activities of Derech Eretz Telecom Ltd. (hereinafter – “Telecom”) were commenced. Telecom is a subsidiary of Derech Eretz that is engaged in provision of usage rights in encasements for laying optical cables along the length of the Highway. In June 2005, Telecom signed an agreement with Derech Eretz that provides it the right to execute the project, including, construction, management, operation and permission to use ten encasements that are intended for laying optical cables along the length of the Highway (hereinafter – “the Communications Venture”). The agreement will be in force so long as the concession agreement is in effect. 109 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) r) (Cont.) In addition, an authorization agreement was signed with Derech Eretz and the State according to which the State gives Derech Eretz the right to use the project’s real estate for purposes of execution of the project by means of Telecom. The agreement provides that the State will be entitled to part of Telecom’s revenues that derive from the Communications Venture. The agreement will be in force so long as the concession contract is in effect. In the framework of the above undertaking, Telecom invested about NIS 17 million. In September 2006, Telcom signed a memorandum of principles with a third party pursuant to which the parties intend to cancel the prior agreement and to sign a new agreement whereby Telcom will provide such third party with a right to use the communications’ channel wherein the communications’ cables will be run. The agreement to be signed will be valid so long as the Concession Contract with Derech Eretz is in effect. The new agreement will cancel the prior agreement from July 2005. In addition, if and when Section 18 of the Highway is paved, the parties intend to give a use right in the communications’ channel of Section 18 to such third party, in exchange for an additional payment. The manner of calculating the royalties to which the State will be entitled in respect of the future agreements to be signed by Telcom has not yet been determined. s) The Accounting Treatment Regarding the accounting treatment for the project in the financial statements of Derech Eretz, see Note 1ZJ. For purposes of calculation of the Company’s share in concessionaire’s earnings, the Company’s share was reduced in respect of options issued by the concessionaire to the State, as noted in (h) above. 110 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (5) Cross Israel Highway (Cont.) t) Tax Ruling In August 2004, the Concessionaire received a pre-ruling from the Income Tax Authorities, pursuant to which if the Concessionaire complies with the conditions set forth below, for tax purposes it will report its taxable income (in its tax reconciliation statement) in accordance with the method indicated in the preliminary confirmations received in the past, that is, based on the “traditional accounting” (“investment in leased real estate” considered to be a “fixed asset”, amortization of the investment in leased real estate based on the income tax rules (deduction of lease fees), and provision of a deduction for inflation in respect of the said amortization, deduction of financing expenses (subject to Section 17(1) of the Ordinance) etc.), all as arises from the confirmations it received in the past. The conditions for the ruling are: – An advance confirmation is given by the Securities Authority for application of the new accounting treatment. – The Concessionaire will apply the same policy for tax purposes over the entire period of the project. – The Concessionaire will be permitted to distribute dividends to its shareholders based on the project’s original cash flows’ model provided that these dividends were distributed from taxable income. In November 2006, the Company received approval from the tax authorities pursuant to which the approval granted to the Company in August 2004 will also apply to Section 18. (6) Highway 431 In July 2005, an agreement was signed between the State of Israel and Netivei Hayovel Ltd. (hereinafter in the Section – “the Concessionaire”), a wholly owned subsidiary of Danya Cebus, for the financing, construction, operation and maintenance of Highway 431, as a PFI (Private Finance Initiative) (hereinafter – “the Concession Agreement”). The Concession Agreement was signed as a result of the Concessionaire’s winning the tender made by the State for the financing, construction, operation and maintenance of the Project for a period of 25 years commencing from July 24, 2007 (hereinafter – “the Effective Date”). In July 2006 the project’s financial close was held in the framework of which the main project agreements – the financing agreements, the project construction agreement and project operation and maintenance agreement – were signed by the parties involved, including the Concessionaire, Danya Cebus and Danya Cebus Operator Ltd., which is a wholly owned subsidiary of Danya Cebus (hereinafter – “the Operator Company”). At the same time, the Concessionaire and the State also signed an amendment to the Concession Agreement. 111 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) Highway No. 431 is planned as a wide, express, suburban highway, which will connect between Highway No. 20 (Netivei Ayalon South) in the west and Highway No. 1 (Jerusalem–Tel-Aviv) in the east, south of Rishon Lezion and Ramala. The length of the Highway is about 23 kilometers, and it is planned to include 12 intersections. The aggregate scope of the Project is about NIS 2 billion, of which the construction costs are estimated at NIS 1.5 billion (in terms of December 2004). This cost is linked to the indices basket that was determined in the Concession Agreement, about NIS 1.8 billion in terms of December 2007 prices. Pursuant to the Concession Agreement, the Concessionaire is responsible, among other things, to obtain the financing required for construction, and establishment, of the Project and the operation and maintenance thereof during the concession period. The Concessionaire intends to construct the Project by means of Danya Cebus (which will act as the Project’s General Construction Contractor). The Concessionaire expects to operate and maintain the Project either by means of Danya Cebus or by means of a wholly owned subsidiary of Danya Cebus guaranteed by Danya Cebus. Pursuant to the Concession Agreement, the Concessionaire undertakes to construct Highway 431 within a timetable set in advance. A failure to comply with the timetable provided in the Concession Agreement constitutes a breach of its provisions, which could even give rise to the cancellation thereof. In addition, delay in completion of the construction of the Highway could trigger a payment of liquidated damages to the State. Completion of construction of the Project is slated to take place in stages, such that certain sections will be opened to traffic before the entire Highway is opened to traffic. After completion of the construction, the Concessionaire will be required to operate and maintain Highway 431, at a level of full availability (subject to certain exceptions detailed in the Concession Agreement), so that it will be open to uninterrupted vehicle traffic without blockage or impediment (deviation beyond a certain level will even cause the imposition of monetary fines), and according to the operating and maintenance demands set forth in the Concession Agreement. Based on the Concession Agreement, the concession period is about 25 years from the effective date, as defined below (hereinafter – “the Concession Period”), of which the construction period is about 2.5 years and the operation and maintenance period is about 22.5 years. At the end of the Concession Period, the Concessionaire will return the Highway to the State for no consideration. 112 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) In consideration for fulfillment of the Concessionaire’s undertakings under the Concession Agreement, the State will pay the Concessionaire the following amounts: (a) A construction grant in the amount of NIS 400 million (hereinafter – “the Construction Grant”), which is to be paid in three installments based on the progress of the construction work – upon the opening of Section A to traffic, upon the opening of Section E to traffic, and upon the opening of the entire Highway to traffic. Based on that stated above, with respect to the Construction Period, the grant is expected to be received, in whole or in part, during 2008. (b) A fixed, semi–annual payment, in the amount of about NIS 58.9 million, during the operation and maintenance period (hereinafter – “the Fixed Payment”). (c) A payment in the amount of 2 agurot for every kilometer traveled by vehicles on the Highway, commencing from the date of the opening of the project to traffic (hereinafter – “the Variable Payment”). The amount of the Construction Grant and the Fixed Payment referred above are subject to certain adjustments provided in the Concession Agreement, including adjustments due to changes in the yields on debenture series from the date of submission of the tender up to the date of opening the Highway to traffic. The said payments are in prices of December 2004 and are linked to the indices basket as provided in the Concession Agreement. The Variable Payment will be linked to the Consumer Price Index for the entire Concession Period. The State committed to provide to the Concessionaire the project area, based on sites, on the dates provided in the Concession Agreement. Delays in delivery of the sites by the State that cause a delay in opening of the Highway to traffic will entitle the Concessionaire to an extension of the Construction Period (but not to an extension of the Concession Period) as well as to monetary compensation based on a mechanism provided in the agreement. The State has the right to make changes (increase or decrease) in the scope of the project, in accordance with pricing principles and mechanisms set forth in the Concession Agreement. It is noted that the State is permitted to cancel the Concession Agreement for various reasons that are provided in the Concession Agreement, including, cancellation due to a breach on the part of the Concessionaire, cancellation due to a continuing act of G-d and cancellation for reasons of convenience. Various compensation mechanisms are provided for the different cancellation causes stated in the in the Concession Agreement. As at the signing date of the report, there are no violations in the project that are sufficient to cause a significant adverse effect on the project. 113 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) For purposes assuring compliance with its undertakings the Concessionaire committed to provide the State an irrevocable and unconditional autonomous guarantee, in the amount of NIS 80 million. Pursuant to the provisions of the Concession Agreement, the guarantee will be reduced (subject to adjustment in respect of execution of certain completions after opening of the section and/or the Highway to traffic) to NIS 50 million upon opening of the first section of the Highway for traffic, to NIS 25 million upon the granting of permission to open the Highway to traffic, and to NIS 10 million three years after the end of the Construction Period. The bank guarantee will be increased to NIS 50 million three years before the end of the Concession Period and will remain in force for two years after the end of the Concession Period and receipt of approval of return of the Highway to the State. The above-mentioned amounts are in terms of December 2004. The Financing Agreement In July 2006 the financing agreements were signed between the Concessionaire and the organizer of the financing – Bank Hapoalim Ltd. – and the rest of the parties financing the project (hereinafter – “the Financing Agreements”). The Financing Agreements provide for provision of a financing framework in the aggregate scope of NIS 1.6 billion (in prices of December 2004, linked to the indices basket provided in the agreement, about NIS 2 billion in prices of December 2007), based on the rate of progress of the project’s execution, in the format of a number of loans, including a construction loan, bridge loan to the construction grant, shareholders’ equity loan, bridge loan to the debt service reserve loan and a long-term loan. Provision of the loans is subject to the fulfillment of conditions, representations and the absence of violations stipulated in the Financing Agreements. In addition, provision of the long-term loan (which is to repay the balance of the other loans except for the debt service reserve loan) is subject to a number of conditions, including conditions relating to completion of the project and the opening thereof to traffic, the non-existence of violations, the maximum debt balance and number of debt repayment periods, existence of insurance and a minimum rating for the operations’ period, receipt of the Construction Grant, deposit of monies in a debt sinking fund, provisions of operation guarantees and receipt of approvals from the lenders for the Construction Period to the lenders technical advisors. The loans will be made by a number of financing parties including lending banks and institutions (the loans for the Construction Period were provided by a consortium of banks whereas the long-term loan is to be provided by a consortium of banks in which the organizer of the financing will take part). 114 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) The Financing Agreement (Cont.) It is noted, if the long-term loan is not provided, including due to non-fulfillment of the conditions for its grant, as stated above, such situation will constitute a violation that will provide the lending parties the right to foreclose on the guarantees as well as investments of shareholders’ equity made by Danya Cebus, to take control over the project, etc. and, therefore, it may have a significant adverse effect on the activities of Danya Cebus and on the results of its operations. The loans are to be provided pursuant to the terms set forth in the Financing Agreements including, among others, mechanisms for adjustment of the interest to the yield on appropriate debenture series, as detailed in the Concession Agreement, for the rating given for the operations’ period as detailed below, and for the possible reduction thereof in exchange for participation by the lenders in additional revenues due to an increase in the total traffic compared with that projected in the base traffic forecast. In the framework of the financing arrangements, Danya Cebus committed to provide shareholders’ equity in cash and guarantees of up to about NIS 140 million (Danya Cebus committed to increase the shareholders’ equity to about NIS 175 million if a number of events and conditions stated in the Financing Agreements occur). Danya Cebus provided a bank guarantee for investing shareholders’ equity at the rate of 50% of the shareholders’ equity required. As stated above, as part of the Financing Agreements Danya Cebus committed to present, upon request, a rating for the project and a rating for the operations’ period of not less than the minimum level (AA–) provided in the agreement at the time of opening of the Highway to traffic. It is noted that the rating process for the operations’ period will be executed in the future proximate to the time of opening of the Highway to traffic and, therefore, it is not possible at this point to estimate the level of the rating that will be given to the project. In addition to the fact that the rating actually determined for the project is a precondition for provision of the long-term loan, receipt of a rating at the minimum level or even higher but lower than the expected rating taken into account in the business plan could significantly increase the project’s financing expenses. The Financing Agreements include a long list of representations, undertakings and actions constituting violations, as is customary for projects of this type. As at the signing date of the report, there were no violations in the project that are sufficient to have a significant adverse effect on the project. 115 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) The Financing Agreement (Cont.) For purposes of ensuring compliance with its commitments, in the framework of the Financing Agreements, the Concessionaire placed a series of fixed and floating liens in favor of the lending parties on all its existing and/or future assets. In addition, in this framework, Danya Cebus placed a lien in favor of the lending parties on all its shares in the Concessionaire, its rights to repayment of shareholders’ loans and all the rest of its derivate rights in connection with the project. Furthermore, the Company committed to the lending parties not to sell or transfer its holdings in Danya Cebus in such a manner that the control over Danya Cebus will be transferred, without the approval of the lending parties, this being up to the opening of the Highway for traffic. The Construction Agreement In July 2006, the Construction Agreement for Highway 431 was signed between Danya Cebus (hereinafter also – “the General Contractor”) and the Concessionaire. This agreement is in a “turn key” format, in the framework of which Danya Cebus committed to construct the project on a “back-to-back” basis with the Concessionaire’s obligations to the State in this context deriving from the concession agreement, at a final price and in accordance with fixed timetables. Danya Cebus committed to complete the construction work of Sections A and E within 27 months, and the rest of the Highway’s sections within 30 months from the Effective Date (July 24, 2006). A failure to comply with the timetables set for completion of the construction work will require Danya Cebus to pay the damages the Concessionaire is charged for by the State pursuant to the provisions of the concession agreement, as well as liquidated damages in the amount of NIS 9.5 million per month (up to a ceiling of NIS 57 million). The contract price was set at NIS 1,487 million (linked to the indices basket – base index of December 2004, about NIS 1.7 billion in terms of December 2007 prices). The contract price is fixed and includes all the risks involved with execution of the construction work on the project, however it does not include several items, such as additional amounts to which the Concessionaire will receive from the State in connection with the construction work pursuant to the provisions of the Concession Agreement, including for changes and additions the State will require, to the extent they are approved and paid by it. Up to the end of the Construction Period, the general contractor will be entitled to payments on account of the linkage differences as stated above, based on a temporary indices basket provided in the Construction Agreement and the final settlement (payment of an amount to the contractor or reimbursement of an amount by the contractor) will take place at the end of the Construction Agreement, as stated above. 116 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) The Construction Agreement (Cont.) As part of the Construction Agreement, Danya Cebus provided the following guarantees: (a) the guarantee the Concessionaire is required to provide for the State’s benefit according to the provisions of the Concession Agreement in the original amount of NIS 80 million (50% of the guarantee was provided by a bank and 50% was provided by an insurance company); (b) a performance guarantee to the lending parties in the amount of 10% of the contract price – NIS 149 million in December 2004 terms (50% of the guarantee was provided by banks and 50% was provided by a Company guarantee); (c) a guarantee in place of retention fees to the financing parties as detailed above. For purposes of receipt of the guarantees Danya Cebus committed to some of the guarantors not to create floating liens on its assets (subject to certain specified conditions and exceptions). As noted above, 50% of the guarantee provided by the Concessionaire to the State was provided by means of a guarantee of an insurance company. For purposes of provision of the guarantee, Danya Cebus signed a detailed agreement with this insurance company that arranges the relationships between the parties. The agreement provides, among other things, that upon the occurrence of certain events the insurance company may demand that Danya Cebus act to replace the guarantee it provided with a guarantee of another entity, and absent such replacement – to deposit in a designated account the amounts of the guarantee it provided, this being until return of the guarantee. For purposes of assuring its obligations, Danya Cebus provided a promissory note to the insurance company. The Construction Agreement also includes the General Contractor’s commitment for a two-year examination period, including provision of a guarantee in respect thereof in the amount of 2.5% of the total Agreement. In addition, in the framework of the financial close, Danya Cebus, the Concessionaire and the financing parties entered into a direct agreement, which is intended, primarily, to arrange the rights of the financing parties in a case where the Concessionaire is unable or there is a possibility that it will be unable to be involved in the project. As part of this agreement, Danya undertook, among other things, not to cancel the Construction Agreement without giving the lending parties the opportunity to remedy the breach, and a mechanism was provided for appointment of a “substitute party” in place of the Concessionaire. Danya Cebus is executing the project both by itself as well as through subcontractors. 117 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) The Operation and Maintenance Agreement In July 2006 the Operator Company signed an agreement with the Concessionaire pursuant to which the Operator Company undertook the Concessionaire’s obligations vis-à-vis the State under the concession agreement relating to operation and maintenance of the Highway during the concession period, including fines imposed on the Concessionaire, if any, in respect of non-compliance with the required level of availability or other operation and maintenance requirements contained in the concession agreement, however not including all that relating to extensive restoration. In consideration of compliance with all its obligations, the Operator Company is entitled to a fixed semi-annual payment in respect of every six months of operation, as defined in the Operation and Maintenance Agreement. The semi-annual payment is to be paid by the Concessionaire within 3 days of the date of receipt of the amounts due to the Concessionaire from the State in respect of that six-month period. In addition, the Operation and Maintenance Agreement provides a mechanism for update of the payment due to the Operator Company as a result of a change in the actual scope of the traffic compared with that projected in the base traffic forecast. The total amount for which the Operator Company is at risk is NIS 60 million (linked to the CPI of December 2004), except for risk relating to a violation of the minimum maintenance level or due to non-availability, which are unlimited at to amount. Pursuant to the Operation and Maintenance Agreement, the Operator Company undertook to provide a performance guarantee to the State covering the operation period in accordance with the concession agreement (commencing from the end of the third year from the grant date of the authorization to open the Highway for traffic), in the amount of NIS 10 million, which towards the end of the concession period will be replaced by a guarantee in the amount of NIS 50 million (in nominal amounts according to the CPI of December 2004). Furthermore, pursuant to the Operation and Maintenance Agreement, for purposes of assuring performance of its obligations thereunder, Danya Cebus provided an owner’s guarantee (i.e., a guarantee of the company) in favor of the Concessionaire, and also committed to provide a bank performance guarantee at the commencement of the operation period, in the amount of NIS 9 million, which upon the existence of certain conditions, beginning after 5 years have passed, will be reduced to NIS 6 million. In addition, in the framework of the financial close, the Operator Company, the Concessionaire and the financing parties entered into a direct agreement, which is intended, primarily, to arrange the rights of the financing parties in a case where the Concessionaire is unable or there is a possibility that it will be unable to be involved in the project. As part of this agreement, the Operator Company undertook, among other things, not to cancel the Operation and Maintenance Agreement without giving the lending parties the opportunity to remedy the breach, and a mechanism was provided for appointment of a “substitute party” in place of the Concessionaire. 118 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) Guarantees Provided by the Company in connection with the Project In May 2006, the Company’s Board of Directors, Audit Committee and General Meeting decided to approve the Company providing a performance guarantee and a guarantee in place of delay fees to Danya Cebus (hereinafter – “the Guarantees”) at the rate of 5% of the contract price (principal) for each guarantee, where the said amount is linked to the index and/or the indices basket, as will be fixed by consent with the project’s lending parties (hereinafter – “the Lending Parties”). As at the date of the report, the principal of the performance guarantee is about NIS 74 million and the principal of the guarantee in place of delay fees is NIS 20 million (in terms of December 2004 prices). It is clarified that the principal of the Guarantees may change in accordance with the changes that take place in the contract price and/or the indices, as noted above. The Guarantees were issued in favor of the trustee on behalf of the Lending Parties. In exchange for provision of the Guarantees and so long as they stand to the benefit of Danya Cebus, Danya Cebus is to pay the Company an annual commission at the rate of 0.5% of the amount of each of the Guarantees. Danya Cebus is to indemnify the Company for any amount the Company pays to a third party in respect to the Guarantees. Every amount paid, as stated, will bear interest at the rate of prime less 1.25% per year. Performance Status Commencing from November 2005, the Concessionaire, through Danya Cebus, commenced execution of preliminary work on the project. The preliminary work was executed by Danya Cebus, both by itself and by means of subcontractors. The consideration to Danya Cebus for performance of the preliminary work was paid upon receipt of the initial financing by the Concessionaire from the financing entities. Performance of the preliminary work constitutes part of the Construction Agreement, and such work was integrated therein upon the signing thereof. As at the date of the report, the project is being carried out as planned, pursuant to the scheduled timetables, except as set forth below: (a) The State has not yet transferred to Danya Cebus a certain site in the Highway. A continued delay in transfer of this site to Danya Cebus’ possession could adversely affect the project’s timetables. (b) Historical findings were recently discovered in part of the Highway. Continuation of the excavations and removals could adversely affect the project’s timetables. 119 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) Performance Status (Cont.) (c) In August 2006, an administrative petition was filed against a temporary by-pass made in a Highway 431 lane. The court rejected the petitioner’s request for interim relief against continuation of the work, and the proceedings in the case are still pending. (d) Approval of the competent authorities has not yet been received for the safety guardrails proposed by Danya Cebus for the project. If approval of the competent authorities is not received or if receipt of their approval is delayed, such matter could have a significant adverse impact on Danya Cebus. (e) The Urban Planning Scheme has not yet been published to take effect with respect to completion of certain parts under the responsibility of the State in one of the areas on which the Highway was routed. A delay in giving effect to the Urban Planning Scheme could adversely affect the project’s timetables. (f) There is a delinquency in the timetables set for execution of the traffic control system. A failure to complete the system by the date of opening the Highway for traffic could have a significant adverse impact on Danya Cebus. Danya Cebus replaced the traffic control system contractor and entered into an undertaking with a substitute contractor. The contractor whose engagement was discontinued recently contacted Danya Cebus with a request to hold arbitration proceedings in respect of its contentions regarding discontinuance of its engagement. (g) Approval of the State and the financing entities has not yet been received as well as statutory approvals for construction of filling stations along the Highway. Accordingly, there is uncertainty regarding construction of the filling stations. It is noted a delay in construction of the filling stations or a failure to construct them could have a significant adverse impact on the project. As at December 31, 2007, the project’s percentage of completion was 68%. The total revenues recorded on the project up to December 31, 2007 came to NIS 1,157 million, of which NIS 752 million in 2007. Due to the significant increase in the execution costs of the contractor work in the project, the gross loss recorded in respect of the project totaled NIS 165 million as at December 31, 2007. The date for receiving authorization to open the Highway for traffic was set at January 2009. Danya Cebus is making efforts to advance the timetables for receipt of the authorization to open the Highway for traffic, however there is no certainty that it will be able to do so, due to among other things the delay factors described in Section above. It is further noted that at this stage the arbitration proceedings addressing Danya Cebus’ claims with respect to amounts it believes the State owes it in connection with performance of the contractor work in the project and changes made therein are in the early stages. If and to the extent Danya Cebus’ claims are accepted, the project’s financial results should be improved, whereas their rejection will have a significant adverse impact on the project, as stated. 120 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (6) Highway 431 (Cont.) Performance Status (Cont.) Due to the fact that Danya Cebus is responsible (whether by virtue of it being a shareholder of the Concessionaire or due it being the Construction Contractor and a guarantor for fulfillment of the Operating Company’s liabilities) for construction, operation and maintenance of the project, the scope of which, as noted, is estimated at NIS 2 billion, it is subject to risks, including risks deriving from violation of the Construction Agreement or from a failure to comply with its conditions. Among the risks, as stated, note can be made of risks deriving from exposure as a result of a failure to comply with timetables, deviation from the project’s construction budget or from its operation and maintenance budget, as well as on account of inaccurate estimates of the project’s construction costs and its operating and maintenance expenses. In addition, due to the extended execution time, Danya Cebus is exposed to price increases that may increase the cost of performing the work. Linkage to the indices’ basket to which Danya Cebus is entitled pursuant to the Construction Agreement, reduces a significant portion of this exposure. In addition, Danya Cebus is exposed to risks stemming from its responsibility to operate and maintain the Highway and to manage the traffic after completion of the construction, which involve violation of the provisions of the Construction Agreement, along with economic exposure to fines and/or non-receipt of operating fees, in whole or in part. Preliminary Decision of the Income Tax Authority Regarding this project, the Income Tax Authority made a number of preliminary decisions, some of which were included as an appendix to the Concession Agreement and constitute an integral part thereof. Pursuant to those preliminary decisions, the Income Tax Authority consents to adopt in connection with the said project, for tax purposes, the traditional accounting standards, despite the fact that for accounting purposes the Statement of Position will be applied with respect to recognition of a financial asset (see Note 1ZJ). The said consent is based on the fact that a preliminary request for receipt of a separate approval regarding this matter will be submitted. The Concessionaire in the project submitted a preliminary request and received separate approval from the Income Tax Authority as stated above. 121 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (7) Prison Project In January 2006, an agreement was signed for execution of a project involving the planning, construction, operation, management and financing of a prison facility south of Be’er Sheva, under the PFI method for a period of about 25 years (including the construction period), between the Government of Israel and the Prisons Service (hereinafter – “the Customer”), on the one side, and A.L.A. Management and Operation (2005) Ltd., a private company owned jointly (in equal shares) by the Company and Minerav Engineering and Construction (1983) Ltd. (hereinafter – “the Bidder”). The prison is planned to include approximately 800 prison cells. The total annual receipts expected to be paid to the bidder in respect of operation of the prison during a period of roughly 22 years is estimated at NIS 64 million for each year of operation. In addition, the bidder is entitled to a construction grant of about NIS 47 million that is to be paid to the bidder upon completion of the construction and receipt of the State’s approval for operation of the prison. In October 2006, the agreement entered into effect and the Bidder commenced construction of the project. Receipt of the amounts due, as detailed above, from the Customer is subject to the terms of the agreement to be signed and the authority of the Customer to shorten the period of the agreement, based on its discretion, beginning with the end of eighth year from the date on which the agreement entered into effect. In connection with this project, the Company provided a guarantee in the amount of NIS 7.5 million. The construction work on the project, which commenced in October 2006, are being executed by a joint venture between Minerav Engineering and Danya Cebus, In March 2007 the project’s financial close was completed. Against the process of privatizing the prison, there is a pending petition with the High Court of Justice. As at the date of the report, a hearing date for the petition has not yet been set. If the petition is accepted, the Company and Minerav will be entitled to compensation in the amount of the direct costs incurred, as detailed in the agreement with the Government of Israel. The accounting treatment of the project is as a financial asset – see Note 1ZJ. 122 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (8) Light Train Project In February 2006, the Company submitted a bid, together with additional parties, in a tender for construction of the “Light Train” in Tel-Aviv. The tender is for an initiative under the BOT method for construction and operation of the “Light Train” system in Tel-Aviv, pursuant to a concession to be granted to the winner by the State for a period of 32 years. The train route is planned to cover a distance of 22 kilometers, running from the Central Bus Station in Petach Tiqwa through Bnei Barak, Ramat Gan, Tel-Aviv–Jaffa and Bat Yam, of which a section of 11 kilometers will be through an underground tunnel. The primary matter of competition in the tender is the amount of the construction grant to be paid by the customer, in increments. Participation in the tender is in the framework of an investor group (hereinafter – “the MTS Group”) in which the Company’s share in this group is 20%. In the Company’s estimation, the cost of the project will amount to about NIS 10 billion. In December 2006, a notification was given by the Tenders’ Committee that the MTS Group won the tender for the Light Train. In May 2007, a concession agreement was signed between the MTS Group and the State, and the project’s financial close was set for 12 months from the signing date of the concession agreement. It is noted that in accordance with the terms of the concession, against performance of the preliminary planning work by the MTS Group, the State will pay amounts at the rate of up to 1.8% of the construction grant during the 12 months from the signing date of the concession agreement. In February 2007, the competitor group, NTS, submitted an administrative petition to the court wherein it demands that the State be forbidden from entering into an undertaking with MTS with respect to execution of the project. In addition, the competitor group demanded that it be declared the winner of the tender. In May 2007, a concession agreement was signed between the MTS Group (of which the Company constitutes 20% thereof) and the State, by virtue of which the MTS Group was granted the concession for construction and operation of the “red line” for the Light Train project in Tel-Aviv and the surrounding area, for a period of 32 years. It is noted that in accordance with the terms of the concession, against performance of the preliminary planning work by the MTS Group, the State will pay amounts at the rate of up to 1.8% of the construction grant (which was set at about NIS 7 billion) during the upcoming 12 months. 123 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (8) Light Train Project (Cont.) In August 2007, the Board of Directors of Danya Cebus and its Audit Committee approved Danya Cebus’ undertaking in an agreement with the Company, in the framework of which the Company assigns it rights and obligations to constitute 40% of the joint venture set up together with third parties (hereinafter – “CJV”), that in a joint consortium with Siemens will be the construction contractor of the Tel-Aviv Light Train project (hereinafter – “the Construction Contractor”). Pursuant to the Company’s right to assign its rights in the Construction Contractor and in CJV, as described above, under the agreement for assignment of the rights, the Company assigns, in a final and unequivocal manner, its right to constitute 40% of the joint venture with CJV and its affiliate in the Construction Contractor to the company, without this derogating from the Company’s obligation to provide bank guarantees and parent company guarantees for the liabilities of Danya Cebus in the framework of the agreements for the Light Train project. The agreement for assignment of the rights includes assignment of all the Company’s rights and obligations under the agreement for establishment of the Construction Contractor, the agreement of principles governing the relationships between the Construction Contractor and the concessionaire (these three agreements were signed in February 2007), and under the agreement of principles for establishment of CJV. Entry into effect of the agreement for assignment of the rights, as stated, is subject to approval by the General Meeting of Danya Cebus pursuant to Section 275 of the Companies Law. (9) Alon – The Israel Fuel Company Ltd. (hereinafter – “Alon”) – Affiliated Company at the rate of 26% a) Energy Activities in the United States a1) In February 2005, Alon, through its subsidiary operating in the United States (hereinafter – “Alon USA”), completed a transaction involving sale of pipelines, tanks and terminals that are used for the storage and transport of refined oil products, to Holly Energy Partners, Limited Partnership (hereinafter – “Holly”), whose securities are traded in the United States, for a consideration of U.S.$120 million in cash and 937,500 subordinated participation units of Holly, the value of which at the date of the transaction was about $30 million and which constitute 6% of Holly’s total issued units. Concurrent with the said transaction, Alon and Holly signed an agreement pursuant to which Alon commits to pipe and store a minimum volume of fuel products in the said pipelines, terminals and tanks, whereas Holly undertakes to permit Alon to pipe and store the said minimum volume. The period of the agreement was set at 15 years, where Alon will have an option to extend the period for three additional periods of 5 years each. The tariffs Alon will bear for piping refined oil products are variable tariffs, which may be reduced upon increase of the volumes piped in excess of the minimum volume as defined in the agreement. The piping fees and storage fees for the refined oil products were set based on the usual tariffs prevailing in the market. 124 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (9) Alon – The Israel Fuel Company Ltd. (hereinafter – “Alon”) – Affiliated Company at the rate of 26% (Cont.) a) Energy Activities in the United States (Cont.) a1) (Cont.) Alon Logistics, a wholly owned company of Alon, which was set up specially for purposes of this transaction, and the General Partner of Holly, signed an agreement pursuant to which Alon Logistics will indemnify the General Partner in respect of cash payments the General Partner is required to make on account of the principal or interest of Holly debt that was taken out for purposes of financing the consideration for the transaction that was paid to Alon, this being in a case where Holly does not meet its obligations. Alon’s pre-tax income in respect of this transaction amounted to about $102 million, net of expenses of the transaction. At the time of the transaction, Alon recognized pre-tax income of about $27 million (the Company’s share of the pre-tax income is about $7 million), whereas the balance of the income – in the amount of about $75 million – will be recognized over a period of 12 years or less, based on the circumstances, as defined in the indemnification agreement. During 2005 and 2006, Alon exercised its right to reduce the amount of the indemnification and, therefore, it recognized additional income of about $6 million and about $10 million, respectively. a2) In March 2006, Alon USA sold fuel pipelines that had not been in use since December 2002, for a consideration of $68 million. Concurrent with sale of the pipelines, as stated, Alon signed a fuel supply agreement with a company related to the purchaser for a period of 10 years with an option to extend the agreement for 4 additional periods of thirty months. The agreement will permit Alon to protect its integrated system by means of maintaining its rights to supply crude oil in the pipeline. Pursuant to the agreement, as stated, Alon is required to supply a minimum of 15 thousand barrels a day through the pipelines during the period of the agreement. The pre-tax income of Alon USA in respect of the aforesaid transaction amounted to about $52.5 million (the Company’s share in the pre-tax income amounted to about $10 million). a3) In July 2006, Alon USA completed the acquisition of 40 convenience stores in Texas in the United States in exchange for a consideration of about $27 million. 125 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (9) Alon – The Israel Fuel Company Ltd. (hereinafter – “Alon”) – Affiliated Company at the rate of 26% (Cont.) a) Energy Activities in the United States (Cont.) a4) In August 2006, Alon, through a subsidiary, completed acquisition of Paramount Petroleum Corporation, an independent refiner of petroleum products. Paramount’s refineries are located in California and Oregon and are capable of reaching a joint refining production of 88,000 barrels of heavy crude oil per day. In addition, the company owns a tanks’ yard of fuel products and seven asphalt terminals located throughout the United States. Further, the company holds 50% of the shares of a company specializing in the manufacture of rubber for tires, with respect to which a patent has been recorded, and in the manufacture of asphalt products. The cost of the acquisition amounted to about $586 million. The acquisition cost is subject to post-acquisition adjustments that have not yet been completed. a5) In September 2006, Alon, through a subsidiary, completed acquisition of Edgington Oil Company, a crude oil refining company located in California. The acquisition includes Edgington’s refineries having a production capacity of about 40 thousand barrels per day. The acquisition cost amounted to about $93 million. a6) In June 2007, Alon, through an investee company operating in the United States (hereinafter – “Alon USA”), acquired all the ordinary shares of Skinny Inc., a company resident of Abilene, Texas, that is held privately and that operates 102 FINA stores in central and west Texas. The total consideration amounts to about $77 million and is subject to adjustments after the closing. Out of the 102 stores, two-thirds were owned by Skinny and one-third was rented. b) Acquisition of The Blue Square (Israel) Ltd. (hereinafter – “the Blue Square”) b1) In September 2005, an agreement was signed between Alon and the partner in Bronfman Alon pursuant to which Alon acquired from the partner shares in Bronfman Alon in exchange for a consideration of about $30 million, such that as at December 30, 2005, the rate of Alon’s holdings in The Blue Square, by means of both direct and indirect holdings, was 57%. During January 2007, the subsidiary acquired from the partner the balance of its shares in Bronfman Alon for a consideration of about $52.6 million. By means of the said acquisition, Alon increased the rate of its direct and indirect holdings in The Blue Square. As at December 31, 2007, the rate of Alon’s holdings in The Blue Square’s share capital was about 71%. 126 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (9) Alon – The Israel Fuel Company Ltd. (hereinafter – “Alon”) – Affiliated Company at the rate of 26% (Cont.) b) Acquisition of The Blue Square (Israel) Ltd. (hereinafter – “the Blue Square”) (Cont.) b2) In December 2006, all the preconditions to the agreement between The Blue Square and Dor Energy, on the one part, and Israel Credit Cards Ltd. (hereinafter – “ICC”) and Diners Club Israel Ltd. (hereinafter – “Diners Israel”), a subsidiary of ICC, on the other side, were completed, pursuant to which The Blue Square and Dor Energy together will acquire from ICC 49% of the issued share capital of Diners Israel, in exchange for a consideration of about NIS 21.3 million. The holdings of The Blue Square and Dor Energy in the issued share capital of Diners Israel is as follows: The Blue Square – 36.75% and Dor Energy – 12.25%. Financing of the consideration will be by means of a loan that will be provided by ICC to The Blue Square and Dor Energy. The loan is for 8 years, linked to the index and bearing interest at the rate of 6%. The loan is to be repaid in a single payment at the end of the period and is secured by shares of Diners. Both parties have the possibility of canceling the agreement if at the end of a period of 4 years and/or 6 years, the number of active credit cards does not exceed an agreed-to number as provided in the agreement. b3) In June 2006, The Blue Square completed a split off of its real estate activities and transfer of the real estate it held directly and certain liabilities to a new wholly owned subsidiary – “The Blue Square Real Estate”. In August 2006, The Blue Square Real Estate issued shares, debentures and convertible debentures, in an initial public offering. The net proceeds received by The Blue Square in the framework of the issuance amounts to about NIS 879 million. As a result of the issuance, Alon recorded a gain of about NIS 25 million (the Company’s share in the gain is about NIS 6.5 million). c) In December 2006, the shareholders of Alon signed a memorandum of principles in the framework of which principles were provided that were agreed to by Alon’s shareholders in connection with advancement of a tender offer of Alon’s shares by Alon’s shareholders, integrated with or after a public offering of Alon debentures during 2007, including in connection with arrangement of the relationships between Alon’s shareholders after completion of the issuance of Alon. Pursuant to the memorandum of principles, all of Alon’s shareholders, except for one, intend offer to the public between 20% and 25% of Alon’s issued shares, where the Company committed to sell a third of its holdings in Alon, subject to a minimum company value in the issuance as provided. 127 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (10) Africa Israel Hotels Ltd. (hereinafter – “Africa Hotels”), a Subsidiary a) In April 2005, an agreement was signed between the partners in the partnership that constructed and operates the “Kings City” attractions’ park, pursuant to which the share of Africa Hotels and an additional partner will increase to a rate of 35.83% each. In 2006, the share of Africa Hotels and the additional partner increased to 37.07% each. b) In March 2006, Africa Hotels, through a subsidiary, signed an agreement with Kanit Hashalom Investments Ltd. of the Azrielli Group (hereinafter – “Kanit”). Pursuant to the agreement, Africa Hotels will rent from Kanit 13 floors in the square tower located in the Azrielli Center in Tel-Aviv, as well as additional areas on the ground floor and in the basement of the square tower, for purposes of constructing and operating of a local business hotel. Pursuant to the agreement, Africa Hotels will rent from Kanit part of the building, as stated, in the envelope level and will perform adaptation work for purposes of its rental as a hotel having 272 rooms and suites. In the estimation of Africa Hotels, the investment in adapting the leased premises for use as a hotel will amount to about U.S.$13 million. The rental period will be 12 years from opening date of the hotel. In addition, Africa Hotels was given two options for additional rental periods: one for 6 years and the other for 6 years and 11 months. According to the agreement, Africa Hotels will pay Kanit a fixed rent plus additional rent to be calculated based on the turnover. The agreement includes a mechanism for a certain reduction of the fixed rent if the total revenues received in a three-year period is less than a certain amount stipulated in the agreement. In the estimation of Africa Hotels, the hotel will be completed around April 2008, subject to changes that may occur during the construction period. c) Regarding the activities of Africa Hotels in Russia – see Note 2I(1)(h). d) In October 2007, the Company published specifications for a full tender offer with respect to acquisition of the ordinary shares of Africa Hotels. The tender offer was revised in November 2007. The tender offer relates to 8,140,749 shares constituting 13.92% of Africa Hotels’ issued and paid-up share capital and the voting rights therein. Pursuant to the tender offer, the Company will acquire from all the offerees all the shares they hold at a price of NIS 7.4 per share. Accordingly, the total proposed consideration amounts to NIS 60,241 thousand. In November 2007 the Company completed the tender offer process and on December 31, 2007, the Company holds 100% of the share capital of Africa Hotels. 128 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (11) Company Investments in the Textiles’ Sector a) The Company holds, indirectly, a 50% interest in the equity and voting rights of Christina America Inc. (hereinafter – “Christina”, a proportionately consolidated company), which is engaged in the manufacture of swimwear, fashion wear and underwear and the marketing thereof, mainly in North America. The balance of the rights in Christina is held by Canadian partners who are active in the fashion and textile market in North America (hereinafter – “the Canadian Partners”). Financing of acquisition of the rights in Christina, as well as the providing of working capital for its operations, was effected in accordance with financing arrangements reached with a group of banking institutions (hereinafter – “the Financing Entities”). The investment of shareholders’ equity and owners’ guarantees required from the Company, is mainly as follows: 1. Shareholders’ equity in cash and owners’ guarantees in lieu of shareholders’ equity in the total amount of Can$9.5 million, against an undertaking by the Canadian Partners to bear responsibility for Can$2 million of the said amount. 2. Additional owners’ guarantees in the amount of Can$11 million against an undertaking by the Canadian Partners to participate in 50% of the said amount. 3. Additional liabilities and/or guarantees to the Canadian Partners in an amount of Can$1 million. Christina’s operations and repayment of its liabilities to the banks is contingent on the support of its shareholders, including the Company. For purposes of assuring repayment of Christina’s liabilities to the banks, a floating lien was recorded on all of Christina’s assets for the benefits of the banks. In addition, Christina’s shareholders, including the Company, provided guarantees in the aggregate amount of Can$9.5 million. b) In September 2007, Christina’s acquired the activities of Baltex Mailot Inc. (a U.S. company engaged in the textile area that is in the process of liquidation) including, fixed assets, customer lists, trade marks and intellectual property, for a consideration of Can$2.5 million. As a result of the acquisition Christina recorded negative goodwill in which the Company’s share comes to about NIS 22 million. The said negative goodwill was recorded on the statement of operations in the “other income” category. 129 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (12) Africa Israel Industries Ltd. (formerly – Packer Plada Ltd., a subsidiary, hereinafter – “Africa Industries”) a) In September 2006 the Company signed an agreement pursuant to which the Company will acquire 23.53% of the share capital of Africa Industries in exchange for a consideration of about NIS 75 million. In February 2007, the transaction was completed and shares of Africa Industries were transferred and recorded in the name of the Company. After completion of the transaction, the Company holds 65.48% of Africa Industries’ share capital and its activities are consolidated in the Company’s financial statements commencing from the beginning of the year. b) In July 2007, Africa Industries, through a foreign subsidiary, signed an agreement for receipt of services with Cigma Trade LLC, which is registered in Russia, in connection with acquisition of 100% of the rights in Koa Gas, a company registered in Russia (hereinafter – “the Property”), for purposes of expanding Africa Industries’ international operations. Koa Gas owns a site for the manufacture and transshipment of construction and infrastructure materials in the City of Kraskovo (hereinafter – “the Site”). The Site is located on an area measuring about 260 dunams of private land and includes buildings and infrastructures, including train tracks and a system of train engines owned by Koa Gas, connection to power cables, connection to the natural gas system, an energy center that services the Site, drinking water wells and water for industrial purposes, as well as other equipment. In consideration for the Property, in July 2007 Africa Industries paid about $23 million. Africa Industries intends to improve the existing activities on the Site, including improvement of the built-up areas on the Site and the rental thereof to third parties, construction of additional buildings for rental purposes, and initiation of industrial activities, both in Africa Industries’ core business area as well as new industrial activities. In Africa Industries’ estimation, the amount of its total investment in the industrial activities on the Site, will reach about $50 million and will be spread over a period of a period between two and three years from the completion date of the acquisition. c) In August 2007, Africa Industries published a prospectus for issuance to the public of 697,416 registered ordinary shares of NIS 1 par value each of the company by means of a rights’ offering to the shareholders, and a shelf prospectus for issuance of ordinary shares and debentures (Series A, B and C). 130 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (12) Africa Israel Industries Ltd. (formerly – Packer Plada Ltd., a subsidiary, hereinafter – “Africa Industries”) (Cont.) c) (Cont.) In September 2007, Africa Industries issued 696,896 ordinary shares of NIS 1 par value each, constituting about 99.9% of the total rights offered to the shareholders of Africa Industries. In exchange for the rights utilized, Africa Industries received the total amount of about NIS 202,099 thousand (gross). The Company participated in the issuance and purchased shares of Africa Industries such that as at December 31, 2007, the Company holds about 67.5% of Africa Industries share capital. In addition, in September 2007, Africa Industries raised NIS 350 million debentures (Series A) by means of a shelf prospectus – see Note 16D(2)(h). d) In March 2007, the Board of Directors of Africa Industries granted 4,650 options to the company’s CEO for no consideration, where each option may be exercised for one ordinary share of NIS 1 par value of Africa Industries. The CEO is entitled to exercise the options in four annual portions during a period of five years from November 1, 2006 (hereinafter – “the Effective Date”) as follows: 25% at the end of two years from the date of their issuance, 25% at the end of three years, 25% at the end of four years and the remaining 25% at the end of five years from the date of their issuance. All options that are not exercised will automatically expire at the end of one year from the vesting date of the last portion of options vested, and every option not exercised up to the said expiration date will be cancelled and will have validity or value. The exercise price of the options is NIS 265.45 per option (linked to the CPI commencing from the CPI that is “known” on the Effective Date, as stated, and up to the last CPI that is “known” on the exercise date). The stock market price of the shares of Africa Industries proximate to the date of the decision of the Board of Director with respect to their issuance was NIS 398.2. The exercise price was determined based on the average closing price of a share of Africa Industries on the Tel-Aviv Stock Market during the 30 days preceding the Effective Date. The fair value per option, calculated based on the Black and Scholes formula, is NIS 179.73, NIS 188.77, NIS 195.79 and NIS 207.74 for each option, for the first, second, third and fourth portions, respectively. 131 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (12) Africa Israel Industries Ltd. (formerly – Packer Plada Ltd., a subsidiary, hereinafter – “Africa Industries”) (Cont.) d) (Cont.) The assumptions used in calculating the above fair value are as follows: (closing) price of a share of Africa Industries on the approval date of the grant by the Board of Directors is NIS 398.2, the exercise price is NIS 265.45 per option, the expected life of each option is 3.58, 4.08, 4.58 and 5.08 years in respect of the first, second, third and fourth portions, respectively, and the standard deviation is 31.3%, 33.2%, 33.9% and 37.2% in respect of the first, second, third and fourth portions, respectively. The standard deviation was calculated based on the daily yields on the shares of Africa Industries for periods corresponding to the expected life of each portion. The annual discount rate for the options is 3.2% on the basis of the yield to maturity of government bonds for periods corresponding to the expected life of each portion. e) Pursuant to a decision of the Board of Directors of Africa Industries from November 2000, the Board of Directors of Africa Industries recommended to the General Meeting of its shareholders to distribute an annual dividend at the rate of 25% of the annual income. (13) Tadiran Telecom Ltd., an affiliated company, hereinafter – “Tadiran Telecom”) a) Commencing from the first quarter of 2006 the Company’s holdings in Tadiran Telecom (which had previously been presented based on a proportionate consolidation) are presented on the equity basis of accouting. b) In September 2007 and agreement was signed between Tadiran and its shareholders regarding a change in the rate of holdings. As a result of this agreement, the Company holds 37.575% of the issued share capital and voting rights in Tadiran Telecom (by attribution). (14) Africa Israel Financial Properties and Strategies Ltd. (a wholly owned subsidiary of the Company, hereinafter – “AFI Financial”) a) In April 2006, Africa Israel Financial Properties and Strategies Ltd. (a wholly owned subsidiary of the Company, hereinafter – “AFI Financial”, together with investee companies of Menorah Holdings Ltd. (hereinafter – “Menorah”, and together “the Purchasers”) signed an agreement with Bank Mizrahi Tefahot Ltd. and Emda Mutual Fund Management Ltd. (hereinafter – “Emda”, and together “the Sellers”) for sale of Emda’s mutual fund management activities to Menorah and AFI Financial for a consideration of NIS 216 million (subject to adjustments). Pursuant to the agreement, the Purchasers will notify the Sellers with respect to the allocation of the funds between them. In June 2006, the transaction was completed and in the framework thereof AFI Financial acquired the mutual fund management activities with respect to 4 of the forty-two funds managed by Emda in exchange for a consideration in the amount of about NIS 24 million (the rest of the funds were acquired by Menorah). 132 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 2 – Investments in Investee and Other Companies I. Additional Information (Cont.) (14) Africa Israel Financial Properties and Strategies Ltd. (a wholly owned subsidiary of the Company, hereinafter – “AFI Financial”) (Cont.) b) In December 2006, a memorandum of understanding was signed by AFI Financial with Africa Israel Investments House Ltd. (hereinafter – “AFI Investments House”, formerly Artrade Financial Engineering Ltd.) and its shareholders. AFI Investments House is a company active in the capital market area having a portfolio management license since 2001. In addition, AFI Investments House provides Africa Israel Funds Management Ltd. (an investee company of AFI Financial) current management services with respect to investments of the Fund’s assets and marketing for investments for management activities of the mutual funds that AFI Financial acquired from Bank Mizrahi and Emda. Pursuant to the agreement, AFI Financial invested the amount of NIS 27 million in AFI Investments House against the issuance of shares that constitute, after their issuance, 50% of AFI Investments House’s issued and paid-up share capital, and also acquired from AFI Investments House’s existing shareholders 10% of AFI Investments House’s issued and paid-up share capital in exchange for a payment to the existing shareholders in the amount of NIS 5.4 million. After completion of the transaction, AFI Financial holds 60% of AFI Investments House’s shares. Furthermore, pursuant to the agreement, all of the holdings of AFI Financial in Africa Israel Funds Management Ltd. was sold to AFI Investments House, against a payment of about NIS 25 million, as well as the holdings of AFI Financial in Africa Israel Issuances Ltd. (an investee company of AFI Financial) against a payment of about NIS 2.4 million. c) J. In August 2007, AFI Financial completed a transaction for acquisition of an additional 34.17% of the share capital of AFI Investments House, in such a manner that its holdings in AFI Investments House increased to 94.17%. Attached Financial Statements of Affiliated Companies The Company attaches to these financial statements the financial statements of the following affiliated companies: – Derech Eretz Corporation Joint Venture –Registered Partnership. – Derech Eretz Joint Venture 18 –Registered Partnership. 133 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 3 – Fixed Assets A. Composition Consolidated Cost Balance at January 1, 2007** Additions Deletions Transfer from real estate for investment due to designation for self-use First-time consolidation of investee company Capital reserve from translation differences at end of the year Balance at December 31, 2007 Accumulated Depreciation Balance at January 1, 2007** Additions Deletions First-time consolidation of investee company Capital reserve from translation differences at end of the year Balance at December 31, 2007 Land, buildings and facilities for self-use Facilities and construction equipment 67,491 51,393 – 98,764 19,753 (86) Hotels* Land Machinery and and buildings equipment 1,186,414 216,996 – 339,206 27,562 (708) Industrial plants Land Machinery and and buildings equipment 41,914 20,290 – Vehicles and jet Office furniture and equipment Total 16,146 19,605 (6,889) 16,760 180,736 (7,136) 76,540 21,273 (16,007) 1,843,235 557,608 (30,826) 1,050 – – – – – – – 167,257 – – – 241,890 344,300 16,183 46,986 – – (9,174) – 6,696 1,043 (75) 287,191 ---------- 118,431 ---------- 374,205 ---------- 206,468 ---------- 6,361 2,905 – 93,225 6,440 (53) 1,394,236 ------------- 366,060 ---------- 310,790 ---------- 268,570 17,924 – 247,648 14,631 (653) 9,331 15,299 – 9,211 13,345 (3,442) (575) 128,217 ---------- 1,050 816,616 (2,085) 3,185,598 ------------- 7,391 9,613 (4,650) 38,234 8,535 (1,117) 679,971 88,692 (9,915) 259,524 10,312 32,415 359,340 452 21 394 (7,490) 1,344 – – – 55,745 – – – – (8,357) 10,610 ---------- 99,612 ---------- 286,494 ------------- 261,626 ---------- 72,018 ---------- 279,090 ---------- 22,687 ---------- 78,461 ---------- 1,110,598 ------------- December 31, 2007 276,581 18,819 1,107,742 104,434 238,772 95,115 183,781 49,756 2,075,000 December 31, 2006** 61,130 5,539 917,844 91,558 32,583 6,935 9,369 38,306 1,163,264 Depreciated Cost * ** Restated due to first-time application of accounting standard – see Note 1ZL(2). Reclassified due to first-time application of accounting standard – see Note 1ZL(3). 134 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 3 – Fixed Assets (Cont.) A. Composition (Cont.) Company Cost Balance at January 1, 2007* Transfer from real estate for investment due to designation for self-use Additions Deletions Balance at December 31, 2007 Accumulated Depreciation Balance at January 1, 2007* Additions Deletions Balance at December 31, 2007 Land, buildings and facilities for operation and for rent Vehicles Office furniture and equipment Total – 2,712 15,427 18,139 1,050 – – 1,050 ------- – 454 (478) 2,688 ------- – 475 – 15,902 --------- 1,050 929 (478) 19,640 --------- – – – – ------- 696 330 (166) 860 ------- 14,305 392 – 14,697 --------- 15,001 722 (166) 15,557 --------- 1,050 1,828 1,205 4,083 – 2,016 1,122 3,138 Depreciated Cost Balance at December 31, 2007 Balance at January 1, 2007 * B. Reclassified due to first-time application of accounting standard – see Note 1ZL(4). Additional Information (1) Set forth below are details with respect to leasehold land – a. Land in Lod, the cost of which, as at December 31, 2007 is NIS 11,142 thousand (December 31, 2006 – NIS 11,142 thousand). The land is leased from the Israel Lands Administration (ILA). For part of the land, the lease period runs until 2043, under a lease capitalized at the rate 91% (a lease agreement has not yet been signed), while for the other part, the lease runs until 2040, and is fully capitalized. The Company has an option to extend the lease periods for an additional 49 years. Situated on the land is an industrial plant for the production of prefabricated elements, which is owned by a subsidiary. 135 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 3 – Fixed Assets (Cont.) B. Additional Information (Cont.) (1) Set forth below are details with respect to leasehold land – (Cont.) b. Lands in Tiberias – Depreciated cost, as at December 31, 2007, of NIS 77,855 thousand (December 31, 2006 – NIS 78,528 thousand). Leasehold (registered) land of about 69.7 dunams the lease periods of which were extended in 1975 up to 2037. Part of these areas are designated as an “Zone A” lodging area pursuant to TMA 13, having 3,000 beds, of which about 500 beds were built in a Holiday Inn hotel in accordance with an approved Urban Planning Scheme. The balance of the subsidiary’s rights in the land will be determined after a rights’ allocation is made between the subsidiary and the ILA and other private owners in the site. Of this area, approximately 15 dunams were designated as a national park pursuant to the National Parks and Nature Reserves Law, 1963, the right of use for which was granted to the National Parks Authority, at no cost, for a fixed period that is automatically renewed as long as there is no cancellation notice from any of the parties. The remainder of the land, measuring some 29.7 dunams, is located on the shore of Lake Kinneret, and constitutes land that has been reclaimed (dried out) from the Kinneret and has not yet undergone parcellation and preliminary registration procedures at the Land Registry Office. The lease periods for this land run up to the years 2020–2023. c. Land in Jerusalem – Depreciated cost, including the structures thereon, as at December 31, 2007, of NIS 172,480 thousand (December 31, 2006 – NIS 175,262 thousand). The land was leased from the ILA under a lease capitalized at the rate of 80% of the basic value, up to 2018, with an option to extend for an additional 49 years. The leasehold rights have not yet been registered in the name of the subsidiary, which is currently making efforts to register its rights in the land. d. Lands in Eilat – 1) Land having a depreciated cost (including the structures thereon) as at December 31, 2007, of NIS 120,158 thousand (December 31, 2006 – NIS 121,574 thousand) was leased from the ILA until 2038 with an option to extend for an additional 49 years. The lease fees for the entire period of the lease were paid in advance by the subsidiary owning the hotel, however the leasehold rights have not yet been registered in its name due to technical reasons stemming from the absence of parcellation of the land in Eilat. 136 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 3 – Fixed Assets (Cont.) B. Additional Information (Cont.) (1) Set forth below are details with respect to leasehold land – (Cont.) d. Lands in Eilat – (Cont.) 2) A lease agreement (capitalized) in respect of a parcel of land having a depreciated cost (including the structures thereon) as at December 31, 2007 of NIS 29,820 thousand (December 31, 2006 – NIS 29,988 thousand) was signed with the ILA by the previous lessees for a period expiring in 2039. The leasehold rights have not as yet been registered in the name of the company owning the hotel. 3) Land having a depreciated cost (including the structures thereon) as at December 31, 2007 of NIS 72,575 thousand (December 31, 2006 – NIS 72,122 thousand) was leased from the ILA under a capitalized lease that is valid until 2036. The leasehold rights have as yet not been registered in the name of the subsidiary owning the hotel. 4) Land having a depreciated cost as at December 31, 2007 of NIS 45,879 thousand (December 31, 2006 – NIS 46,584 thousand). About 5.93 dunams relates to the subsidiary’s share (37.07%) in a partnership for establishment of an attractions park in Eilat. In August 2006 a lease agreement was signed with the ILA for a period of 4 years commencing from February 16, 1997, with an option for and additional 49 years that was exercised. The lease rights have not yet been registered in the partnership’s name. e. Land in the Dead Sea area – Depreciated cost (including the structures thereon), as at December 31, 2007, of NIS 51,988 thousand (December 31, 2006 – NIS 54,503 thousand). 8.2 dunams relate to the share of a subsidiary (50%) in a partnership, which built a hotel in the Ein–Bokek region, on the shores of the Dead Sea. The lease agreement for the land, which has an area measuring 16.4 dunams, was signed by the ILA with the other partner to the transaction. The lease is a capitalized lease for 49 years, running up to 2039, with the right to extend for an additional 49 years. f. Land with a depreciated cost as at December 31, 2007 of NIS 37,487 thousand (December 31, 2006 – NIS 37,543 thousand). About 2 dunams relate to the share of a subsidiary, which owns the Crowne Plaza Haifa Hotel. The land on which the property is built, has an area of 0.7 dunams, which is owned by the investee company, and an area of 1.4 dunams, under a lease agreement with the Municipality of Haifa for a period of 49 years up to 2047. The Hotel area is located in a part of the building that is used for hotel and residential purposes. 137 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 3 – Fixed Assets (Cont.) B. Additional Information (Cont.) (1) Set forth below are details with respect to leasehold land – (Cont.) g. Leasehold of industrial buildings – Industrial building in Tel-Aviv – depreciated cost as at December 31, 2007, of NIS 1,080 thousand (December 31, 2006 – NIS 3,869 thousand), held under a lease for a period up to 2010, with an option to extend for an additional 49 years. h. Real estate held under a capitalized lease from the ILA, the balance of which as at December 31, 2007 is NIS 10.4 million, on which the plants of certain subsidiaries are located. The leasehold rights are for a period of 49 years ending in the years 2014–2054, with the possibility of extending the lease period by an additional 49 years. (2) Costs of land, buildings for operation and rent and hotels, in the consolidated balance sheet, including capitalized expenses, are presented below: December 31 2006 2007 Capitalized costs in respect of hotels: Financing expenses Administrative and general expenses 48,538 15,009 63,547 41,526 11,910 53,436 (3) Investment grants – total investment grants received and deducted from the cost of fixed assets presented in the consolidated balance sheet, are as follows: December 31 2006 2007 From buildings held for rent Machinery and equipment From hotels* 7,328 53,700 116,045 177,073 7,328 – 116,045 123,373 Regarding investment grants received, liens were registered or there is an obligation to register liens on real estate assets of the related companies in favor of the State of Israel. See Note 15G. (4) Includes a cumulative provision for decline in value of assets, of NIS 42,904 thousand. (5) Part of the fixed assets is pledged to secure loans received by subsidiaries – Note 15F. (6) Part of the freehold and leasehold lands has not yet been registered in the name of the Group companies in the Land Registry Office, mainly due to technical reasons. 138 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 4 – Real Estate for Investment and Real Estate for Investment under Construction A. Set forth below is the movement in real estate for investment during the year: Balance as January 1, 2007 Impact of first-time application of Accounting Standard No. 16 (1) Additions during the year: Acquisitions Increase in fair value (2) Additions for initially companies consolidated Transfer from real estate for investment under construction Total additions Deletions during the year: Sales Transfer to fixed assets due to change of designation to self-use Total deletions Net translation differences deriving from translation of financial statements of foreign activities Balance at December 31, 2007 Consolidated 2007 Company 2006 2,931,627 ------------- 25,772 --------- 2,223,635 ------------- 47,658 --------- 896,505 2,040,010 533,311 582 9,165 – 1,205,437 4,675,263 ------------- – 9,747 --------- 1,349,213 – 1,050 1,350,263 ------------- 1,050 1,050 --------- (121,994) ------------- – --------- 8,358,268 82,127 (1) See Note 1ZL(3) regarding the methods pursuant to which the fair values of the real estate for investment were determined as at January 1, 2007. (2) The fair value of real estate for investment was determined on the basis of valuations performed by outside, independent appraisers having appropriate professional qualifications with respect to the location and type of the investment property appraised. The fair value was determined on the basis of transactions recently executed in the market involving similar properties and similar locations to the property owned by the Company, should there have been any such transactions, as well as based on discounting of the future cash flows expected to derive from the properties. The range of the discount rates used in estimating the fair values are: Israel Office and commercial space 7.25–9.5 139 In Percentages Western Eastern Russia Europe Europe 7.75–13.0 6.0–8.0 5.75–8.5 U.S. 7.5–5.5 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 4 – Real Estate for Investment and Real Estate for Investment under Construction (Cont.) B. Pursuant to Regulation 8B of the Securities Regulations (Periodic and Immediate Reports), 1970, the Company examined the need to attach to these financial statements the Group’s material appraisals. For this purpose, the Company applied a quantitative analysis whereby a property is considered material if its fair value exceeds 10% of the total assets in the consolidated balance sheet. Regarding assets the revaluation of which to fair value is recorded on the statement of operations, the extent of the materiality was analyzed based on the revaluation recorded on the statement of operations for the period. The amounts recognized in the consolidated statement of operations for the year ended December 31: Rental income from real estate for investment Direct operating expenses deriving from real estate for investment that produced rental income C. 2007 2006 2005 498,740 424,813 305,013 195,267 219,416 146,292 Set forth below is the movement in real estate for investment under construction during the year: Balance as January 1, 2007 Additions during the year: Acquisitions and construction costs Additions for initially companies consolidated Capitalization of financing costs to real estate under construction Total additions Deletions during the year: Sales Transfer to real estate for investment Total deletions Net translation differences deriving from translation of financial statements in foreign currency Balance at December 31, 2007 140 Consolidated 2007 Company 2006 2,664,745 ------------- 3,652 ------- 4,046,210 2,936,383 340 – 285,290 7,267,883 ------------- – 340 ------- 49,270 1,205,437 1,254,707 ------------- – – – ------- (552,436) ------------- – ------- 8,125,485 3,992 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 4 – Real Estate for Investment and Real Estate for Investment under Construction (Cont.) D. Other Information Set forth below are details with respect to leasehold lands – a. Land in Yehud on which the Company built a commercial center that is leased from the ILA under a capitalized lease until the year 2042. b. Land in Lod that is leased from the ILA for a period of 49 years (part of which ends in 2052 and part ends in 2043) with an option to extend the lease for an additional 49 years. Located on the land are buildings for high-tech industries and offices. The lease rights have not yet been recorded in the name of the subsidiary. c. Land and buildings held for rent in Nes Ziona that are leased from the Weizmann Institute of Science (under a non-capitalized lease). On the above tract of land, a subsidiary has erected an industrial park for high-tech industries. The lease period for the land is until 2029. Under an agreement with the Weizmann Institute, at the end of the lease period, the land and buildings erected thereon will become the property of the Institute, at no cost. With respect to this lease, the subsidiary is to pay annual lease rentals at the rate of 7% of the value of the land without development and enhancements made by the lessee, as will be valued every ten years by a real estate appraiser. The last valuation in respect of the area developed in the first stage is based on the land prices in 2001, while in respect of the area developed in the second stage it is based on the land prices in 1999. The lease rentals are linked to the CPI. d. Land and buildings for rent in Migdal Ha’Emek upon which a high-tech industrial park is situated. The leasehold rights for this part of the land are held under a lease capitalized at the rate of 91% up to the years 2044, with an option to extend for an additional 49-year period. e. Real estate in Prague (Czech Republic) – Land rights acquired in Prague by subsidiaries and leased out upon completion of the renovations. The lands were leased from the Czech authorities for periods of 30 and 50 years, in consideration of annual lease fees. f. Real estate in Amsterdam (The Netherlands) – Rights in land and a building acquired in Amsterdam by a subsidiary that are leased out in part. The land is leased from the Municipality of Amsterdam until 2040. g. Land in the government complex project – Rights in land located in Tel-Aviv in the government complex project owned by a subsidiary and held under lease terms for a period of 49 years (up to 2053) with an option to extend for an additional 49 years. 141 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 4 – Real Estate for Investment and Real Estate for Investment under Construction (Cont.) D. Other Information (Cont.) h. The Africa House in Yehud is located on land held under capitalized lease terms for a period of 49 years (up to 2042) with an option to extend for an additional 49 years. i. Land in Jerusalem – a subsidiary’s share in the acquisition cost of fully capitalized lease rights (91%) of land having an area measuring 2.5 dunams. A shopping mall was constructed on the land, which is located in the Talpiot Industrial Area in Jerusalem, with additional costs accompanying the acquisition, in the amount of NIS 4 million. The lease rights were acquired for a period of 49 years ending in 2018. There is an option to extend on terms that will be customary in that period. j. A subsidiary acquired land from the Weizmann Institute of Science (under a non-capitalized lease), having an area of about 30 dunams, located in a complex for high-tech industries in Nes Ziona (the Weizmann Complex). Based on the approved Urban Planning Scheme, construction buildings intended for the high-tech industry may be constructed on this site. In this framework, the company has completed construction of 7 multi-purpose buildings, on an aggregate area of 31,300 square meters, which have been leased out in exchange for economic lease fees. k. Land in Savyon leased under a non-capitalized lease from the ILA until the year 2002. The Company has an option to extend the lease for an additional period of 49 years. The Company has notified the ILA of its decision to exercise the said option to extend the lease for an additional 49 years. l. Lands in New York (United States) (i) Land rights leased from the landowner up to 2102, in exchange for annual lease fees. A project of apartments held for rent has been constructed on the land. (ii) Land rights in New York leased from the landowner up to 2054 in exchange for annual lease fees. 142 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 5 – Loans and Other Long-Term Receivables A. Composition Interest Rate at December 31 2007 % Linked to the CPI Linked to the CPI Linked to the CPI Linked to the CPI Linked to the Building Index Linked to the Paving Index Unlinked Linked to the US$ Linked to the US$ Linked to the US$ Linked to the Can$ 0 4–5 5–6 7–8 16,724 51,393 34,073 184,938 29,827 23,652 49,913 436,743 7–8 554,814 – 7–8 0 0 5–6 6–8 0–5 493,169 42,722 104,525 504 508,055 18,005 2,008,922 278,207 1,730,715 Current maturities* B. Consolidated December 31 2007 2006 – 1,287 122,391 2,774 549,750 1,217 1,217,554 122,104 1,095,450 Interest Rate at December 31 2007 % 5–6 0 0 8 Company December 31 2007 2006 – – 103 – – – 468 – – – – – 1,287 140,163 2,774 – – 144,692 404 144,288 24 104,525 – 7,384 35,736 147,772 103 147,669 Repayment Dates First year – current maturities Second year Third year Fourth year Fifth year Over five years Not yet determined 278,207 42,175 – – – 227,246 1,461,294 2,008,922 * Includes in respect of the Boymelgreen Group – see Note 2I(1)(a2). 143 103 – – – – – 147,669 147,772 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 5 – Loans and Other Long-Term Receivables (Cont.) C. Breakdown by Size December 31, 2007 Company Consolidated Number Number of of deposits Outstanding deposits Outstanding balance and loans balance and loans Amount of Deposit / Loan Up to 1,000 From 1,001 – up to 10,000 From 10,001 – up to 100,000 From 100,001 – up to 500,000 From 500,001 – up to 1,300,000** 5 1 6 3 1 Current maturities 1,293 5,041 169,750 599,917 1,232,921 2,008,922 278,207 1,730,715 2 2 – 1 – 127 43,120 – 104,525 – 147,772 103 147,669 ** Financial debt in respect of a BOT project – see Section D. below. D. The balance of the long-term receivables linked to the CPI includes a balance, in the amount of NIS 1,233 million, relating to Highway 431 – see details in Notes 1ZJ and 2I(6). E. The balance of the long-term receivables linked to the CPI includes a balance, as at December 31, 2006 in the amount of NIS 20,261 thousand in respect of Cross Israel Highway, which was fully paid on December 31, 2007, as stated, as described below: In accordance with the concession contract signed by the State and the Concessionaire (Derech Eretz), the Concessionaire was required to execute expansion work, as defined in the concession contract, upon the fulfillment of expansion conditions, as specified in the concession contract (hereinafter – “the Expansion Work”). CJV (the contractor) and the Concessionaire have an agreement, which rises to the level of a contract, with respect to the execution of certain expansion work by CJV for the Concessionaire during the construction period of the Highway. CJV included in its books a long-term debt, equal to the amount of the present value (based on a capitalization rate of 5.5%) of the payments expected to be received in respect of the Expansion Work it performed, as stated above, during the construction period of the Highway. Concurrent with fulfillment of some of the expansion tests for the Highway and the expected advancement of some of the other expansion dates, the Concessionaire held discussions with the Appointed Authority and with the lending banks in connection with the Expansion Work performed in the past by CJV that is considered a SFC (statutory final configuration). As part of these discussions it was agreed that the Concessionaire will pay the said liability relating to the Expansion Work performed in the past by CJV during the year of the report. On December 31, 2007, the Concessionaire transferred as noted, to the Partnership (CJV) an amount in full payment of the Concessionaire’s liability to the Partnership in respect of costs the Partnership incurred as a result of construction of element considered an SFC. 144 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 5 – Loans and Other Long-Term Receivables (Cont.) F. The balance of the long-term trade receivables linked to the CPI as at December 31, 2007 includes a balance due of about NIS 42 million of an investee company engaged in the steel area. The credit granted in this area of activities is spread out over 24 monthly payments, that is, average credit of about a year. This balance was capitalized as at the balance sheet date. Note 6 – Real Estate A. Composition Consolidated December 31 2007 2006 Freehold Leasehold B. 2,140,767 347,483 2,488,250 1,289,609 247,683 1,537,292 Company December 31 2007 2006 15,486 42,133 57,619 16,094 45,868 61,962 Additional Information (1) Part of the freehold real estate owned by subsidiaries has not yet been registered in their names, due to technical reasons. (2) The leasehold land has been leased from the Israel Lands Authority. Development agreements were signed with the Israel Lands Authority with respect to most of the parcels, pursuant to which the Company must execute development and construction work on the said parcels within a period of three to six years. Note 7 – Inventory of Buildings held for Sale Consolidated December 31 2007 2006 Cost invested: Land Other Less – Cumulative amounts recorded in the statement of operations Receipts from customers with respect to projects for which revenue has not yet been recognized 145 Company December 31 2007 2006 3,178,950 4,944,231 8,123,181 1,396,473 2,553,463 3,949,936 102,616 154,734 257,350 74,098 111,733 185,831 3,165,628 1,204,277 83,973 68,952 509,360 4,448,193 288,907 2,456,752 22,476 150,901 2,194 114,685 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 8 – Construction Work in Progress, Net Consolidated December 31 2007 2006 In current assets Cost of work performed Less portion recorded in the statement of operations In current liabilities Customer advances Less: portion recorded in the statement of operations Advances, net, in respect of work in progress 1,577,625 1,573,066 4,559 1,089,315 1,089,315 – 1,391,302 1,375,970 15,332 1,156,580 1,145,817 10,763 Note 9 – Other Inventory Consolidated December 31 2007 2006 Clothing Articles – Finished goods Work-in-progress, raw and auxiliary materials etc. Building and auxiliary materials Food, beverages and other materials Steel and Ceramics – Raw, auxiliary and packaging materials Work-in-progress Finished goods and constructed products Inventory in transit 146 67,058 31,453 98,511 --------- 61,337 25,482 86,819 ------- 6,136 3,906 10,042 --------- 5,705 2,663 8,368 --------- 151,651 10,333 194,884 23,732 380,600 --------- – – – – – --------- 489,153 95,187 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 10 – Deferred Tax Asset A. Composition Consolidated December 31 2007 2006 Future tax benefits receivable in respect of – Costs and expenses relating to construction projects which will be recognized for tax purposes upon completion of the projects and recognition thereof for financial reporting purposes Adjustments for inflation Inter-company profits Other expenses Losses carried forward B. 340,350 – – 43,969 65,197 449,516 224,730 (5,215) 10,113 (22,975) 36,966 243,619 Company December 31 2007 2006 13,894 – – 1,618 16,613 32,125 16,205 (1,801) – (5,904) 12,847 21,347 Movement during the year Consolidated December 31 2007 2006 Balance at beginning of the year Changes relating to current activities Changes relating to capital activities Entry into the consolidation 147 243,619 195,680 (5,946) 16,163 449,516 168,601 74,561 457 – 243,619 Company December 31 2007 2006 21,347 10,778 – – 32,125 27,965 (6,618) – – 21,347 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 11 – Trade and Other Receivables Consolidated December 31 2007 2006 Trade receivables Customers and revenues receivable from completed construction projects Tenants, lessees and others Purchasers of property Customers of a hotel subsidiary Customers of industrial Less: allowance for doubtful debts Other receivables and debit balances Subsidiaries Prepaid expenses and advances to suppliers Current maturities of deposits, loans and long-term loans Short-term loans Receivables in respect of fixed assets Receivables in respect of sale of investee company Deposits in respect of acquisition of investee company Advance tax payments net of provisions Futures transactions in derivative financial instruments* Accrued income Institutions Other receivables Company December 31 2007 2006 193,128 1,239,785 33,416 38,814 614,433 2,119,576 (51,159) 2,068,417 197,055 646,625 21,778 38,622 54,123 958,203 (9,535) 948,668 – – 251 75 9,561 – – 9,636 – 9,636 – 667,975 – 200,654 1,114,558 51,012 – 5,515 278,207 2,227 2,481 122,104 11,215 4,784 103 – – 404 – – 585,057 – – – – – 44 207 251 – 222,187 102,482 61,337 5,407 – 102,203 61,337 2,838 31,414 104,203 141,388 363,627 1,916,191 44,561 105,280 29,575 191,168 1,361,142 13,030 2,751 – 7,919 1,291,576 7,622 1,790 – 13,226 92,732 * See Note 38. Note 12 – Marketable Securities Consolidated December 31 2007 2006 Shares Mutual fund participation certificates Securities convertible into shares Other debentures Short-term Treasury notes Basket certificates 104,421 125,260 5,091 1,143,983 126,810 6,645 1,512,210 148 86,458 23,370 18,263 48,569 650,971 14,043 841,674 Company December 31 2007 2006 – 8,898 – – – – 8,898 – – 14,380 – – – 14,380 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 13 – Cash and Cash Equivalents and Short-Term Investments Short-Term Loans Interest Rate % Euro deposit Shekel deposit (1) Dollar linked (2) Canadian dollar 3.14–4.85 3.84–4.8 5.51–10.5 Consolidated December 31 2007 2006 101,943 62,095 647,378 – 811,416 13,365 103,723 874,385 8,691 1,000,164 Interest Rate % 3.84 Company December 31 2007 2006 – 5,735 – – 5,735 – 5,000 – – 5,000 (1) Includes the amount of about NIS 56 million of pledged shekel deposits against provision of a bank guarantee and the amount of about NIS 25 million of a pledged deposit. (2) Includes the amount of about NIS 600 million constituting monies in trust. Cash and Cash Equivalents Consolidated December 31 2007 2006 In foreign currency In Israeli currency Short-term bank deposits 3,826,896 59,752 718,719 4,605,397 149 356,569 66,950 780,550 1,204,069 Company December 31 2007 2006 28,568 1,038 1,279 30,885 94,566 1,171 1,143 96,880 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 14 – Other Assets and Deferred Expenses Original amount Capital reserve from translation differences Accumulated amortization Entry into the consolidation Deferred Issuance Expenses* Goodwill 7,171 156,875 – (5,849) – 659 (49,650) 144 Consolidated Customer Other Base and Deferred Other Expenses 10,420 – – 108,123 221 (18,005) Software Development Costs** Total 7,811 290,400 – – – – – 880 (73,504) 144 Balance at December 31, 2007 1,322 108,028 10,420 90,339 7,811 217,920 Balance at December 31, 2006 – 61,859 – 24,964 6,663 93,486 Software Development Costs** Company Other Deferred Expenses Total Cost Balance at January 1, 2007 Additions 18,494 1,341 – 7,171 18,494 8,512 19,835 -------- 7,171 ------- 27,006 -------- 16,829 1,192 – 5,849 16,829 7,041 18,021 -------- 5,849 ------- 23,870 -------- At December 31, 2007 1,814 1,322 3,136 At December 31, 2006 1,665 – 1,665 Balance at December 31, 2007 Accumulated Amortization Balance at January 1, 2007 Amortization for the year Balance at December 31, 2007 Amortized Balance * These expenses will be allocated shares and/or options and/or debentures issued under a shelf prospectus during the two years it is open. ** Reclassified due to first-time application of accounting standard – see Note 1H(3). Note 15 – Capital Notes Company – capital notes which were issued to subsidiaries. The capital notes are non-interest bearing, unlinked and with no scheduled repayment dates. 150 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities A. Classified by linkage bases and interest rates Consolidated Convertible debentures Debentures Banks Liabilities to sellers of real estate Others Linked to the Consumer Price Index 0%–6.1% December 31 U.S. Dollar 5.8%–11.61% Swiss Franc 4.91%–4.36% 58,260 7,812,771 856,774 – 529,172 6,507,367 – – 127,815 152,603 2,792 – 43,586 8,883,200 7,080,125 Linked to Foreign Currency – – 127,815 Unlinked 2007 2006 Euro 5.9%–7.8% Other Foreign Currency 5.7%–8% Total 3.6%–7.75% Grand Total Grand Total – – 1,477,972 – – 108,753 – 529,172 8,221,907 – 418,266 1,549,909 58,260 8,760,209 10,628,590 92,373 5,505,897 2,755,793 – 90,715 – 39,061 – 173,362 – 26,195 152,603 202,349 179,637 80,638 1,568,687 147,814 8,924,441 1,994,370 19,802,011 8,614,338 Less: current maturities (3,046,898) Total 16,755,113 7,849,288 1,348,184 208,815 24,090 18,014 18,127,387 8,076,117 Deferred taxes Liabilities for employee severance pay, net 151 (765,050) Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) A. Classified by linkage bases and interest rates (Cont.) Company Convertible debentures Debentures Banks Liabilities to sellers of real estate Other Consumer Price Index 0–5.4% Unlinked 5.9%–7.75% 56,394 6,090,456 51,296 20,189 – 6,218,335 – 418,226 26,200 – – 444,426 December 31 2007 2006 Total Total Less – current maturities 56,394 6,508,682 77,496 20,189 – 6,662,761 (427,716) 86,980 3,713,924 76,200 20,469 29,881 3,927,454 (581,640) Total 6,235,045 3,345,814 114,308 114,308 27,264 3,657 4,165 3,474 6,380,782 3,467,253 Capital note – non-interest bearing and unlinked Deferred taxes Liabilities for employee severance pay, net B. Repayment Dates December 31 2007 2006 Consolidated Company First year – current maturities Second year Third year Fourth year Fifth year More than five years Repayment date not yet determined Repayment dependent on progress of construction and sale of units in projects to be built* 3,046,898 2,372,583 4,003,830 1,972,615 1,467,845 5,504,046 1,270,334 427,716 511,866 600,361 766,341 1,099,154 20,189 3,216,945 163,860 19,802,011 20,189 6,662,761 * See E. below Regarding contractual limitations and financial covenants – see Note 22A(7). 152 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) C. Convertible Debentures (1) Convertible Debentures of the Company In November 2003, the Company raised funds through the issuance of non-negotiable debentures in an aggregate scope of NIS 200 million, from institutional investors, in the framework of which the Company issued to them two different series of index-linked debentures (one secured by liens and the other unsecured) (hereinafter, together – “the Debentures”), together with two separate series of options which may be exercised for shares of the Company (hereinafter, together – “the Options”). (a) One series is in the principal amount of NIS 100 million of debentures (Series A), non-negotiable, registered, repayable in one lump-sum payment on November 6, 2008, bearing fixed annual interest at the rate of 5.25%, payable quarterly, linked (principal and interest) to the Consumer Price Index (above and below – “the Debentures (Series A)”). This series may be redeemed early at the end of the second, third and fourth years of the term of the Debentures (Series A), at the election of the holders of the Debentures (Series A). In addition, the Company issued to the holders of the Debentures (Series A), for no consideration, options (Series A), which convey to their owners 123,500 options exercisable for 123,500 of the Company’s NIS 0.1 par value each ordinary shares, in exchange for an exercise premium of NIS 810 per share (linked to the Consumer Price Index of September 2003 and subject to adjustments as detailed below). The debentures are not secured by liens. (b) In addition to the first issuance, and independent thereof, the Company issued a series in the principal amount of NIS 100 million of debentures (Series B), non-negotiable, registered, repayable in one lump-sum payment on November 6, 2008, secured by fixed, first priority liens on 3,600,000 ordinary shares of NIS 1 par value each of Africa Properties Ltd. and 311,414 ordinary shares of NIS 1 par value each of Parker Plada Ltd., bearing fixed annual interest at the rate of 5.15%, payable annually, linked (principal and interest) to the Consumer Price Index (above and below – “the Debentures (Series B)”). In addition, the Company issued to the holders of the Debentures (Series B), for no consideration, options (Series B), which convey to their owners 122,300 options exercisable for 122,300 of the Company’s NIS 0.1 par value each ordinary shares, in exchange for an exercise premium of NIS 818 per share (linked to the Consumer Price Index of September 2003 and subject to adjustments). (c) The above-mentioned options may be exercised, at any time, based on the decision of each of the holders of the options, in whole or in part, commencing on November 27, 2003 and up to November 6, 2008, except during the dates 12–16 of each month. The exercise price of an option from each of the two series of options shall be paid only through the offset thereof against the unpaid principal amount of the debentures and/or the interest payments, of the relevant series of debentures with respect to which the options’ series was issued, as the case may be. Full exercise of the options from both series will convey to their holders up to 245,800 of the Company’s ordinary shares NIS 0.1 par value each (subject to adjustments). 153 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) C. Convertible Debentures (Cont.) (1) Convertible Debentures of the Company (Cont.) At the request of the holders of the Company’s debentures (Series A and Series B) who were interested in exercising the options while continuing to hold the Company’s debentures, in January 2005, the Company issued, in place of the existing debentures, new debentures of the Company (Series C and D), in a principal amount identical to the principal of the debentures that they held prior to exercising the options and on terms identical to those of the existing debentures (except with respect to the options). For a description of the debentures (Series C and Series D), see Section D(1), below: As a result of that stated above, 398,180 ordinary shares of NIS 0.1 par value each were issued to the holders of the debentures (Series A and Series B). As at December 31, 2007, the exercise premium of the options (Series B) was NIS 66. During the period of the report, 4,036 options (Series A) and 60,107 options (Series B) of the Company were converted into 641,430 ordinary share of NIS 0.1 par value. As at December 31, 2007, the balances of the par value of the Debentures (Series A) and the Debentures (Series B) were NIS 36,662 thousand and NIS 18,912 thousand, respectively. As at December 31, 2007, 28,738 options (Series A) were outstanding whereas the options (Series B) were exercised in full. (2) Convertible Debentures of Subsidiaries In September 2004, Africa Properties issued NIS 150 million par value registered debentures (Series B). The debentures bear interest at the annual rate 4.65%, linked to the CPI. The principal of the debentures is linked to the CPI and is repayable in 4 equal annual installments on October 2 of each of the years 2006–2009 (inclusive). The debentures are convertible up to September 18, 2009 into ordinary registered shares of NIS 1 par value such that if the conversion is executed up to September 18, 2006 the conversion rate will be NIS 120.17 par value of debentures for one ordinary share of NIS 1 par value (after adjustments for dividends distributed), whereas if the conversion is executed thereafter, the conversion rate will be NIS 134.03 par value of debentures for one ordinary share of NIS 1 par value (after adjustments for dividends distributed). On the same date, Africa Properties issued 1,000,000 registered options (Series 2), for NIS 100,000,000 par value debentures (Series B), against an exercise premium of NIS 95 linked to the CPI. In October 2005 the options (Series 2) expired. Up to this date, 995,695 options (Series 2) were exercised for NIS 99,959,500 par value debentures (Series B). In 2007, NIS 2,509,310 par value debentures (Series B) were converted into 18,722 ordinary shares of NIS 1 par value of Africa Properties. As at December 31, 2007, NIS 8,973,985 par value debentures (Series B) were outstanding. 154 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (1) Convertible Debentures of the Company (a) In January 2005, at the request of the holders of the Company’s debentures (Series A and Series B), the Company issued, in place of the existing debentures, new debentures of the Company, in a principal amount identical to the principal of the debentures that they held prior to exercising the options and on terms identical to those of the existing debentures (except with respect to the options) as follows: – NIS 1,699,595 par value registered debentures (Series C), unsecured, scheduled for repayment in one lump sum payment on November 6, 2008, bearing fixed interest at the annual rate of 5.25%, payable quarterly, linked to the Consumer Price Index of September 2003. – NIS 30,841,380 par value registered debentures (Series D), secured, scheduled for repayment in one lump sum payment on November 6, 2008, bearing fixed interest at the annual rate of 5.15%, payable annually, linked to the Consumer Price Index of September 2003. The debentures (Series D) were secured in the same manner and at the same level as the debentures (Series B) are secured. (b) In March 2005, the Company issued non-marketable, unsecured, registered debentures (Series E), in total par value of NIS 111 million, to institutional investors. The debentures are repayable in one payment of principal, in March 2007, are linked to the Consumer Price Index, and bear annual interest of 4%, payable semi-annually. During the year the debentures (Series E) were repaid. (c) In May 2005, the Company issued non-marketable, unsecured, registered debentures (Series F), having a total par value of NIS 157 million, to institutional investors. The debentures are repayable in one payment of principal, in May 2008, are linked to the Consumer Price Index, and bear annual interest of 3.55%, payable quarterly. (d) In July 2005, the Company issued non-marketable, unsecured, registered debentures (Series G), in the principal amount of NIS 166 million to institutional investors. The debentures are scheduled for repayment in one payment of principal in July 2008, are linked to the Consumer Price Index and bear annual interest at the rate of 3.65%, payable quarterly. (e) In August 2005, the Company issued non-marketable, unsecured, registered debentures (Series H), in the principal amount of NIS 210 million to institutional investors. The debentures are scheduled for repayment in one payment of principal in August 2007, are linked to the Consumer Price Index and bear annual interest at the rate of 3.35%, payable quarterly. During the year the debentures (Series H) were repaid. 155 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (1) Convertible Debentures of the Company (Cont.) (f) In November 2005, the Company issued non-marketable, unsecured, registered debentures (Series I), in the principal amount of NIS 428 million to institutional investors. The debentures are scheduled for repayment in one payment of principal in November 2009, are linked to the Consumer Price Index and bear annual interest at the rate of 4.2%, payable quarterly. In January 2006, the Company raised an additional NIS 72 million by means of an increase of the debentures (Series I) series. (g) In December 2005, the Company issued non-marketable, unsecured, registered debentures (Series J), in the principal amount of NIS 140 million to institutional investors. The debentures are scheduled for repayment in one payment of principal in December 2012, are linked to the Consumer Price Index and bear annual interest at the rate of 5.4%, payable quarterly. In the months January and February 2006, the Company raised an additional NIS 360 million by means of an increase of the debentures (Series J) series. (h) In March 2006, the Company issued non-marketable, unsecured, registered debentures (Series K), in the total principal amount of NIS 215.5 million, to institutional investors. The debentures are repayable in one lump-sum payment of principal in March 2011, are linked to the Consumer Price Index and bear annual interest at the rate of 5.1%, payable quarterly. In June 2006, the Company raised an additional NIS 200 million in the framework of an increase in the debentures (Series K), and in July 2006 an additional NIS 84.5 million was raised. (i) In September 2006, the Company issued non-marketable, unsecured, registered debentures (Series L), in the total principal amount of NIS 394.5 million, to institutional investors. The debentures are repayable in five equal annual payments commencing in September 2010, are linked to the Consumer Price Index and bear annual interest at the rate of 5.2%, payable quarterly. Regarding registration of the debentures (Series L) for trade in June 2007 – see Section P below. (j) In September 2006, the Company issued non-marketable, unsecured, registered debentures (Series M), in the total principal amount of NIS 155.5 million, to institutional investors. The debentures are repayable in four equal annual payments commencing from September 2015, are linked to the Consumer Price Index and bear annual interest at the rate of 5.35%, payable quarterly. Regarding registration of the debentures (Series M) for trade in June 2007 – see Section P below. 156 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (1) Convertible Debentures of the Company (Cont.) (k) In December 2006, the Company issued non-marketable, unsecured, registered debentures (Series N), in the total principal amount of NIS 560 million, to institutional investors. The debentures are repayable in five equal annual payments commencing from December 2014, are linked to the Consumer Price Index and bear annual interest at the rate of 5.4%, payable quarterly. Pursuant to the terms of the debentures, if the debentures (Series N) are registered for trading on the Tel-Aviv Stock Exchange, the annual interest rate borne by the debentures (Series N) will be 4.9% commencing from the date of their registration and thereafter. In January 2007, the Company raised an additional NIS 192 million as part of an increase of the debentures (Series N). Regarding registration of the debentures (Series N) for trade in June 2007 – see Section P below. (l) In December 2006, the Company issued non-marketable, unsecured, registered debentures (Series O), in the total principal amount of NIS 217 million, to institutional investors. The debentures are repayable in three equal annual payments commencing from December 2010, are linked to the Consumer Price Index and bear annual interest at the rate of 5.05%, payable quarterly. Pursuant to the terms of the debentures, if the debentures (Series O) are registered for trading on the Tel-Aviv Stock Exchange, the annual interest rate borne by the debentures (Series O) will be 4.8% commencing from the date of their registration and thereafter. In January 2007, the Company raised an additional NIS 34 million as part of an increase of the debentures (Series O). Regarding registration of the debentures (Series O) for trade in June 2007 – see Section P below. (m) In March 2007, the Company issued non-marketable, unsecured, registered debentures (Series P), in total par value of about NIS 730 million, to institutional investors. The debentures are repayable in three annual payments in March in each of the years 2015 through 2017, are linked to the Consumer Price Index, and bear annual interest of 5.2%, payable semi-annually. Pursuant to the terms of the debentures (Series P), if during the period of the debentures (Series P) they are registered for trading on the stock exchange, the annual interest rate borne by the debentures in respect of the period beginning from the date the debentures commence trading and up to the end of the period of the debentures, will decrease by 0.5% and will be 4.7%. 157 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (1) Convertible Debentures of the Company (Cont.) (m) (Cont.) Regarding registration of the debentures (Series P) for trade in June 2007 – see Section P below. (n) In March 2007, the Company issued non-marketable, unsecured, registered debentures (Series Q), in total par value of about NIS 178 million, to institutional investors. The debentures are repayable in two annual payments in March in each of the years 2010 through 2011, are linked to the Consumer Price Index, and bear annual interest of 4.65%, payable semi-annually. Pursuant to the terms of the debentures (Series Q), if during the period of the debentures (Series Q) they are registered for trading on the stock exchange, the annual interest rate borne by the debentures in respect of the period beginning from the date the debentures commence trading and up to the end of the period of the debentures, will decrease by 0.4% and will be 4.25%. Regarding registration of the debentures (Series Q) for trade in June 2007 – see Section P below. (o) In March 2007, the Company issued non-marketable, unsecured, registered debentures (Series R), in total par value of about NIS 100 million, to institutional investors. The debentures are repayable in one payment in March 2012, are unlinked, and bear annual interest of 6.55%, payable semi-annually. Pursuant to the terms of the debentures (Series R), if during the period of the debentures (Series R) they are registered for trading on the stock exchange, the annual interest rate borne by the debentures in respect of the period beginning from the date the debentures commence trading and up to the end of the period of the debentures, will decrease by 0.4% and will be 6.15%. Regarding registration of the debentures (Series R) for trade in June 2007 – see Section P below. (p) In May 2007, the Company published a shelf prospectus, in the framework of which the Company intends to offer shares and/or debentures and/or options for shares and/or convertible debentures. The structure of the issuance and its date, terms and financial scope have not yet been determined. In addition, as part of the said prospectus the Company registered for trading on the stock exchange debentures it issued in private offerings from September 2006 and thereafter in the aggregate amount of NIS 2.6 billion. 158 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (1) Convertible Debentures of the Company (Cont.) (q) In September 2007 the Company issued marketable, unsecured, registered debentures (Series U), in the aggregate principal amount of about NIS 966 million, which were offered in one million units by means of a tender on the unit price. The gross proceeds received by the Company in the public offer amounted to about NIS 956 million. The debentures are repayable in 5 equal semi-annual payments to be paid in September and March of each of the years 2012 through 2014 (commencing from September 2012 and up to the final payment in September 2014). The debentures are linked to the Consumer Price Index and bear interest at the annual rate of 4.8% payable semi-annually. (r) In October 2007 the Company issued marketable, unsecured, registered debentures (Series X), in the aggregate principal amount of about NIS 705 million, which were offered in 705,000 units by means of a tender on the interest. The gross proceeds received by the Company in the public offer amounted to about NIS 705 million. The debentures are repayable in three equal semi-annual payments to be paid in April and October of each of the years 2015 through 2017. The debentures are linked to the Consumer Price Index and bear interest at the annual rate of 5.1% payable semi-annually. (s) In October 2007 the Company issued marketable, unsecured, registered debentures (series V), in the aggregate principal amount of about NIS 320 million, which were offered in 320,000 units by means of a tender on the interest. The gross proceeds received by the Company in the public offer amounted to about NIS 320 million. The debentures are repayable in two equal semi-annual payments to be paid in April and October of each of the years 2010. The debentures are unlinked and bear interest at the annual rate of 5.9% payable semi-annually. (2) Convertible Debentures of Subsidiaries (a) In January 2004, Africa Israel International Investments (1997) Ltd., a whollyowned subsidiary of the Company, issued a series of registered, non-marketable debentures with an aggregate principal par value of NIS 44.3 million (out of a series of NIS 45 million), to institutional investors, which are scheduled for repayment in the years 2006 through 2009 in 4 equal annual installments, bearing interest at the annual rate of 5%, repayable semi-annually, and linked (principal and interest) to the representative exchange rate of the U.S. dollar. The debentures are secured by a lien on the rights of a Company subsidiary to receive earnings deriving from a residential project in the United States (after payment of the mortgage to the financing bank and the project’s expenses). 159 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (2) Convertible Debentures of Subsidiaries (Cont.) (b) In February 2004, Africa Israel Properties Ltd., issued a series of registered, non-marketable debentures (Series A) with an aggregate principal par value of NIS 261 million (out of a series of NIS 400 million), to institutional investors, which are scheduled for repayment in the years 2006 through 2013 in 8 equal annual installments, bearing interest at the annual rate of 5.6%, and linked (principal and interest) to the Consumer Price Index of December 2003. (c) In May 2004, Africa Hotels made a private issuance to institutional investors of non-marketable debentures. The total scope of the issuance amounted to NIS 87 million. The investors were given an option, for no consideration, pursuant to which they will be able to acquire an additional amount of debentures in the ratio of twothirds of the number of debentures they already purchased, at the end of three months from the issuance date in exchange for a payment of NIS 1 linked to the CPI for each debenture of NIS 1 par value. In May 2004, institutional investors exercised their right to acquire additional debentures, in such a manner that Africa Hotels issued additional debentures in the amount of NIS 55.33 million. The debentures are for a ten-year period, with equal quarterly principal repayments over the life of the debentures, plus interest at the rate of 5.8% on the unpaid balance. The principal and the interest are linked to the CPI “known” on the issuance date. The debentures are secured by a fixed, first priority lien on the real estate on which the Crowne Plaza, Tel-Aviv is situated and a guarantee of the Company. Africa Hotels intends to use the proceeds of the issuance for purposes of business expansion and development and, therefore, it entered into an agreement with the Company pursuant to which the monies deriving from issuance of the debentures will be deposited with the Company in a CPI-linked deposit bearing interest at the rate of 5.95%. Africa Hotels will be able, subject to agreement the parent company, to request the proceeds of the issuance, in whole or in part, by means of provision of a written notice, delivered at least 7 business days prior to the requested repayment. (d) In January 2005, for purposes of financing Project 88 Leonard in New York, which includes 350 residential units for rent, the Company issued through a subsidiary (indirect) operating in the United States, two series of non-marketable debentures, in a total principal amount of $120 million. The debentures are repayable in November 2037 and they bear variable interest payable on a weekly basis. For purposes of securing repayment of the debentures, the subsidiary placed a lien on its rights in the project. 160 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (2) Convertible Debentures of Subsidiaries (Cont.) (e) In September 2005, Africa Hotels made a private issuance to institutional investors of registered debentures (Series D) of NIS 1 par value each, linked to the Consumer Price Index, in the aggregate amount of NIS 180 million. The debentures are repayable in one lump-sum payment at the end of three years from the issuance date and they bear annual interest at the rate of 3.7%, linked to the Consumer Price Index. The interest is to be paid in equal quarterly payments over the life of the debentures. The Company guaranteed fulfillment of Africa Hotels’ obligations pursuant to the trust indenture between Africa Hotels and the trustee for payment of the principal, linkage differences and interest, if they are not fulfilled by Africa Hotels. Provision of the guarantee is made without provision of any consideration whatsoever to the Company. (f) In June 2006, Africa Residences made an initial public offering pursuant to a prospectus of 260 million registered debentures (Series A) of NIS 1 par value each, repayable in 8 equal annual installments in December of each of the years 2009 to 2016. The debentures are linked to the Consumer Price Index and bear annual interest at the rate of 5.9%, as fixed in the tender, that is payable semiannually. The proceeds of the package issued allocated to the debentures amounted to NIS 281 million and after allocation of the issuance expenses the net proceeds amounted to NIS 269 million. The effective interest on the debentures as at December 31, 2007 and as at the issuance date is 5.31% per year. (g) In May 2007, Africa Properties issued a series of debentures (Series C), and another series of debentures (Series D), in the total amount of NIS 600 million. Maalot, The Israeli Securities Rating Company Ltd. (hereinafter – “Maalot”) notified Africa Properties of the granting of a rating of “AA/Stable” to the private issuance of the two series of debentures issued. The debentures (Series C), in the amount of NIS 500 million par value, bear annual interest at the rate of 4.4% and are repayable in 6 equal annual payments in each of the years 2010 up to and including 2015. The interest is payable semi-annually. The debentures (Series C) are linked (principal and interest) to the Consumer Price Index. The debentures (Series D), in the amount of NIS 100 million par value, bear annual interest at the rate of 5.9% and are repayable in 4 equal annual payments in each of the years 2010 up to and including 2013. The interest is payable annually. The debentures (Series D) are not linked (principal and/or interest). 161 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) D. Debentures (Cont.) (2) Convertible Debentures of Subsidiaries (Cont.) (g) (Cont.) Pursuant to the terms of the debentures (Series C) and the debentures (Series D), if during the period of the debentures (Series C) and the debentures (Series D) Africa Properties publishes (based on its sole discretion) a prospectus offering its securities on the Tel-Aviv Stock Exchange Ltd. (hereinafter – “the Stock Exchange”) and/or a registration prospectus for listing its securities on the Stock Exchange, Africa Properties will be required to register the debentures (Series C) and the debentures (Series D) for trading on the Stock Exchange. Pursuant to the terms of the debentures, if the debentures (Series C) and the debentures (Series D) are registered for trading on the Stock Exchange, the annual interest rates to be borne by the debentures (Series C) and the debentures (Series D) in respect of the period commending from their registration date, will be the rates determined as stated above, less 0.25%. It is hereby clarified that Africa Properties has not undertaken to register the debentures (Series C) and/or the debentures (Series D) for trading on the Stock Exchange, except as stated above. (h) Pursuant to a shelf prospectus it published in August 2007, in September 2007 Africa Industries issued NIS 350,000 debentures (Series A), repayable (principal) in four equal annual payments, payable on September 30 of each of the years 2011–2014, bearing annual interest at the rate of 5.8% as determined in the tender. The interest is payable semi-annually on March 31 and September 30 of each of the years 2008–2014 linked (principal and interest) to the Consumer Price Index. The debentures are secured by a floating lien on all the property of Africa Industries. E. Liabilities to Sellers of Real Estate The contractual obligations to sellers of real estate are in respect of payment of certain portions of the receipts from sales of units and floor space in projects to be built on the land. The amounts stated above constitute the balance of the original amounts allocated to acquisition of the parcels of land as of their acquisition dates. F. Collaterals in respect of Credit Received (1) Land, real estate rights and other rights deriving therefrom in the Company and on a consolidated basis that were acquired and built with the aid of foreign financing are pledged in favor of the financing institutions (generally banks). 162 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) F. Collaterals in respect of Credit Received (Cont.) (2) By Africa Hotels and its subsidiaries – (a) Mortgages on real estate rights, including leasehold rights and specific charges on real estate, machinery, equipment and furniture, and floating charges unlimited in amount on all of their assets, were registered in order to secure their liabilities to banks and others. The outstanding balance of the secured liabilities, as at the balance sheet date, was NIS 773 million. (b) There is a commitment to register a lien and a mortgage on the rights of Africa Hotels and its subsidiaries in order to secure loans and credit from banks. (3) By Africa Industries and its subsidiaries – (a) Fixed and floating liens on assets of Africa Industries and on assets of its subsidiaries, including their unpaid share capital with no limitation as to amount. (b) A first-priority lien on real estate in Kiryat Malachi, Ashkelon and Haifa with no limitation as to amount. (c) Notes and checks receivable deposited with banks for collection. (d) Goodwill and insurance fees of the Group companies. (4) By Gottex Models Ltd. – a subsidiary and its subsidiaries – (a) There is a floating charge on all the assets of a subsidiary and a lien on credit card vouchers for purposes of securing a liability to a bank. (b) There is a fixed charge, unlimited in amount, in favor of banks and a financial institution, on equipment and machinery, rights in machinery, the share capital, the goodwill and sums due from certain department stores. There is also a floating charge on the fixed assets, monies, notes, deposits, the property and insurance rights. (c) A mortgage was registered in favor of banks on the Company’s rights in certain real estate assets, in order to secure loans received from them. (5) With respect to credit received from a bank, the Company has provided a floating negative pledge on its assets, in whole or in part, to the bank. 163 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 16 – Long-Term Liabilities (Cont.) F. Collaterals in respect of Credit Received (Cont.) (6) By other subsidiaries – As security for loans and credit received from banks, floating liens have been recorded on their present and future assets and rights. In addition, fixed liens have been recorded on goodwill and unpaid share capital and mortgages on certain portions of real estate, including, proceeds that will be due to the companies in respect of those projects, including rights of a related company therein. Regarding collaterals in respect of credit received – see also Note 2 and Note 21. G. Collaterals in respect of Grants Received Certain subsidiaries have received investment grants that are subject to the fulfillment of certain conditions. In the event that they fail to fulfill such conditions, they will be required to refund the grants received plus interest and linkage increments accrued from the date of receipt. To secure compliance with the terms attached to receiving investment grants, subsidiaries have registered floating charges on their assets in favor of the State of Israel. The total grants received up to December 31, 2007, in respect of which such charges have been registered, amount to NIS 177,073 thousand. In the estimation of Company Management, as at the balance sheet date the said subsidiaries have met all of the required conditions. Note 17 – Deferred Taxes A. Composition Consolidated December 31 2007 2006 Inflationary adjustments in respect of land Depreciation differences Other timing differences in respect of revenues and expenses B. Company December 31 2007 2006 62,547 357,739 18,484 47,996 – – 2,292 1,365 927,898 1,348,184 142,335 208,815 27,264 27,264 – 3,657 208,815 700,897 290,406 148,066 1,348,184 252,321 (5,525) (37,981) – 208,815 3,657 11,915 11,692 – 27,264 4,101 – (444) – 3,657 Movement during the year Balance at beginning of the year Changes related to capital activities Changes related to current activities Entry into the consolidation Balance at end of the year 164 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 18 – Liabilities for Employee Severance Pay, Net A. The liabilities of the Company and its subsidiaries in respect of employee severance benefits are fully covered by provisions made for this purpose, as well as by regular, current payments to certain insurance funds (including funds for the coverage of comprehensive pension arrangements) and to insurance companies in respect of insurance policies and severance pay liability. Amounts paid, as stated, which are not under the control of the above-mentioned companies, are not included in the balance sheet. B. Employees of a subsidiary in the hotels’ sector are also covered by a collective bargaining agreement of the hotels’ sector. C. The employees of a subsidiary from the grade of foreman and below are covered by a collective bargaining labor agreement for workers in the construction and public works sector, which was signed between the Contractors and Builders Association and the General Federation of Labor – Construction Workers Union, in April 1968, as updated through the years and the addendum thereto dated August 2004 (hereinafter – “the Collective Agreement”). According to this agreement, the subsidiary is required to provide a comprehensive pension for all employees from the grade of foreman and below. Some of the affected employees are covered by a comprehensive pension plan and some are covered by Managers’ Insurance policies. Based on a legal opinion it received, the subsidiary’s risk is low, if not very low, in respect of a claim by the employees insured by Managers’ Insurance and who approved or ratified their choice for this in writing, to complement rights as if they were insured in a pension fund. The subsidiary’s liabilities for employee severance pay are fully covered by the amounts provided for this purpose and by regular current payments to pension funds and/or insurance companies and/or severance pay funds in banks and/or severance pay funds. In addition, the general labor agreement provides an obligation to transfer payments to an advanced continuing education fund for foremen functioning as active foreman with at least 10 years of service in the construction industry, holding a license as a foreman from the Ministry of Labor and engineers having at least 3 years of service and serving in the position of a foreman. For some of these employees provisions were not made for the full amounts based on the collective agreement covering advanced continuing education. The subsidiary made a monetary provision on its books that, in its estimation, is adequate. D. Employees in the industrial sector are covered by the collective bargaining agreements with the Workers’ Committees Union. These agreements impose on the subsidiaries operating in the industrial sector certain limitations and monetary obligations that in the opinion of Company Management are not significant. 165 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 18 – Liabilities for Employee Severance Pay, Net (Cont.) E. The provisions for retirement pay and pensions are stated in the balance sheet net of amounts funded with severance pay funds and insurance companies, and the surrender values of policies for severance pay insurance, as follows: Consolidated December 31 2007 2006 Liabilities Less – amounts funded including accumulated income Company December 31 2007 2006 53,401 41,772 5,120 4,727 29,311 24,090 23,758 18,014 955 4,165 1,253 3,474 Note 19 – Credit from Banks and Others A. Composition Interest Rate % From Banks – Revolving credit Short-Term Loans – Linked to the dollar In euro In Swiss francs In Canadian dollars In Japanese yen Unlinked Other foreign currency Debentures sold short Total from banks From Other Lenders* – Linked to the dollar Linked to the CPI Linked to the Ruble Linked to the Ruble Unlinked Consolidated December 31 2007 2006 Bank rate 91,878 34,030 5.1–6.25 6.2–12 1,034,878 367,132 – 86,989 9,853 1,765,280 36,117 – 3,392,127 ------------ 2,028,910 49,277 97,970 75,066 92,766 1,274,764 36,940 5,066 3,694,789 ------------ 14,301 1,061,715 33,422 34,879 408,362 1,552,679 ------------ 138,865 739,507 1,952 – – 880,324 ------------ 3,983 2,367,754 57,322 617,839 3,046,898 -----------7,991,704 26,930 95,091 59,581 583,448 765,050 -----------5,340,163 6 2.2 5.1–7 8.2–8.45 5.15–6.3 3.5–5.25 0–6 6–14.5 6.25–7.25 Current Maturities – Other lenders Short-term loans Convertible debentures Debentures * Company – credit from related party. 166 Interest Rate % Bank rate 5.1–6.7 5.15–6.3 3.5–4.5 6.25–7.25 Company December 31 2007 2006 1,206 895 – – – – – 367,015 – – 368,221 ------------ – – 8,733 – 19,415 57,321 – – 86,364 ---------- 14,301 993,140 – – 408,362 1,415,803 ------------ – 282,718 – – – 282,718 ---------- – – 56,394 371,322 427,716 -----------2,211,740 – – 57,783 523,857 581,640 ---------950,722 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 19 – Credit from Banks and Others (Cont.) B. Security – see Note 16F. C. Regarding contractual restrictions and financial benchmarks – see Note 22(A)(7). D. Commercial Deposits Africa Israel 1985 (Financing) Ltd. (a subsidiary, hereinafter – “Africa Financing”) raised deposits from institutional and private depositors. Some of the deposits bear Bank of Israel interest plus a margin of 0.375%–0.65% whereas other deposits bear Libor interest plus a margin of 0.1%–0.4%, for a period of 365 days with the possibility to accelerate the repayment by Africa Financing or by the depositors. The issuance was executed against an unconditional commitment of Africa Financing to make full repayment of the amounts. The commitment is guaranteed by a fixed, first priority lien on assets and by a guarantee of the Company. Note 20 – Contractors and Suppliers Consolidated December 31 2007 2006 Contractors and suppliers Provisions for project completion costs and warranties Company December 31 2007 2006 1,187,970 613,188 5,006 4,311 273,196 1,461,166 100,547 713,735 1,625 6,631 1,625 5,936 Note 21 – Other Payables and Credit Balances Consolidated December 31 2007 2006 Subsidiaries Government agencies Interest payable on long-term liabilities Provision for taxes on income net of advance tax payments Deferred income Deposits from customers Accrued expenses Creditors in respect of land and fixed assets Employees, agencies and others in respect of salaries and wages Dividend to minority shareholders of subsidiaries Payables with respect to forward transactions and derivate financial instruments Deposits from lessees Other credit balances 167 Company December 31 2007 2006 – 55,922 147,291 – 73,597 62,539 33,487 1,381 51,569 847,282 3,657 16,367 30,472 60,903 193,994 189,646 390,146 19,009 12,211 7,818 136,413 2,345 – 569 – 119 – – 516 – 119 – 101,443 49,289 18,655 9,349 812 595 812 595 60,612 91,169 212,177 1,534,587 131,318 10,144 80,860 586,138 9,750 – 13,375 129,717 18,032 – 4,728 900,645 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments Regarding contingent liabilities and commitments in investee companies – see also Note 2. Regarding collaterals in respect of credit received – see also Note 15. A. Contingent Liabilities 1) Construction and real estate transactions (a) There is a contingent liability as part of the customary warranty for the quality of construction in accordance with the Sales Law (Residences) (Assurance of Investments of Residence Purchasers), 1984, for apartments and other buildings completed and delivered to buyers and customers. (b) Within the framework of contracts for the purchase of land and land rights, there are commitments, some of which are secured, made by the Company and subsidiaries to the sellers of the rights to execute the building plans and deliver apartments in the buildings to be constructed under the agreements. (c) Legal and other claims have been filed against the Company and some of its subsidiaries, mainly with respect to building and real estate transactions, in connection with which there are differences of opinion between the parties regarding the terms of execution and/or interpretation of the said transactions. The total amount of the claims and demands is NIS 108 million and provisions in the amount NIS 14 million (consolidated) have been made in respect thereof. These provisions were made based on, among other things, opinions received from the legal advisors of the companies involved. In the opinion of Company management, the total amount of the provisions is sufficient and constitutes adequate coverage for the above-mentioned claims. (d) Other liabilities are as follows: Consolidated December 31 2007 2006 i) ii) Company December 31 2007 2006 Balance of guarantees given to banks and others in respect of investee companies 1,556,825 412,530 1,639,165 1,308,904 Liabilities for guarantees given by banks to purchasers of apartments under the Sales Law (Apartments) (Securing Investments of Apartment Purchasers) – 1974 555,872 269,710 45,582 116,347 168 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (e) As at December 31, 2007, the backlog of contracts for construction and contracting projects (orders’ backlog) amounted to (consolidated) NIS 215 million. (f) The Company has issued guarantees, unlimited in amount, in favor of banks, on behalf of Afriram Ltd. – the total of the guaranteed liabilities as at the balance sheet date is NIS 12 million (g) In March 2007 an arbitration decision was rendered in connection with a dispute between Africa Israel Properties Ltd. (a subsidiary, hereinafter – “Africa Properties”) and a third party with which a combination transaction is being executed. The subject matter of the arbitration was a claim by the third party for compensation in respect of delays in construction of the first stage of the project, a failure to construct the second stage of the project and additional causes of action in the aggregate amount of about NIS 45 million. Africa Properties claimed repayment of the loan it made to the third party along with other contentions, in the aggregate amount of about NIS 54 million. The arbitrator’s decision rejected the third party’s claim for delays in construction of the first stage of the project and partly accepted its claim delays in construction of the second stage of the project. On the other hand, Africa Properties’ claim in connection with repayment of the loan it made to the third party was accepted. As a result of the arbitrator’s decision, Africa Properties recorded net revenues in its books in the amount of about NIS 8 million. The third party submitted a request for cancellation of parts of the arbitrator’s decision (the value of which in Africa Properties’ estimation is about NIS 4 million). In the estimation of Africa Properties, based on the opinion of its legal advisors, the chances the request will be accepted are low and, therefore, no provision in request thereof was recorded in its books. (h) Danya Cebus employs, directly or indirectly, thousands of Israeli and foreign workers, as well as workers coming from the Judea, Samaria and Gaza Strip territories. A significant portion of Danya Cebus’ employees constitutes foreign workers, which it employs based on its needs and the scope of its activities. 169 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (h) (Cont.) Every year the Government sets a quota for foreign workers for the construction industry. Over the past several years, the Government has adopted a policy of reducing the employment of foreign workers, both through increasing the cost of their employment as well as by means of reducing the number of permits issued for their employment. As part of this policy, among other things, the Government has started collecting a permit application fee for foreign workers, imposing an annual charge, and making a levy on the employment itself. It is noted, that the Government is likely to impose additional taxes and levies that will act to further increase the employment cost of foreign workers. Further, conditions for the employment of foreign workers were determined, including filing of certain reports and deposit of monies in a fund for the benefit of foreign workers. In addition to the above-mentioned terms and limitations, the Government decided to totally prohibit the employment of foreign workers on projects executed for the Government, Government companies, statutory companies, local authorities and municipal corporations (“National Projects”). The Government’s policy of cutting back the number of permits issued for employment of foreign workers in the construction industry was manifest in a reduction of the quota from 30,000 in each of the years 2002 and 2003 to 12,000 in 2007. As a result of reducing the quotas, as noted above, Danya Cebus received an allocation of permits for employment of foreign workers, up to change in the method for employing the workers as detailed below, which was less than the number it required based on the scope of its activities and its needs. To the best of Danya Cebus’ knowledge, based on a Government Decision on September 12, 2006, up to 2009 an additional cutback of about 6,000 permits is planned and from 2010 permits will be issued only to foreign experts. The above-mentioned Government Decision, if applied, could have a significant adverse impact on Danya Cebus. During 2004, Danya Cebus filed a petition with the Supreme Court sitting as the High Court of Justice with respect to its inability to use the entire amount of the permits that was issued to it in 2003 because of the Government’s “closed skies”, by which the Government limited the entry of foreign workers into the country. During 2005, the Company filed a claim against the State, in the amount of NIS 42 million, in respect of the damages it suffered as a result of its non-use of the permits for employment of foreign worker it received in 2003. 170 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (h) (Cont.) In 2005, the method for employing foreign workers was changed. In accordance with the change, the permits to employ foreign workers in the construction industry are provided to authorized entities that hold a license to employ foreign workers in the construction industry, and not to the construction companies themselves, all in accordance with the following: * Granting of the permit to the authorized entity will be contingent upon the payment of an annual charge to the State. In addition, receipt of the permit is conditioned on payment of permit fees for each foreign employee. * As the employers of the foreign workers the authorized entities will be required to pay the salaries of the foreign workers and to provide them with all the conditions they are entitled to receive by law. * Companies in the construction industry that request to employ foreign workers will contact the approved companies in order to actually employ the foreign workers employed by the approved companies. * An actual employer of foreign workers will be required to see to and to confirm that the foreign workers it employs receive proper employment conditions and it will bear, in addition to the company, responsibility for a failure to provide such conditions to the workers, based on a procedure for employing foreign workers. Danya Cebus set up a company named “Yovelim Personnel Ltd.”, which is its wholly owned subsidiary, for purposes of receiving permits to employ foreign workers as described above. In 2006, this company received a license for employment of 350 foreign workers and in 2007 it received a license for employment of 700 foreign workers. As at the date of this report, the company has not yet employed foreign workers under the licenses it received. Danya Cebus employs the foreign workers it needs for its activities through other authorized entities. Employment of foreign workers without compliance with the law could trigger stiff criminal sanctions, including fines amounting to thousands of shekels for each day a foreign worker is employed without a permit and the taking of measures against the registration of the contractor in the Contractors’ Registry. It is noted that in the past, charges were filed against Danya Cebus and its officers in connection with employment of foreign workers that were replaced by administrative fines. Based on a legal opinion received by Danya Cebus, its exposure to risk is very low, if any at all, since all the foreign workers it employs are covered by the Human Resources Law, 1996, pursuant to which at the end of nine months of employment of a foreign worker, he becomes a regular employee of the company. 171 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (h) (Cont.) The matters described above have resulted in, among other things, a significant increase in the employment cost of these workers (whose compensation is also affected by fluctuations in the dollar exchange rate). In light of this and as stated above, the foreign workers’ matter has a material adverse effect on the activities of Danya Cebus. Russia – Russian law permits employment of foreign workers, both in the Company’s administrative offices and on the work sites, subject to obtaining an annual quota of staying approvals and work permits. Rumania – Rumanian law permits employment of foreign workers (including in administrative positions) subject to receipt of work permits. There is an annual quota for foreign workers, which is published by the Government of Rumania every year. As at the date of the report, Danya Rumania is in the process of obtaining work permits for its foreign workers in Rumania, most of which have not yet been received. It is noted that the process of receiving work permits is long and in certain cases work permits for foreign workers are not received (both for site and administrative workers). Employment of foreign workers contrary to law could result in imposition of large fines. The absence of work permits for Danya Rumania’s foreign workers (including managers) could result in the company not being able to meet its obligations in this country and, therefore, to a material adverse impact on the company. (i) Cross Israel Highway Project In June 2006, a claim was filed against Derech Eretz together with a request for certification thereof as a class action, in the amount of NIS 12 million. The claim deals with double charges of those towing and those towed with an allegation of deceit. During 2007, the parties reached a compromise that was submitted to the District Court, which decided that the process of approval of the compromise agreement should be advanced in accordance with that stated in the Class Action Claim Law. Pursuant to the compromise agreement, Derech Eretz committed to return the amount of the charge to any party demonstrating that it was charged twice and to notify parties under 4 tons towed regarding the possibility that they were charged twice, as stated. In the opinion of the Management of Derech Eretz, the total amount of the charge in connection with double charges is not material and Derech Eretz recorded a provision for this amount in its financial statements. 172 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (i) (Cont.) In December 2007, a hearing on the claim was held in the District Court of Haifa wherein it was claimed by the requesting party that Derech Eretz does not have the authority to collect a “detailed statement commission” and that it must send as a regular matter detailed statements including detail of every travel use and not a total of all the travel uses made during the billing period. The preliminary position of Derech Eretz is that the District Court does not have jurisdiction to hear the matter and that the jurisdiction lies with the Magistrate’s Court. Regarding the substance of the mater, Derech Eretz’s is, based on the opinion of its legal advisors, which is supported by the position of Cross Israel Highway Ltd. and the Taxes Authority, that Derech Eretz has the authority to collect a “detailed statement commission” and that the statements it sends to its customers are proper. A judgment has not yet been rendered. It is possible that a decision will be rendered only with respect to the jurisdiction issue or that a decision will be rendered on the substantive claim. In addition, as at the approval date of the financial statements, legal claims have been filed against the contractor, in the aggregate amount of NIS 20 million. The contractor’s management based on, among other things, an opinion of its legal advisors, recorded provisions in the contractor’s books in respect of the abovementioned claims and demands, in the amount of NIS 2.4 million. In the estimation of contractor’s management, the overall amount of the provisions is sufficient and constitutes appropriate coverage for the said legal claims. (j) Danya Cebus is a party to an arbitration proceeding dealing with a claim filed by Danya Cebus against a customer (hereinafter – “the Customer”), regarding a project executed by Danya Cebus for the Customer. Danya Cebus’ claim is a monetary demand for payment of about NIS 24 million along with a claim for declaratory relief. The Customer filed a counterclaim for payment of about NIS 16.5 million. According to the assessment of the attorneys handling the claim on behalf of Danya Cebus, the chances that Danya Cebus will be required to pay any amount at all to the Customer are not high. In addition, the Customer foreclosed on guarantees of Danya Cebus in the amount of NIS 4.5 million, which are included in Danya Cebus’ claim. 173 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (k) As a result of an accident that occurred in August 2006, wherein a child and his mother were injured due to the falling of covering stones in a building that was constructed by Danya Cebus, Danya Cebus decided to execute internally initiated examinations and reinforcement work with respect to loose covering stones (to the extent such stones are found) in buildings constructed by the company as part of its warranty vis-à-vis the customers ordering the work in connection with the quality of the construction in the framework of the provisions of the Sales Law (Apartments), 1973. Danya Cebus updated the periodic amounts recorded to the warranty provisions with respect to this liability. As at the report date, the company has not been sued by the injured parties, however if and to the extent it is sued, in the estimation of Danya Cebus, based on the opinion of its insurance advisors, its insurance coverage is appropriate. (l) Based on the information in the possession of Danya Cebus, an investigation is being carried on by the Value Added Tax Authorities with respect to matters relating to the timing of issuing invoices in connection with projects constructed over the past several years. As part of this investigation, a number of Danya Cebus’ officers were interrogated and documents were confiscated from Danya Cebus’ offices. In August 2007, a request was submitted for issuance of a warrant for the arrest and release on bail of three managers of Danya Cebus. As part of the hearing with respect to arrest and release on bail, the Court ordered the release of the managers where, among other things, the conditions for release require that each of the managers present the sum of NIS 75,000 in cash or a bank guarantee in the aforesaid amount linked to the CPI. In August 2007, the Audit Committee and Board of Directors of Danya Cebus approved that it shall deposit with the Court as a cash bond for the managers, bank guarantees in the aggregate amount of NIS 225,000 (that is, a bank guarantee in the amount of NIS 75,000 for each of the managers) (hereinafter – “the Bond”), subject to the signing by each of the managers a letter of commitment whereby they each undertake to comply with all the conditions of the Decision and subject to conditions stipulated in the Bond. Deposit of the bank guarantees by Danya Cebus is made since the presence of the managers is essential to the continuation of Danya Cebus’ regular activities and it permits the managers to continue performing their positions in and outside of Israel. Issuance of the bank guarantees by Danya Cebus is made in accordance with the conditions and subject to the restrictions provided in the Companies Law regarding this matter. 174 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (l) (Cont.) In connection with this matter it is noted that to the best of Danya Cebus’ knowledge, at this stage no contention has been raised according to which the managers acted to secure a personal gain, and in its estimation, based on the legal advice it received, the concealment of revenues is not involved. Danya Cebus will continue cooperating with the VAT Authorities to the extent necessary. In Danya Cebus’ estimation, as well as based on a professional opinion it received, it is not anticipated that the matter of the investigation will have a material impact on the financial results. In addition, based on the information in the possession of Danya Cebus, the VAT Authorities are carrying on an investigation against one of Danya Cebus’ subcontractors. As part of this investigation, Danya Cebus employees were questioned and documents were provided to the investigators relating to the relationship between Danya Cebus and the said subcontractor. (m) In November 2002, a monetary claim was filed against Africa Residences in the District Court of Haifa in the amount of about NIS 9.84 million (as at November 2002). The plaintiffs contend that, based a combination agreement from 1995, the plaintiffs committed to transfer to Africa Residences land they owned in exchange for a commitment of Africa Residences to construct residential units on the real estate and to transfer to the plaintiffs a certain percentage of the residential units built. The project was not ultimately executed since the City of Haifa conditioned the granting of the building permit on constructing a road to the real estate as well as on additional development work, the cost of which significantly exceeded the rate of the development impositions according to law. The plaintiffs contend that Africa Residences is the party that must bear the said expenses, whatever their rate may be, and that its refusal to do so constitutes a breach of the agreement. For its part Africa Residences argues, that based on the language of the agreement as well as on the conduct of the parties, the plaintiffs as the owners of the real estate were required to bear the road construction and other development expenses (in excess of the development impositions required by law). In October 2005, the Court rejected the claim. In December 2005, the plaintiffs appealed the District Court’s decision, as stated, to the Supreme Court, which directed the parties to a mediation process. The mediation efforts between the parties did not work out well and as a result the case was set for submission of summary positions to the Court. Africa Residences estimates based on legal advice it received, that in light of the fact that it won in the District Court, it would appear that the chances the decision will be affirmed are greater than the chances it will be reversed. 175 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (m) (Cont.) As at the signing date of the financial statements, the parties are conducting negotiations in connection with signing an amended agreement whereby the original transaction will be executed with a change in certain conditions. (n) The Company and a subsidiary have a number of transactions with holders of rights in connection with agricultural lands leased from the Israel Lands Administration, which relate to Decision 727 of the Israel Lands Council (hereinafter – “Decision 727”). In August 2002, a decision was rendered by the Supreme Court sitting as the High Court of Justice that is known as “the East Keshet Ruling” (hereinafter – “the Decision”), pursuant to which, among other things, Decision 727 was cancelled for the reasons set forth in the Decision. As a result of the Decision, in September 2003 transitional rules were approved by the Israel Lands Council in connection with the said decision. As a result of approval of the transitional rules, the Company and the rights holders agreed to cancel a number of transactions, while in connection with certain transactions the Company and the rights holders are deliberating their cancellation whereas with respect to other transactions the Company and/or the rights holders have submitted a demand to the Israel Lands Administration to realize them in accordance with Decision 727. The Israel Lands Administration rejected the requests of the Company and/or the lessees. As things now stand, there is no legal certainty regarding the possibility of executing these transactions and, regarding some of the transactions, the Company is looking into other ways of executing them without there being any certainty that, in fact, it will be possible to execute them. In the estimation of Company Management, the impact of the Supreme Court’s East Keshet decision on its financial statements and its results of operations is not expected to be material. (o) In May 1995, Africa Residences entered into an agreement with Eilot Investments (Ramat-Vered) 1994 Ltd. (hereinafter – “Eilot”) pursuant to which Africa Residences sold to Eilot parcels of real estate in Rehovot intended for the construction of industrial buildings held for rent on three different sites (hereinafter – “the Project”). Africa Residences sold the sites, as stated, to Eilot on the conditions of a “turnkey project” and committed to serve as the Project’s executing contractor. 176 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (o) (Cont.) The agreement provides that under certain conditions Eilot will be permitted to require Africa Residences to acquire from it the rights it acquired from a third party in Site B of the Project as well as to cancel acquisition of the rights in Site C. Eilot notified Africa Residences that it is entitled, so it contends, to exercise its rights as stated. In the opinion of Africa Residences, the conditions to exercise the “sale right” and the “cancellation right”, as stated, by Eilot have not been fulfilled. As at the date of the financial statements, the sale transaction with respect to Eilot’s rights in Site C was not cancelled, nor were Eilot’s rights in Site B sold to Africa Residences. As at the date of the financial statements, the debt of Eilot to Africa Residences in respect of its share in Site B and Site C amounts to NIS 36.539 million, after offsetting the rent due to Eilot relating to its share in rental of the areas in Sites A and B, by virtue of assignment of a right given to Eilot up to NIS 10 million. As at December 31, 2007, Africa Residences offset NIS 13.95 million by virtue of assignment of the right (despite its maximum amount as stated). In June 2006, the Company entered into an agreement with Africa Residences pursuant to which the Company and Africa Residences will act together in order that Africa Residences will collect the debt from Eilot. All the costs and expenses in respect of conducting the proceedings as stated will be borne by the Company. In a case where it is determined in a court decision or compromise agreement that Eilot is entitled to require Africa Residences to acquire from it its rights in Sites B and/or C, the Company will acquire the property from Eilot and will pay Eilot’s debt to Africa Residences plus interest. The Company and Eilot are carrying on negotiations in order to settle the dispute between them. (p) On August 6, 2007, the District Court of Jerusalem issued a temporary Stay of Proceedings Order against various companies in the Hefzibah Group (hereinafter – “Hefzibah”) as well as orders for appointment of receivers for some of its assets. In light of the collapse of Hefzibah and the legal proceedings undertaken against it, Danya Cebus recorded a pre-tax loss in its financial statements in the period of the report in the amount of about NIS 28.4 million in respect of projects it executed for Hefzibah. This amount was calculated on the assumption that Danya Cebus will cease performance of work on Hefzibah projects and taking into account the provisions recorded in the past. 177 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 1) Construction and real estate transactions (Cont.) (p) (Cont.) The amount of the loss does not take into account the possibility, if any, that Danya Cebus will succeed in collecting part of Hefzibah’s debt to it, or to reduce part of the balance of the payments it owes on the projects. In this connection it is noted that Danya Cebus gave notice of realization of its lien on the various projects and it is carrying on negotiations with Hefzibah’s creditor banks and/or its receivers relating to the said projects. In this framework, Danya Cebus has reached an agreement with Bank Hapoalim regarding completion of the construction of two projects. The said agreement was not approved by the Court. Nonetheless, the aforesaid bank’s request to perform urgent work in one of the projects by means of Danya Cebus was approved. In addition, Danya Cebus is carrying on advanced negotiations with additional banks in order to complete the construction of projects accompanied by such banks and in this framework it reached an in-principle agreement with Bank Mizrahi Tefahot Ltd. that has not yet been signed. It is emphasized that in light of the complexity of the legal proceedings relating to the matter and the large number of projects Danya Cebus performed for Hefzibah, as well as the need to make use of estimates (both with respect to the amounts due to Danya Cebus from Hefzibah in connection with the various projects discontinued, as well as regarding the expenses on those projects), the aforementioned data is based on estimates reflecting the information in the possession of Danya Cebus as at the approval date of this report and its assessments in respect thereof. Accordingly, there are likely to be changes in the said estimates. In this regard, among other things, continuation of the stay of proceedings against Hefzibah could result in additional expenses, such as, guarding expenses, overhead, various consultants, etc. (q) A legal claim was filed against a subsidiary, which the plaintiff seeks to have certified as a class action, pursuant to which the plaintiff contends the subsidiary was negligent in enforcing the law restricting smoking in one of the Group’s shopping malls. The amount of the class action is estimated at NIS 15 million. The subsidiary rejects the plaintiff’s contention. As at the signing date of the financial statements, the company’s response to the above-mentioned request had not yet been filed. (r) A claim was filed against a company from the Czech Republic that executed the “Koroni” project in Prague, in which the Company holds a 50% interest, by the project’s executing contractor, in the amount of €31.7 million. The subsidiary intends to file a counterclaim. In the Company’s estimation, the chances that the aforementioned claim will be accepted in full are less than 50%. 178 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 2) Textiles (a) Gottex has provided an indemnification to shareholders of Gottex Industries Inc. should the shareholders be sued with respect to the above-mentioned company. (b) As part of the acquisition of Gottex, the Company guaranteed all the liabilities of Gottex to Israeli banks to which, as at December 31, 2007, Gottex owes about NIS 144 million. (c) During 2006, an investigation was carried on by the Taxes Authority in connection with payment of import duties by Gottex upon the import of bathing suits manufactured in Rumania and Turkey. In December 2007, a demand was issued for payment of Customs/VAT, in the amount of about NIS 6 million, plus interest, linkage differences and penalties. The company filed an appeal with the Taxes Authority with respect to the aforesaid demand. In respect of the above-mentioned claim, Gottex recorded a provision in the amount that in the opinion of its management, based on the opinion of its legal advisors, it will be required to pay. 3) Hotel Operations (a) Legal claims have been filed against hotel subsidiaries by employees, guests and suppliers, in the total amount of NIS 2,244 thousand. Based on the opinion of their legal advisors, the managements of these companies have recorded provisions in the total amount of about NIS 180 thousand that, in their estimation, are adequate to cover these claims. (b) In 1995, a hotel subsidiary was requested to pay NIS 1 million (in historical terms) as its participation in building a wharf near the hotel in Eilat, as well as various other liabilities. This subsidiary undertook to participate in such expense under certain conditions, in the amount of about $250 thousand, and rejected the additional financial demands. As at the balance sheet date, construction of the wharf has not yet begun, and no provision has been included in the financial statements in respect of this demand. 179 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 3) Hotel Operations (Cont.) (c) In the course of building a hotel on the shores of the Dead Sea, which is included in the financial statements as part of a proportionately consolidated partnership, certain construction work was carried out at a depth lower than that stipulated in the City Building Plan, in accordance with which the building permit for the hotel was issued. In respect of this construction, the hotel company and the other partner made a commitment to a third party that they will not demand or claim from the latter compensation or indemnification or any other payments in respect of damage or losses that may be caused as a result of actions taken by the third party that will bring about a rise in the water level in the area. They have also undertaken toward other parties (the local authorities) that they will assume full responsibility for construction of the hotel and for any direct or indirect damage that may be caused to them, as well as to the hotel and its foundations, and will indemnify them in respect of any payment or claim related to the above. In 2003, the State of Israel executed Stage B of the protection work against a rise of the water level of the Dead Sea and the Partnership participated, along with the rest of hotels in the area, based on its relative proportion. At the present time, a long-term plan is being formulated by the State of Israel, in accordance with the directives of the High Court of Justice and under its supervision, for handling the protection work. This plan will include mandatory timetables for its execution and will indicate the financial sources for the work to be performed. The insurance company does not include in the insurance policy damages caused by the “swallowing” occurrence in the Dead Sea area. In the estimation of the partners in the hotel, based on the engineering solutions made as part of construction of the hotel, there is no material exposure in respect of the said commitments. (d) The Crowne Plaza Hotel in Tel-Aviv was acquired in a state of having been constructed with building variances. During 2005 a building permit was received that approves the hotel as it is built. In June 2005, as part of the process of obtaining the building permit, the City of Tel-Aviv issued a Betterment assessment in respect of enclosing (roofing) the swimming pool and the alleged utilization of rights in the hotel’s basement level. The demand is in the amount of about NIS 2.5 million. Africa Hotels deposited (under protest) bank guarantees in favor of the City in the amount of about NIS 2.6 million. In the estimation of the management of Africa Hotels and its legal advisors, and based on an opinion of a real estate appraiser, the company has good contentions against the amount of the above-mentioned Betterment assessment and, therefore, no provision was included in the financial statements. If and when the company is required to pay the Betterment assessment, as stated, it will record such amount to the cost of the hotel. 180 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 3) Hotel Operations (Cont.) (e) Africa Hotels and its subsidiaries have provided guarantees to cover various hotel liabilities. 4) Communications (a) In October 2006, NTV Global Networks (Israel) Ltd. and NTV Hungary Commercial Limited Liability Company, the operators of the NTV Mir activities, filed a petition with the Supreme Court sitting as the High Court of Justice wherein they requested, among other things, that the Minister of Communications use his powers to permit commercial advertisements in Israel on the cable channels, in general, and/or on the NTV Mir channel, in particular, and to determine that the decision of the High Court of Justice, as stated above, from October 28, 2004, does not apply to the NTV Mir channel. Concurrently, the parties requested an interim order to permit them to continue broadcasting Israeli advertisements as part of their broadcasts until a decision is made by the Minister of Communications. Upon filing of the petition and the request for an interim order, a temporary order was issued delaying implementation of the decision of the Local Council that applies the said court decision to the NTV Mir channel. In November 2006, a decision was rendered rejecting the decision for an interim order. The aforesaid petition has not yet been set for hearing. The affiliated company believes that the chances the petition will be rejected are good. (b) Vash Telcanal has a capital deficiency of approximately NIS 77 million, which includes an accumulated loss of roughly NIS 148 million. Financing of Vash Telcanal’s investments is by means of share capital, premium, receipts on account of share capital and capital notes, in the amount of about 89 million and a bank loan in the amount of about 75 million (guaranteed by the shareholders). During the year, Vash Telcanal had earnings of about NIS 1 million (2006 – a loss of NIS 16 million), the total sales’ turnover was about NIS 78 million (2006 – about NIS 59 million), and there were positive cash flows from current operations of about NIS 3 million (2006 – negative cash flows NIS 12 million). The shareholders of Vash Telcanal, including the Company, have committed to financially support its activities. (c) During 2006, a financing agreement was signed between Vash Telcanal and a bank for purposes of receiving a limited credit framework for the company. In accordance with this agreement, the bank provided Vash Telcanal a credit framework in the aggregate scope of NIS 82 million, subject to the Company and Mr. Lev Leviev (the controlling interest in the Company and an indirect shareholder in Vash Telcanal) guaranteeing, jointly and severally, for all of Vash Telcanal’s liabilities to the bank under a perpetual guarantee limited as to amount, in the amount of NIS 90 million (plus linkage differences and interest). 181 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 4) Communications (Cont.) (d) As part of the conditions of the broadcasting license received by an affiliated company, it is required to make a minimum number of local productions, which are defined both as a function of broadcasting hours as well as in financial terms. As at the balance sheet date, the company is in compliance with the minimum requirements as stated. (e) Pursuant to the terms of the broadcasting license, Vash Telcanal provided a bank guarantee in the amount of NIS 3 million linked to the CPI of October 2001. The guarantee is valid for up to two years from the end of the license period and it will serve, among other things, to ensure enforcement of all of the license’s conditions and fulfillment of the directives of the Minister, the Supervisor and the Council by the license holder, as well as for compensation and indemnification of the State for any damage, payment, physical loss or financial loss caused due to nonfulfillment of the license’s conditions. (f) Vash Telcanal recorded a first-priority floating lien, unlimited as to amount, in favor of a bank, on all its property and assets. In addition, Vash Telcanal recorded a negative pledge in favor of a bank, pursuant to which it will not make any payments to the shareholders or companies related thereto, including, repayment of shareholders’ loans and dividends, and the Company will not acquire its shares, prior to repayment of the credit the bank extended to Vash Telcanal, without the bank’s consent, subject to certain qualifications. 5) Africa Israel Industries (a) During the regular course of business legal claims have been filed against Africa Industries and its subsidiaries in the total amount of about NIS 11 million. As at December 31, 2007, Africa Industries recorded a provision in respect of the claims that in the estimation of management, based on opinions of its legal advisors, is sufficient to cover the liability that may arise, if any. (b) There are guarantees outstanding in the amount of about NIS 29 million issued by banks to customers and supplies of subsidiaries in the industrial sector. 182 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 5) Alon Israel Oil Company Ltd., an affiliated company (hereinafter – “Alon”) (a) In December 2003, a claim was filed against the gas companies (including a subsidiary of Alon) alleging that the defendants were parties to a cartel, which they entered into beginning in 1994 (and even prior thereto) and up to 2003, in the course of which the Restrictive Practices Authority gave notice of a recommendation to file charges against the gas companies and their managers in connection with the existence of a cartel, as stated. The plaintiff contends, that by means of the alleged cartel, the gas companies collected unfair and unreasonable prices. Together with the claim, a request for certification thereof as a class action pursuant to the Restrictive Practices Law, the Consumer Protection Law and Rule 29 of the Rules of Civil Procedure, was filed. The amount of the class action was set by the requesting party at an amount of at least NIS 1 billion, along with punitive damages. Alon’s subsidiary has submitted its response to the request for certification. The hearing on the request for certification has not yet commenced. (b) In May 2004, a class action claim, in the amount of approximately NIS 40 million, was filed against Alon and its subsidiaries in the District Court of TelAviv alleging that the discount of 15 agurot per liter of gasoline given by the chain’s filling stations which operate on a self-service basis is not fulfilled, and as a practical matter the claimants allege that a discount of only 3 agurot per liter is given. In October 2004, the companies submitted their response to the request and contended that the request to certify the claim as a class action should be summarily dismissed. Since the hearings on this claim are in the very preliminary stages, at this juncture Alon’s legal advisors are unable to estimate the claim’s chances of success. Accordingly, Alon did not include a provision in respect of this claim in its financial statements. (c) In June 2003, a request was filed against The Blue Square and certain investee companies in the District Court of Tel-Aviv, to certify as a class action a claim, in the amount of NIS 25 million. The petitioner claims damages that allegedly accumulated in respect of the unlawful rounding of the prices of products sold by weight to customers in the stores of the above-mentioned companies. In April 2004, the Tel-Aviv District Court rejected the request to certify the claim as a class action. As a result of the said rejection, the petitioner filed an appeal with the Supreme Court. In February 2007, the parties reached an arrangement whereby The Blue Square will pay the petitioner the amount of NIS 50 thousand to cover its expenses and the expenses of its legal advisors and will also compensate the amount the petitioner in the amount of NIS 30 thousand plus Value Added Tax, which was paid, in accordance with the Court’s decision. 183 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 5) Alon Israel Oil Company Ltd., an affiliated company (hereinafter – “Alon”) (Cont.) (d) Regarding the matter of environmental protection, Alon USA could sustain losses due to Federal, state and local laws and regulations relating to environmental protection. The regulations govern the matter of release of materials into the environment and could create future liabilities for Alon USA with respect to which it will be forced to examine the impacts of release or dumping of certain fuel, chemical and mineral materials in various sites, to repair or restore these sites, to indemnify other parties due to damages caused to property and natural resources and as a result of the repair and restoration costs. These contingent liabilities are in respect of activity sites owned by Alon USA relating to its past and present activities. Pursuant to these regulations, in the current period Alon USA is participating in examinations, evaluations and clean-ups relating to environmental protection, gas stations, pipelines and terminals. In the future, Alon USA may be involved in additional examinations, evaluations and clean-ups relating to environmental protection. The scope of the future costs will depend on unknown factors, such as, the type of contamination in many of the sites, as well as the timing, scope and method of the actions necessary to repair the damage to the environment, along with determination of Alon USA’s relative liability in proportion to other responsible parties. (e) A statement of claim was filed against Alon and its subsidiaries in the amount of about NIS 21.7 million along with a request for certification thereof as a class action. Based on that alleged in the statement of claim, the defendants breached the provisions of the “Order for Supervision of Prices of Goods and Services (Maximum Prices in Gas Stations), which instructs that an additional charge is not to be collected for full service from vehicles having a “handicapped person” sticker in service stations having self-service fuel pumps. Negotiations are being conducted between the plaintiffs and the fuel companies towards a compromise agreement the main thrust of which is creation of a mechanism that will assist in application of the Supervision Order – this being without an admission on the part of the fuel companies with respect to any of the plaintiffs’ claims. (f) In the course of preparation of monthly reports to the tax authorities executed by Dor Alon Energy Israel Ltd. (hereinafter – “Dor Alon”) during July 2007, a suspicion arose among Dor Alon’s financial personnel of non-reconciling items in the books of one of Dor Alon’s private subsidiaries (hereinafter – “the Subsidiary”), which will require the amendment of reports filed with the tax authorities. 184 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 5) Alon Israel Oil Company Ltd., an affiliated company (hereinafter – “Alon”) (Cont.) (f) (Cont.) Since the discovery, Dor Alon is making efforts through its auditing CPAs as well as through its Internal Auditor, who was appointed as an outside examiner (hereinafter in this subsection – “the Outside Examiner”) to examine the matter of the Subsidiary, and to make a comprehensive inquiry as to the facts and the impact thereof on Dor Alon. Reports were filed with the relevant authorities and Dor Alon is acting in cooperation with the authorities in order to complete the examinations. In the estimation of Dor Alon’s management, the financial statements in respect of the periods commencing from 2003 were amended, and the revision of the statements, as noted, resulted in a reduction of Dor Alon’s shareholders’ equity by about NIS 25 million in respect of the said period. Alon transferred the above-mentioned amount to Dor Alon immediately in order to prevent a decline in Dor Alon’s shareholders’ equity. (g) In June 2007, a class action claim was filed against five fuel companies, including a subsidiary of Alon, alleging that the discount of 15 agurot per liter of fuel pumped by means of self-service is not complied with and, as a practical matter, a discount of only 3 agurot per liter is given. Since a claim in its very early stages is involved, Alon’s legal advisors are unable to assess the claim’s chances of success. (h) In November 2007, a search was made by clerks of the Taxes Authority (VAT) in the offices of Dor Alon (a subsidiary of Alon). A number of employees of Dor Alon were detained in the VAT offices for questioning and provision of testimony in connection with the supplying of fuel to the Palestinian Authority. The Deputy CEO of sales of Dor Alon, who is responsible for the sale of fuel to the Palestinian Authority, was arrested by the Court for a week on the suspicion that he allegedly assisted others in an unlawful manner and sold fuel for his own personal benefit in the area of the State of Israel that was intended for the Palestinian Authority. Dor Alon is not aware of the said unlawful act that was allegedly committed by one of its employees or others. 6) Liability of Directors and Senior Officers (a) The Company and some of its subsidiaries, after approval by the General Meetings of their shareholders, amended their Articles of Association, in such a manner as to enable them to provide indemnification and liability insurance for directors and other officers. The said companies insured the liability of their directors and officers, as noted, in amounts of up to US$50 million per claim and in total, for the period beginning on February 1, 2007 and ending on December 31, 2007. As at the balance sheet date, the insurance policies were renewed on the same terms up to March 31, 2009. 185 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 6) Liability of Directors and Senior Officers (Cont.) (b) In July 1999, the General Shareholders Meeting of the Company approved the granting of indemnification as follows: 1. To grant to all officers of the Company, each one individually, subject to the provisions of all laws, an undertaking, in advance, to indemnify him in respect of any monetary obligation that may be imposed upon him in respect of any of the following: 1.1 A monetary obligation that is imposed upon the officer, in favor of any other person, on the basis of a court judgment, including a compromise judgment or an arbitration decision approved by a court of law, in respect of any act that he performed or is to perform, in his capacity as an officer of the Company and/or of a subsidiary or of a related company of the Company and/or of another company in which the said officer acts as an officer, in his capacity as an officer of the Company. 1.2 Reasonable litigation costs, including lawyers fees, which he will pay or which a court of law will require him to pay, in respect of legal proceedings filed against him by the Company, or on its behalf, or by another person, or in respect of a criminal charge from which he was exonerated, all of which arose due to an act that he performed or is to perform in his capacity as an officer of the Company and/or of a subsidiary or of a related company of the Company and/or of an other company in which the said officer acts as an officer, in his capacity as an officer of the Company. 2. The undertaking of the Company to indemnify the officers will apply only in respect of a monetary obligation and/or expenses that may be indemnified according to law. 3. The aggregate amount of the indemnification which the Company will pay in respect of a monetary obligation as described in Section 1.1 above relating to a single set of events, in respect of the letters of indemnity which will be issued to all of the Company’s officers, will not exceed the NIS equivalent of US$20 million, and the overall aggregate amount of the indemnification that the Company will pay, in respect of a monetary obligation as described in Section 1.1 above, relating to all sets of events, in respect of the letters of indemnity which will be issued to all of the Company’s officers will not exceed the NIS equivalent of US$60 million. 4. The terms of the indemnification are described in detail in the text of the letter of indemnification that was approved by the General Meeting of the Company’s shareholders. 186 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 6) Liability of Directors and Senior Officers (Cont.) (c) In February 2000, Danya Cebus decided (after receiving the approval of its Board of Directors and of the General Meeting of its shareholders) to grant to its directors and the other officers of the company (hereinafter – “the Officers”), an undertaking, in advance for indemnification in respect of any monetary obligation that will be imposed upon them and in respect of reasonable litigation expenses, directly or indirectly, relating to a prospectus published by Danya Cebus in February 2000. The indemnification liability will only apply in respect of a monetary obligation or expenses for which indemnification is permissible under law. In addition, the aggregate amount of the indemnification that Danya will pay in respect of the letters of indemnity, which will be issued to all of its Officers, may not exceed the lower of the two following amounts: 1. The amount of the overall gross proceeds in respect of the securities being offered by Danya Cebus under the prospectus, including the proceeds that will be received upon the exercise of convertible securities offered to the public under the prospectus. 2. The NIS equivalent of US$20 million. At an Extraordinary General Meeting of Danya held in January 2001, it was resolved that an undertaking be given to the directors and other officers to indemnify them up to an amount of US$10 million. In November 2006, Danya Cebus decided (after receiving the approval of its Board of Directors and of its General Shareholders Meeting) to grant letters of indemnity to all its officers in connection with their activities relating to, directly or indirectly, the project for construction of Highway 431. The aggregate amount of the indemnity to be paid by Danya Cebus to all the parties entitled to indemnification under the letters of indemnity may not exceed $20 million (not including reasonable litigation expenses). In February 2007, the General Meeting of the shareholders of Danya Cebus decided to approve an undertaking by Danya Cebus in insurance policies for insurance of the liability of company officers for the period beginning February 1, 2007 and ending January 31, 2008, as follows: (1) A policy for insurance of the liability of officers under which the liability limits in respect of one claim or in the aggregate for the entire initial insurance period is US$15 million. 187 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 6) Liability of Directors and Senior Officers (Cont.) (c) (Cont.) (2) An additional policy for insurance of the liability of officers that will apply as a specific surplus component in excess of the base policy and the surplus group policy taken out by Africa Israel, for it and for its subsidiaries, under which the liability limits in respect of one claim or in the aggregate for the entire insurance period is US$30 million. (d) In July 2004, Africa Properties decided to grant indemnification to its officers as follows: To grant to the company’s directors and officers (hereinafter – “the Officers”), to each of them individually, subject to the provisions of all laws, an undertaking, in advance, to indemnify them in respect of any monetary obligation which will be imposed upon him and in respect of reasonable litigation expenses, directly or indirectly, relating to a prospectus relating to a tender of the company’s securities that the company intends to publish during September 2004 (hereinafter – “the Prospectus”), for each of the following: (1) A monetary obligation that is imposed upon the officer, in favor of any other person, on the basis of a court judgment, including a compromise judgment or an arbitration decision approved by a court of law, in respect of any act that he performed or is to perform, in his capacity as an officer of the company and/or of a subsidiary of the company. (2) Reasonable litigation costs, including lawyers fees, which he will pay or which a court of law will require him to pay, in respect of legal proceedings filed against him by the company, or on its behalf, or by another person, or in respect of a criminal charge from which he was exonerated, or a criminal charge of which he is convicted regarding a crime that does not involve criminal intent, all of which arose due to an act that he performed or is to perform in his capacity as an officer of the company and/or of a subsidiary of the company. The undertaking to indemnify the officers will apply only in respect of a monetary obligation and/or expenses that may be indemnified according to law. The aggregate amount of the indemnification that the company will pay in respect of the letters of indemnity, which will be issued to all of its officers, will not exceed the lower of the two following amounts: (1) The aggregate proceeds (gross) of the securities offered under the prospectus. (2) The NIS equivalent of US$20 million. The indemnification will be provided under the terms stipulated in the letter of indemnity. 188 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 6) Liability of Directors and Senior Officers (Cont.) (e) In June 2006, Africa Residences decided to provide an indemnification commitment to officers relating to its prospectus (hereinafter – “the Indemnification Decision”). The indemnification commitment will apply to every liability or monetary expense imposed on the officer stemming from his actions, as detailed in the Indemnification Decision. The cumulative amount of the indemnification to be paid by Africa Residences to all parties entitled to indemnification in respect of a monetary liability pursuant to a court decision may not exceed 25% shareholders’ equity of Africa Residences based on the latest annual financial statements published prior to the actual payment date of the indemnification. In addition, under the terms of the underwriting agreement, Africa Residences committed to indemnify the underwriters for a liability imposed on them in connection with the prospectus, in accordance with the conditions set forth in the underwriting agreement. The amount of the indemnification may not exceed NIS 520 million. 7) Contractual Restrictions and Financial Covenants (a) In connection with various types of approvals and bank guarantees provided by a bank for the benefit of a Company, the Company committed to maintain a “ratio of economic shareholders’ equity to economic total assets” as defined in the agreement. In addition, the Company committed to not to register floating liens on its property and its assets without receiving the bank’s approval. If the Company does not comply with the conditions provided, the bank will be permitted to call the credit it extended to the Company for immediate repayment. As at the date of the financial statements, the Company is in compliance with the financial covenants provided. (b) Regarding Debentures Series F, G, and I (see Note 16), the Company committed to maintain the rating of the debentures issued. If the rating of the debentures declines from the AA group, the interest fixed in respect of the debentures will increase by 0.5%. (c) Africa Israel Properties – In February 2004, a trust indenture was signed between Africa Properties and the Trust Company of Union Bank Ltd., which serves as the trustee for the Debentures (Series A) issued by Africa Properties (see Note 16D(2)(b)). In addition, in September 2004, a trust indenture was signed between Africa Properties and Deloitte Touche (Israel) Breitman, Almagor Trust Company Ltd., which serves as the trustee for the Debentures (Series B) issued by Africa Properties (see Note 16C(2)). 189 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 7) Contractual Restrictions and Financial Covenants (Cont.) (c) (Cont.) In the framework of the trust indentures, Africa Properties committed to comply, at all times, so long as the debentures have not been fully repaid, with certain financial covenants, including, among others, the following: 1) The ratio of the debt to capital and debt, as defined in the trust documents, shall not exceed 60%. 2) The ratio of the depreciated cost of the pledged assets of Africa Properties, as defined in the trust documents, and the depreciated cost of its assets shall not exceed 40%. 3) The ratio of the total annual investments of Africa Properties in new assets under construction, as defined in the trust documents, and the total depreciated cost of the real estate assets less the investment in new assets under construction, shall not exceed 15%. 4) Africa Properties shall be permitted to distribute dividends and/or to provide loans to Group companies, as defined in the trust documents, subject to the ratio of the debt to capital and debt not exceeding 60%. 5) Africa Properties shall not pay any amount for repayment of loans it received by Group companies, as defined in the trust documents, in excess of the amount of the proceeds from the issuance. In a case of violation of one of the financial covenants detailed above, and such violation is not corrected by the end of the calendar quarter succeeding the calendar quarter in which the violation took place, the trustee shall be entitled to call the unpaid balance of the debentures for immediate repayment, in whole or in part. As at the balance sheet date, Africa Properties is in compliance with the financial covenants provided. (d) Africa Hotels – For purposes of securing a credit line in the amount of about NIS 54 million, Africa Hotels is holding deposits of about NIS 16.8 million. Africa Hotels has committed to comply with financial and other covenants, including, among others, an obligation vis-à-vis the bank regarding the minimum rate of the ratio of the company’s shareholders’ equity during the credit period to its total assets. 190 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 7) Contractual Restrictions and Financial Covenants (Cont.) (d) Africa Hotels – (Cont.) For purposes of securing a credit line in the amount of about NIS 33 million, Africa Hotels committed to comply with financial and other covenants, including, among others, an obligation vis-à-vis the bank that its shareholders’ equity will not drop below a certain amount and regarding the minimum rate of the ratio of its shareholders’ equity during the credit period to its total assets. For purposes of securing a credit line in the amount of about NIS 9 million, a hotel subsidiary committed to comply with financial and other covenants, including, among others, an obligation vis-à-vis the bank that its shareholders’ equity will not drop below a certain amount and regarding the minimum rate of the ratio of the hotel company’s shareholders’ equity during the credit period to the amount of its credit. In addition, Africa Hotels committed that its holdings in the hotel company will not change during the credit period. If Africa Hotels and the subsidiaries do not comply with the said with financial covenants, in whole or in part, the banks will be permitted to call the aforementioned credit for immediate repayment. In the estimation of the management of Africa Hotels, Africa Hotels and the subsidiaries are in compliance with all the financial covenants provided for them. In 2005, Africa Hotels and its subsidiaries received State-guaranteed loans in the aggregate amount of NIS 5.9 million. The loans are linked to the CPI and bear interest at the rate of 5.2%. The State is participating in payment of the interest at the rate of 4% during the first year, whereas commencing with the second year the State’s participating in payment of the interest depends on the amount of tourists entering the State. In May 2006, the State’s participation in the interest decreased by 1% and is now 3%. In addition, restrictions have been imposed on the subsidiaries with respect to use of the loan funds and there are restrictions the breach of which will subject the loans to immediate repayment. The restrictions include: liquidation of the companies, discontinuance of the hotel activities or assignment thereof, a failure to make payments, etc. Furthermore, Africa Hotels and its subsidiaries committed that they will not withdraw capital, including distribution of a dividend and management fees, and they will not take out shareholders’ loans, except those made up to one year prior to receipt of the loans. In the estimation of the managements of Africa Hotels and its subsidiaries, the companies are in compliance with the restrictions provided. 191 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 7) Contractual Restrictions and Financial Covenants (Cont.) (d) Africa Hotels – (Cont.) In the framework of bank accompaniment for a project, a proportionately consolidated hotel partnership committed to comply with financial covenants regarding the rates of shareholders’ equity, the life of the loan, and the rates of the partnership’s operating income before financing expenses, taxes, depreciation and amortization (EBITDA), in such a manner that they will not drop below certain rates, which change over the course of the period, of the unpaid balance of the loan. As at the balance sheet date, the partnership is not in compliance with the financial covenants. Subsequent to the balance sheet date, the partners and the guarantors requested from the bank not to call the partnership’s debts and liabilities for immediate repayment notwithstanding violation of the commitments to the bank. The bank agreed to their request and, accordingly, did not call the partnership’s debts and liabilities for immediate repayment, subject to the conditions determined with the bank. In the estimation of management, the partnership will comply with the conditions determined. (e) Tadiran Telecom Ltd. (Proportionately Consolidated Company) – In the framework of the financing agreement signed between Tadiran Telecom and the bank, Tadiran Telecom committed to comply at all times with certain financial covenants, including, among others, an obligation regarding the ratio of capital and guarantees to the total assets, minimum operating surplus, ratio of total credit and debt coverage ratio as these time were defined in the agreement. In addition, Tadiran Telecom committed not to provide collaterals to third parities, not to record liens and/or other security interests, not to receive additional credit, except for credit of certain types approved by the bank, and agreement was also reached regarding limitations applicable to changes in capital. If Tadiran Telecom does not comply with these financial covenants, in whole or in part, or upon the occurrence of certain events detailed in the agreement, the bank will be permitted to call the aforementioned credit for immediate repayment. In 2006, a written revision of the financing agreement was signed with the bank pursuant to which the financial covenants were updated. As at the balance sheet date, Tadiran Telecom is in compliance with the updated financial covenants. As at December 31, 2007, the balance of Tadiran’s credit amounts to about NIS 8 million. 192 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 7) Contractual Restrictions and Financial Covenants (Cont.) (f) In order to finance construction of a commercial center and office building in Prague (hereinafter – “the Project”) a proportionately consolidated company of Africa Properties that operates in the Czech Republic, took out a bank loan in the amount of about €80 million, which is scheduled for repayment on December 31, 2016. As part of the terms of the loan, the proportionately consolidated company undertook to maintain a debt coverage ratio (the ratio between the Project’s revenues and the interest and principal repayments) at a rate of not less than 1.2. In addition, the ratio between the balance of the loan and the market value of the asset shall not exceed 80% unless the debt coverage ratio is greater than 1.2. If the proportionately consolidated company does comply with the financial covenants, the bank is permitted to accelerate the loan’s repayment date. As at the balance sheet date, the proportionately consolidated company is in compliance with the aforementioned financial covenants. (g) A subsidiary of Africa Properties has a long-term liability to banks in the amount of NIS 23 million that was used for acquisition of a property in Holland that is pledged to the bank. As at the signing date of the financial statements, the rent from the above-mentioned property is less than the rent on the date of receipt of the loan. If there is no change in this situation, the bank is permitted to demand that an adjustment be made to the repayment amount of the loan principal in such a manner that the rate of the principal repayments will be twice the present rate. Up to the signing date of the financial statements, a demand as stated above had not been received from the bank. (h) For purposes of financing the construction of offices in Belgrade, Serbia (hereinafter – “the Project”), a subsidiary in Serbia (hereinafter – “ACB”) signed a financing agreement with an Austrian bank. The credit framework will reach the amount of about €14 million in Stage A and about €16 million in Stage B of the project. As security for the loan, ACB placed a lien on all its rights in the Project in favor of the bank. In addition, the shares of ACB held by the subsidiary and by the partner were pledged in favor of the bank. As part of the terms of the loan, ACB undertook to maintain a debt coverage ratio (the ratio between the Project’s revenues and the interest and principal repayments) at a rate of not less than 1.2. In addition, the ratio between the balance of the loan and the market value of the Project shall not exceed 70%. If ACB does comply with the financial covenants, the bank is permitted to accelerate the loan’s repayment date. As at the balance sheet date, ACB is in compliance with the aforementioned financial covenants. 193 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 7) Contractual Restrictions and Financial Covenants (Cont.) (h) (Cont.) As part of the financing agreement for Stage B, the Company gave the Austrian bank a guarantee in the amount of about €365 thousand, for purposes of assuring the interest payments by ACB during the Project’s construction period. (i) Gottex – For purposes of securing repayment of long-term loans received by a subsidiary partnership of Gottex, the subsidiary partnership committed to maintain various financial covenants, as follows: A. The subsidiary partnership’s shareholders’ equity, including partners’ loans and investments, shall at no time be less than NIS 20 million and its rate in proportion to the total assets shall not be less than 20% – the higher of the two. B. The subsidiary partnership’s gross profit shall not be less than 38% of the partnership’s sales’ revenues. In a case of breach of the above-mentioned commitments, the bank may call the amounts due to it from the partnership or its subsidiary for immediate repayment. As at the balance sheet date, the subsidiary partnership was in compliance with all the conditions it undertook to maintain as stated in the agreement with the bank. (j) Africa Industries – The terms of the loans received by subsidiaries of Africa Industries impose a requirement to comply with financial covenants as follows: A. The ratio of the equity to the total assets may not drop below 22%. B. The total equity may not be less than NIS 120 million. As at December 31, 2007, the subsidiaries were in compliance with the said conditions. 194 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 7) Contractual Restrictions and Financial Covenants (Cont.) (k) Project Derech Eretz – As part of the financing agreements for Project Derech Eretz, an addendum to the shekel loan agreements and the dollar debentures agreement was signed that spells out the representations, obligations, violations, conditions and project procedures to which Derech Eretz is subject. This agreement defines, among other things, the conditions under which Derech Eretz will be considered to be in violation of the financing agreements, along with the steps the banks may apply in such circumstances, including foreclosure of guarantees, discontinuance of the project financing and calling the entire unpaid balance of the credit as at the date of the violation for immediate repayment, and discontinuance of payment of the company’s invoices – steps that could cause Derech Eretz to breach agreements relating to the Project. In addition, it was provided that amounts shall not be paid to the shareholders prior to December 31, 2009 and that in order to pay amounts to the shareholders the annual senior debt coverage ratio must be at least 1.35. (l) Alon Group – The Alon Group committed to maintain various financial covenants in connection with loans and credit received by the Group. As at the date of the financial statements, the companies in the Alon Group are in compliance with the financial covenants determined. 8) Individual Borrower Limits The Group companies constitute a “borrower group” (as the term is defined in Provisions for Proper Bank Management of a Bank in Israel regarding “Limitations on Debt of an Individual Borrower and of a Borrower Group” (hereinafter – “the Procedure”)). As a result, the Israeli banks are subject to limitations with respect to the maximum amount of credit they are permitted to provide to each of the Group companies, including the Company, which are impacted by the total credit they extended to the Group and to its controlling interest. In the beginning of 2006, the Company and Alon Israel Fuel Company Ltd. (hereinafter – “Alon”) were informed by two banks, that in light of Africa Investments’ right vis-à-vis Alon to prevent various decisions in Alon and its subsidiaries, and in light of the definition of the term “control” in the Procedure, the Africa Investments Group and the Alon Group should be viewed as one borrower group for purposes of the Procedure. As a practical result of this, these banks are prohibited from providing additional credit to the companies included in these two groups. 195 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) A. Contingent Liabilities (Cont.) 8) Individual Borrower Limits (Cont.) As at the date of the report, the parties are carrying on contacts in order to formulate a solution to the above-mentioned problem so that the Company Group and the Alon Group will not be viewed as a single Borrower Group for purposes of the Procedure, including, examination of the possibility of making a tender offer of Alon’s shares by Alon’s sharehlolders on an integrated basis or after a public offer of Alon’s debentures (and cancellation of part of the veto rights provided to the Company in the Alon Group). As at the date of the report, Danya Cebus (a subsidiary) took out almost the entire allowable credit (including the maximum guarantees the Israeli banks are permitted to provide it in accordance with its present credit framework). B. Commitments 1) Construction and Real Estate Transactions There are commitments to local and other authorities, kibbutzim, contractors, planners and consultants, and contingent commitments for cooperation in the development of land and payments in respect of evictions and performance of development and construction work. In addition, there are agreements with purchasers of apartments, shops and buildings and commitments for their completion and delivery to the purchasers in the ordinary course of business of the member companies of the Africa Israel Group (including in the framework of joint ventures). 2) Textiles In February 2003, an agreement was signed between Gottex Trademarks and the Spanish group, Inditechs, (hereinafter – “Inditechs”), which is a manufacturer of the Zara and Pull & Bear lines, and which is granting the franchises, pursuant to which Gottex Trademarks will be granted the franchise for selling the Zara and Pull & Bear merchandise in Israel, for a period of five years. The franchise agreements provide, among other things, that in consideration of the franchise, Gottex Trademarks shall pay royalties to Worldwide Zara and the Spanish company at a rate of its total sales as provided in the agreement. In September 2003, an agreement was signed between Gottex and the Temporary Receiver of Klil Yofi Model Ltd. and Gidon Uberzon Beachwear Ltd. (hereinafter – “the Selling Companies”), pursuant to which Gottex purchased from the Selling Companies inventory, fixed assets, trademarks, goodwill and other assets, for a consideration of U.S.$1,300 thousand plus 4% of sales of bathing suits and beachwear designed or which will be designed by Mr. Gidon Uberzon, for a period of 5 years from October 1, 2003, up to the amount of U.S.$1,175 thousand. The Company and Generiqu Holding B.V. provided guarantees, in the amount of U.S.$587 thousand each. The long-term liability is presented in the financial statements at a discount rate of 4.7%. 196 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) B. Commitments (Cont.) 2) Textiles (Cont.) Gottex and Mr. Gidon Uberzon signed an agreement pursuant to which Mr. Uberzon will be the exclusive provider of design and planning services, consulting with respect to manufacturing and marketing matters, assistance in promotion of sales and advertising of products and provision of management services to the design department. In exchange, Gottex is to pay to Mr. Uberzon 1%–3% of the total sales, however not less than $200 thousand. The aforesaid agreement is effective for a period of 5 years from 2003. The minimum lease rentals (not including additional amounts calculated as a percentage of the total sales), linked to the CPI or the U.S. dollar, which the partnership committed to pay in the framework of the long-term lease contracts covering the stores, amount to about NIS 136 million. 3) Hotel Operations (a) Africa Hotels has signed a number agreements with the Holiday Inn Worldwide chain that govern the rights and obligations of the companies of the Hotels Group, with respect to the operation of the chain’s hotels in Israel and in the West Bank (hereinafter the – “Territory”). In November 2006, towards the end of the framework agreement, a new general framework agreement was signed, the highlights of which are detailed below: 1. Framework Agreement The framework agreement extends the conditions of the prior framework agreement (from September 2004) and includes, among other things, extension of the individual franchise agreements up to March 2014, while giving Africa Hotels an additional option up to March 2021. Under the agreements, Africa Hotels pays royalties and marketing fees derived as a fixed percentage of total revenues from the rooms. In addition, every hotel is charged for a payment of a fixed amount calculated based on the number of rooms. As part of the new agreement, Africa Hotels relinquished the exclusivity it enjoyed in connection with use of the “Holiday Inn” trademark while, at the same time, it was released from its obligation not to operate hotels in Israel under a different name. 197 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) B. Commitments (Cont.) 3) Hotel Operations (Cont.) (a) (Cont.) 2. Individual Franchise Agreements The franchise agreements with the worldwide “Holiday Inn” and “Crowne Plaza” chains are signed in respect of every hotel separately and, in principle, are similar to each other, with modifications as required. Under a franchise agreement, a hotel is entitled, among other things, to operate under the “Holiday Inn” or “Crowne Plaza” trade names in accordance with the classification of each hotel with respect to which a franchise agreement was signed. In addition, the franchisee is entitled to use the trademark and trademark as well as the chain’s international booking system. Failure to comply with the agreements signed separately with every hotel regarding these operations is a cause for revoking the franchise agreement. In addition, it was provided that each hotel will comply with the standards determined by the worldwide “Holiday Inn”, both with respect to the hotel’s building and the facilities and accessories installed therein, as well as the level of the services provided and to be provided by the hotel. (b) There are agreements between subsidiaries and third parties for managing and operating various hotels in Israel, in consideration for management fees that are based on fixed amounts and/or certain percentages of the gross profit. 4) Communications and Telecom Industry (a) The Company holds an interest, together with other partners, in Tadiran Telecom through holding companies, as detailed below – Africa Israel Communications Ltd. (hereinafter – “Africa Communications”) – 50% (which is held 50.1% by the company and 49.9% by Memorand Management (1998) Ltd. (hereinafter – “Memorand”), a company owned (indirectly) by the Company’s controlling interest. In the agreement between the Company and Memorand it was provided that Memorand has the right to acquire additional shares from the Company at any time or to receive them by means of an issuance from Africa Communications, in exchange for their par value, in such a manner that the rate of holdings of Memorand in the capital and voting rights of Africa Communications will be the same as the Company’s interest therein. 198 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) B. Commitments (Cont.) 4) Communications and Telecom Industry (Cont.) (a) (Cont.) For purposes of financing the transaction and the current operations of the acquiring company, Tadiran Telecom signed an agreement with a financing bank. As part of the collaterals given to the financing bank, the Company provided such bank with a limited guarantee in the amount of US$2.5 million. A guarantee in the same amount was provided by the Company’s controlling interest. The said guarantees were also provided in respect of the share of Mr. Roni Bergman, this being against receipt of a commitment form Mr. Bergman pursuant to which he will indemnify the Company and its controlling interest for half of every amount they pay in respect of his share. See Note 22(A)(7) regarding the matter of the credit agreement with the bank. (b) As at December 31, 2007, Tadiran Telecom has a deficit in its shareholders’ equity in the amount of about NIS 59.7 million. Tadiran Telecom lost NIS 22.6 million for the year. The company has a deficit in its cash flows from operating activities of about NIS 466 thousand for the year. The shareholders of Tadiran Telecom, including the Company, provided bank guarantees in the amount of about $8 million to the bank for purposes of securing debt of about NIS 33 million deriving mostly from credit received at the beginning of the company’s operations, in addition to liens recorded for purposes of securing the credit received from the bank. During the year, the shareholders made loans to Tadiran Telecom of about NIS 11.5 million against a lien on Tadiran Telecom’s leasing portfolio. In addition, the shareholders of Tadiran Telecom provided additional credit of about NIS 16 million. Subsequent to the balance sheet date, a subsidiary of Tadiran Telecom is carrying on negotiations with a U.S. bank for receipt of additional credit, which will be secured by a guarantee of Tadiran Telecom, the repayment date of which is expected to be in 2009. In addition, after the balance sheet date, the interested party provided an interested-party guarantee in the amount of $3 million in favor of Tadiran Telecom for purposes of receiving bank credit. (c) Employees in the telecommunications’ industry are entitled to additional benefits in respect of termination of the employer–employee relationship in accordance with the security net agreements, in a case where such employer–employee relationship ends prior to March 2012, and the said termination of their employment in the telecommunications’ industry is not a result of their initiative. Furthermore, some of the employees are entitled to the aforesaid additional benefits even where their employment in the telecommunications’ came to an end of their own volition. 199 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) B. Commitments (Cont.) 4) Communications and Telecom Industry (Cont.) (c) (Cont.) At the end of the said period, these additional benefits will be discontinued. Among other things, the additional benefits include the right to enlarged severance benefits at the rate of 290% or, alternatively, a right to elect early retirement up to 10 years prior to legal retirement age. As at the balance sheet date, the maximum amount of the commitment, based on an actuarial evaluation, in a case where the employment of all the employees included in the security net agreements is terminated, amounts to NIS 62 million. In a special collective bargaining agreement signed in August 2001 between the communications’ company and the employees’ representatives, the telecommunications’ company committed to provide collaterals for securing its liabilities under the security net agreement for realization of the employees’ rights. The special collective bargaining agreement provides that on the date the agreement takes effect, the telecommunications’ company is to deposit with a trustee a bank guarantee in the amount of $6 million. Once every six months an examination will be made of the updated value of the liabilities under the security net agreement as at such date, and where 25% of such value is less than $6 million, such bank guarantee will be replaced by a guarantee in an amount equal to 25% of the value of the liability. The guarantee will be effective for 12 months and the trustee will be required to request its extension for additional periods, up to the end of the security net period in 2012. The telecommunications’ company undertook to bear the expenses of the trustee and his fee for services rendered. As at the balance sheet date, the amount of the guarantee is about $5 million. In addition, the telecommunications’ company recorded a second-priority floating lien on all its assets in favor of the attorneys in trust, coming after the lien or liens to the banks, in the amount of $5.5 million of the liabilities based on the security net agreements. (d) The telecommunications company has agreements with certain employees that are members of management, wherein it is provided, among other things, that the telecommunications company will adopt a plan for granting options to managers and senior employees in the framework of which the offerees determined by the Board of Directors of the telecommunications company will be granted rights to purchase shares in the telecommunications company in the total amount of 10% of the telecommunications company’s paid-up share capital. The vesting period of the options was determined in increments, at 25% per year, in the first two years beginning from the end of the first year from the execution date, and at 50% per year, from the end of the third year from the execution date. The said execution date is the date of completion of acquisition of E.C.I.’s business systems division, which was November 6, 2001. 200 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 22 – Contingent Liabilities and Commitments (Cont.) B. Commitments (Cont.) 4) Communications and Telecom Industry (Cont.) (d) (Cont.) The options’ plan will be executed in accordance with Section 102 of the Income Tax Ordinance and all the taxes and required payments due with respect to the plan will be borne by the offerees. During the period of the report, the Board of Directors of the telecommunications company approved the options’ plan. As at the signing date of the financial statements, no options had yet been issued to the employees. 5) The cumulative amount of the sales’ contracts that has not yet been recognized as income up to the end of the period of the report is NIS 571 million. 6) In the framework of acquisition of Dor Energy (1988) Ltd. (hereinafter – “Dor”) a partnership was set up that provided bank financing for acquisition of Dor and which holds convertible debentures issued to it by Alon, in the aggregate amount of NIS 225.6 million. The Company is a limited partner, and its share in the partnership is 26%. Alon guaranteed the partnership’s liabilities to the financing bank, as stated. Each party placed a lien on its interest in the partnership and on the shares of Alon for purposes of securing the financing received by the partnership from the bank in connection with the Dor transaction with no reciprocal guarantee between the partners. The lien on the shares of Alon which are held by the Company is limited to the amount of about U.S.$4 million. 7) Regarding undertakings with related parties – see also Note 36. 201 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 23 – Revenues from Construction and Real Estate Transactions Consolidated For the Year Ended December 31 2007 2006 2005 From sale of residential units From sale of lots From contractor work (1) (1) Revenues from contracting work Total per statement of operations Adjustment of income from contract work which is recognized by “zero margin” method, net 2,489,748 148,152 1,655,296 4,293,196 1,313,438 401,053 1,268,426 2,982,917 1,831,564 174,300 790,131 2,795,995 1,655,296 1,268,426 790,131 (100,171) 1,155,125 42,580 1,311,006 (63,248) 726,883 Company For the Year Ended December 31 2007 2006 2005 From sale of residential units 99,171 107,083 92,586 Note 24 – Net Earnings from Investee Companies Consolidated For the Year Ended December 31 2007 2006 2005 From affiliated companies 110,359 128,234 220,312 Company For the Year Ended December 31 2007 2006 2005 From subsidiaries From affiliated companies 4,439,157 9,401 4,448,558 *861,140 5,651 866,791 * Restated due to first-time application of accounting standard – see Note 1ZL(2). 202 *554,389 7,332 561,721 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 25 – Other Revenues Consolidated For the Year Ended December 31 2007 2006 2005 Commissions from franchisees Management fees, technical supervision and sundry Management fees from mutual funds and venture capital funds Capital gains, net Income from Cross Israel Highway Project * Gain on decline in rate of holdings Negative unallocated excess cost created upon acquisition 2,836 8,212 3,060 7,901 2,752 8,571 51,385 178,935 – ** 3,452,226 12,180 575,114 6,645 195,842 – 212,997 2,033 35,626 21,965 3,715,559 61,263 862,005 – 261,979 Company For the Year Ended December 31 2007 2006 2005 Management fees, technical supervision and sundry Income from overseas guarantee fees Capital gains, net Income from Cross Israel Highway Project * Management fees from mutual funds * ** 37,253 20,670 – – – 57,923 18,689 39,079 – 6,645 3,400 67,813 20,638 50,778 11 2,033 – 73,460 See Note 2I(4). Includes income from decline in rate of investment in AFI Development in the amount of NIS 3.4 billion – see Note 2I(b3). 203 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 26 – Costs and Expenses on Construction and Real Estate Transactions Consolidated For the Year Ended December 31 2007 2006 2005 Land Salaries and related expenses Building materials Subcontractors Depreciation Sundry 668,304 202,145 334,836 2,421,981 7,295 790,024 4,424,585 404,874 147,649 312,599 1,400,306 8,728 175,336 2,449,492 521,622 106,796 194,444 966,699 8,812 204,306 2,002,679 Add – opening inventory Less – closing inventory Total as reflected in the statement of operations – 4,559 4,420,026 9,822 – 2,459,314 2,460 (9,822) 1,995,317 (100,171) 4,319,855 42,580 2,501,894 (63,248) 1,932,069 Adjustment of costs of projects, the income from which is recognized by the “zero margin”method, net Company For the Year Ended December 31 2007 2006 2005 Land Subcontractors Sundry 53,496 23,206 12,255 88,957 204 15,604 41,518 17,226 74,348 11,127 44,849 31,289 87,265 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 27 – Gross Profit on Construction and Real Estate Transactions (Consolidated) Initiated construction projects Residential units for sale Land Total Revenues Costs Gross profit 2,489,748 2,481,901 7,847 148,152 90,788 57,364 2,637,900 2,572,689 65,211 Residential construction 652,293 663,620 (11,327) 2007 Construction work in progress Industrial & commercial Infraconstruction structures Other 91,714 86,971 4,743 907,356 1,094,826 (187,470) 3,933 1,920 2,013 Total Grand Total 1,655,296 1,847,337 (192,041) 4,293,196 4,420,026 (126,830) Includes provision for loss 402,802 Initiated construction projects Residential units for sale Land Total Revenues Costs Gross profit 1,313,438 972,893 340,545 401,053 260,387 140,666 1,714,491 1,233,280 481,211 Residential construction 555,420 546,745 8,675 2006 Construction work in progress Industrial & commercial Infraconstruction structures Other 227,570 212,348 15,222 478,615 461,891 16,724 6,821 5,050 1,771 Total Grand Total 1,268,426 1,226,034 42,392 2,982,917 2,459,314 523,603 Includes provision for loss 4,228 Initiated construction projects Residential units for sale Land Total Revenues Costs Gross profit 1,831,564 1,145,725 685,839 174,300 93,340 80,960 2,005,864 1,239,065 766,799 Residential construction 477,363 451,471 25,892 Includes provision for loss 2005 Construction work in progress Industrial & commercial Infraconstruction structures Other 137,039 145,636 (8,597) 157,118 143,716 13,402 18,611 15,429 3,182 Total 790,131 756,252 33,879 Grand Total 2,795,995 1,995,317 800,678 18,071 205 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 28 – Expenses of Maintenance, Supervision and Management of Real Estate and Other Properties Consolidated For the Year Ended December 31 2007 2006 2005 Salaries and related expenses Depreciation Other 23,233 4,372 167,662 195,267 32,576 60,031 126,809 219,416 59,061 42,509 44,722 146,292 Company For the Year Ended December 31 2007 2006 2005 Salaries and related expenses Depreciation Other 3,945 – 1,188 5,133 7,893 1,177 1,229 10,299 5,266 1,174 8,765 15,205 Note 29 – Costs and Expenses of Hotel Operations Consolidated For the Year Ended December 31 2007 2006 2005 Cost of services Salaries and related expenses Food and beverages Other expenses Unallocated operating expenses Salaries and related expenses Energy Property maintenance Taxes and insurance Advertising, marketing and public relations General expenses Depreciation, amortization and usage fees 95,142 43,597 43,220 181,959 ---------- 86,182 37,614 46,620 170,416 ---------- 76,211 33,269 35,585 145,065 ---------- 31,973 20,640 12,022 16,019 13,089 13,147 106,890 ---------40,537 ---------- 32,446 19,189 12,039 14,867 10,643 11,143 100,327 ---------*38,036 ---------- 19,437 17,749 7,555 14,184 13,739 12,928 85,592 ---------*30,779 ---------- 329,386 308,779 261,436 * Restated due to first-time application of accounting standard – see Note 1ZL(2). 206 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 30 – Costs and Expenses in Industry and Textiles Consolidated For the Year Ended December 31 2007 2006 2005 Cost of sales Materials consumed Salaries, wages, and related expenses Outside services Manufacturing expenses Design and development, net Depreciation Other expenses Royalties to the Chief Scientist Purchased goods Changes in inventory of work in process Changes in inventory of finished goods and products Research and development expense, net Salaries and related expenses Materials and components Subcontractors Depreciation Other development expenses Grants from the Chief Scientist Selling and marketing expenses Salaries, wages, and related expenses Commissions paid to agents and others Advertising, exhibitions, and sales promotions Rent and maintenance of stores and offices Transport, moving and packaging Depreciation Other Administrative and general expenses Salaries, wages, and related expenses Bad and doubtful debts Depreciation Legal and professional fees Office and other expenses Total 207 695,311 80,234 25,354 5,055 4,743 16,634 75,928 – 903,259 523,295 1,256 (30,608) 1,397,202 ------------ 146,242 11,706 5,583 5,575 4,496 2,676 715 – 176,993 62,913 (9,210) 5,773 236,469 ---------- 98,469 24,183 7,288 10,445 4,233 5,263 1,974 3,349 155,204 125,883 (5,561) (8,503) 267,023 ---------- – – – – – – – ------------ – – – – – – – ---------- 15,138 1,048 965 1,169 4,356 (2,215) 20,461 ---------- 85,902 51,924 16,174 53,559 28,016 7,763 16,650 259,988 ------------ 28,615 33,265 10,521 28,918 – 3,754 4,759 109,832 ---------- 35,831 15,518 10,514 29,557 – 3,743 16,211 111,374 ---------- 36,643 7,320 2,834 3,486 18,644 68,927 -----------1,726,117 8,439 250 1,396 3,126 1,259 14,470 ---------360,771 13,008 321 2,189 3,093 12,926 31,537 ---------430,395 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 31 – Administrative and General Expenses Consolidated For the Year Ended December 31 2007 2006 2005 Salaries and related expenses Directors’ fees Depreciation Other 41,712 680 2,047 44,191 88,630 31,058 501 2,924 30,779 65,262 23,278 605 1,806 21,124 46,813 Company For the Year Ended December 31 2007 2006 2005 Salaries and related expenses Directors’ fees Depreciation Other 31,299 541 1,914 36,678 70,432 28,164 480 1,945 25,893 56,482 19,729 560 1,782 20,303 42,374 Note 32 – Financing Expenses (Income), Net Consolidated For the Year Ended December 31 2007 2006 2005 In respect of long-term liabilities In respect of short-term credit From marketable securities Other (income) expenses Less – amount of net financing expenses capitalized to fixed assets and work in progress 1,122,054 76,520 (23,011) (272,324) 903,239 323,482 315,849 (52,762) 25,857 612,426 219,641 323,318 (35,776) (17,927) 489,256 292,302 610,937 187,493 424,933 220,877 268,379 Company For the Year Ended December 31 2007 2006 2005 In respect of long-term liabilities In respect of short-term credit From marketable securities Other (income) expenses 429,091 23,538 108 (280,744) 171,993 208 118,388 2,655 (9,889) (79,087) 32,067 58,524 16,647 (1,667) (193,396) (119,892) Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 33 – Amortization of Other Assets and Deferred Expenses Consolidated For the Year Ended December 31 2007 2006 2005 Loss from decline in value of assets Loss from decline in rate of holdings Amortization of investments and other assets Mutual fund management expenses Other – 20,177 15,837 8,698 6,482 51,194 30,530 – 14,212 3,400 11,521 59,663 17,082 – – – 742 17,824 Company For the Year Ended December 31 2007 2006 2005 Loss from decline in value of assets Capital loss, net Amortization of investments and other assets – 15,368 13,769 29,137 4,240 11,478 – 15,718 – 742 – 742 Note 34 – Taxes on Income A. Most of the Group companies in Israel are assessed under the Income Tax Law (Adjustments for Inflation), 1985, and the provisions for taxes and carryforward losses were computed in accordance with the said Law. B. (1) The hotel subsidiaries are “Industrial Companies” as defined in the Law for Encouragement of Industry (Taxes), 1969 (hereinafter – the “Encouragement of Industry Law”), and are entitled to accelerated depreciation rates and other benefits pursuant to that law. Commencing with 1997, the hotel subsidiaries file a consolidated tax return for purposes of reporting the income of some of the Group companies and, commencing with 2002, a consolidated tax return is filed by additional group companies. According to the tax laws, losses incurred from the first year for which a consolidated tax return was filed may be offset between the companies, subject to certain limitations. Losses sustained in prior years may be deducted only against the income of the companies that incurred the losses. (2) The investment programs for construction, renovation, and establishment of some of the hotels were granted “Approved Enterprise” status under the Law for the Encouragement of Capital Investments, 1959 (hereinafter – the “Encouragement of Capital Investments Law”). The approved plans entitle some of the related subsidiaries to grants and tax benefits. Pursuant to this Law, the revenues deriving from the approved plans are entitled to a reduced tax rate of 25% during a period of 7 years from the year in which the company first had taxable income. The benefits plan for one of hotels ended in 2007. 209 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 34 – Taxes on Income (Cont.) B. (Cont.) (3) Certain of the hotels of the subsidiaries, which are located in areas such as Eilat, Tiberias and the Dead Sea, are entitled to tax reductions and benefits under certain laws. (4) The tax losses of the above-mentioned hotel subsidiaries, as at December 31, 2007, which are available for carryforward to future years, amount to about NIS 585 million. C. Gottex and its subsidiary, are “Industrial Companies” as defined in the Law for Encouragement of Industry, and are entitled to accelerated depreciation rates and other benefits pursuant to this law. D. Affiliated companies have tax losses available for carryforward to future years, in the amount of about NIS 261 million, in respect of which no deferred taxes have been recorded. E. The Company has tax losses available for carryforward to future years, in the amount of about NIS 80 million, in respect of which no deferred taxes have been recorded. F. (1) A subsidiary of Danya Cebus is an “Industrial Company” as defined in the Encouragement of Industry Law, and is entitled to accelerated depreciation rates and other benefits pursuant to this law. (2) Danya Cebus has accumulated losses of about NIS 119 million, in respect of which no deferred taxes have been recorded. (1) Africa Industries and its subsidiaries are entitled to tax benefits by virtue of the Law for the Encouragement of Capital Investments in their capacity as an “Approved Enterprise” or a “Benefited Enterprise” received by some their plants. G. In addition, Africa Industries and certain of its subsidiaries are “Industrial Companies” within the meaning thereof in the Law for the Encouragement of Industry (Taxes), 1969, By virtue of this status, the companies are entitled to claim depreciation at accelerated rates in respect of equipment used in the industrial activities, as determined in the regulations. (2) H. The tax losses of Africa Industries and its subsidiaries as at December 31, 2007, which are available for carryforward to future years, total about NIS 10 million. The balance of the carryforward losses as at December 31, 2007 regarding which deferred taxes have not been recorded amounts to about NIS 9 million. The tax system in Russia is a new system that is revised frequently and may even be revised retroactively, including the imposition of penalties. The Russian tax laws are not clear and are subject to different interpretations by different tax authorities, in the various districts. In the opinion of the managements of the companies in Russia, the companies operate in compliance with the tax laws. 210 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 34 – Taxes on Income (Cont.) I. The Group companies overseas are assessed under the tax laws in those countries and the provisions for deferred taxes and carryforward losses were computed in accordance therewith. J. On December 30, 2002, the Company requested an arrangement from the Income Tax Authorities with respect to accumulated earnings and a change in the organizational structure in contemplation of the tax reform, including in connection with a subsidiary and its investee companies. On December 31, 2003, and agreement was signed with the Income Tax Authorities pursuant to which the amount of about NIS 5,382 thousand will be paid to the Income Tax Authorities relating to earnings accrued in the books of an affiliated company up to December 31, 2002 in respect of the investee companies acquired from it by the subsidiary (not including companies acquired from another related company). As a result of the acquisition of the above-mentioned companies, the cost basis of the subsidiary’s investment in the investee companies for tax purposes is higher than the cost basis of the investment included in the financial statements. K. In December 2003, the Company signed an agreement with Africa Properties whereby as part of a structural change of the holdings of the income-producing properties, certain of the Company’s properties as well as certain investee companies were transferred to Africa Properties against an issuance of shares and premium in the aggregate amount of about NIS 640 million. For purposes of ensuring completion of transfer of the real estate rights from the Company to Africa Properties, caveats were recorded in favor of Africa Properties or pledges were recorded on the Company’s contractual rights in the properties and a monetary deposit was made by the Company with trustees in the amount of NIS 5 million in favor of Africa Properties. Transfer of the properties was executed pursuant to the provisions of Section 104A of the Income Tax Ordinance with a tax deferral. On a future sale of the properties and companies, as stated, by Africa Properties, tax will be imposed where in calculation of the tax, the tax bases and acquisition dates of these properties and companies will be the tax bases and acquisition dates that would have been determined if the Company had sold them. L. Regarding an agreement with the Income Tax Authorities in connection with a change in the holdings’ structure of foreign investee companies – see Note 2I(1)(c2). M. Tax Assessments (1) The Company has received final tax assessments from the Income Tax Authorities up to and including the 2004 tax year. Some of the subsidiaries have received final tax assessments up to 2002, while others have not received tax assessments since commencing their operations. 211 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 34 – Taxes on Income (Cont.) M. Tax Assessments (Cont.) (2) Africa Properties has received tax assessments from the Income Tax Authorities for the 2000–2002 tax years, pursuant to which it is required to pay about NIS 5.2 million (not including interest and linkage differences), due to the disallowance of expenses and part of its financing expenses. Africa Properties’ Management has appealed these assessments to the District Court. In the estimation of Africa Properties’ Management, based on an opinion of its legal advisors, the demand of the Income Tax Authorities is not expected to create a tax liability for the company beyond that recorded in the books. (3) Africa Residences Ltd. has received tax assessments from the Income Tax Authorities for the 2000–2001 tax years, pursuant to which it is required to pay NIS 2 million (not including interest and linkage differences) due to the disallowance of real financing expenses allocated to a dividend it distributed. Africa Residences’ Management rejects the aforesaid demand and has appealed the assessments. In the estimation of Africa Properties’ Management, based on an opinion of its legal advisors, the company’s chances are good that its arguments will be accepted and, therefore, no provision has been included in the financial statements in respect of the said demand. N. Amendments to the Tax Laws (1) On July 25, 2005, the Law for Amendment of the Income Tax Ordinance (No. 147 and Temporary Order), 2005 (hereinafter – “Amendment No. 147”) was passed by the Israeli Knesset. Amendment No. 147 provides, among other things, a gradual reduction of the Companies Tax rate in the following manner: in the 2006 tax year a tax rate of 31% will apply, in 2007 a tax rate of 29% will apply, in 2008 a tax rate of 27% will apply, in 2009 a tax rate of 26% will apply, and from 2010 and thereafter, a tax rate of 25% will apply. In addition, commencing from 2010, upon reduction of the Companies Tax rate to 25%, every real capital gain will be subject to tax at the rate of 25%. (2) On August 21, 2007, an amendment to the Companies Tax rate in the Czech Republic was approved. The amendment provides for a gradual reduction of the tax rate from 24% to 19% in the following manner: a tax rate of 21% will apply commencing from January 1, 2008; a tax rate of 20% will apply commencing from January 1, 2009; and a tax rate of 19% will apply commencing from January 1, 2010. In the period of the report, the Company recorded income from a tax benefit on its books in the amount of about NIS 18 million in respect of this amendment. (3) On February 26, 2008, the Knesset (the Israeli Parliament) passed the Income Tax Law (Adjustments for Inflation) (Amendment 20) (Limitation of the Application Period), 2008 (hereinafter – “the Amendment”). Pursuant to the Amendment, application of the above-mentioned law will end in 2007 and starting from 2008, the law’s provisions will no longer apply, except for the transitional rules the purpose of which is to prevent distortions in the tax calculations. According to the Amendment, in the 2008 tax year and thereafter, adjustment of the revenues for tax purposes to a real (inflation-adjusted) base will no longer be made. In addition, linkage to the index of the depreciation amounts on fixed assets and the amounts of carryforward tax losses will be discontinued, such that these amounts will be adjusted up to the index for the end of the 2007 tax year, and their linkage to the index will cease from this date forward. 212 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 34 – Taxes on Income (Cont.) O. Composition Consolidated For the Year Ended December 31 2007 2006 2005 Current taxes Deferred taxes* Taxes in respect of prior years Current taxes Deferred taxes* 525,630 92,897 618,527 ---------- 312,075 (132,733) 179,342 ---------- 228,483 73,892 302,375 ---------- 1,942 1,829 3,771 ---------622,298 (9,795) 20,191 10,396 ---------189,738 (13,069) 23,418 10,349 ---------312,724 Company For the Year Ended December 31 2007 2006 2005 Current taxes Deferred taxes* Taxes in respect of prior years Current taxes Deferred taxes* See Notes 10 and 17. 213 – 914 914 ---------- 9,509 1,136 10,645 ---------- 53,945 6,087 60,032 ---------- (914) – (914) ---------– (1,861) 5,038 3,177 ---------13,822 (7,220) 13,024 5,804 ---------65,836 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 34 – Taxes on Income (Cont.) P. The main differences between the theoretical tax on the reported earnings and the amount of the provision for taxes are set forth below: Theoretical tax on reported earnings for the year as per the statement of operations Company’s equity in net earnings of investees Non-allowable expenses (exempt income), net Capital gains (losses) 2007 29% Consolidated 2006 31% 2005 34% 2007 29% Company 2006 31% 2005 34% 1,585,604 382,718 383,825 1,233,621 265,781 242,879 (39,753) (78,237) (1,290,082) (268,665) (190,831) 15,186 1,418 (32,004) 7,890 (10,016) (938) – Gain on decline in holdings’ rate (995,295) (76,776) (9,878) Deferred taxes at different tax rates (26,150) 1,293 (6,509) 6,855 (254) – (3,903) 908 (1,337) – 680 Utilization of tax loss carryforwards and benefits with respect to which deferred taxes were not created (2,917) Utilization of tax losses and benefits in respect of which deferred taxes were not created 93,125 10,482 2,801 40,411 3,100 3,771 10,396 9,220 (914) 3,177 (29,297) (116,914) 9,895 – 25,000 – Taxes in respect of prior years Foreign subsidiaries and earnings taxed at reduced rates First-time recording of deferred taxes for the Company’s share in income of investees Other differences Tax provision for the year (700) (8,469) – – 14,266 – 189 – – 787 – – 5,804 – – – – 2,587 4,744 8,658 – 10,178 7,008 622,298 189,738 312,724 – 13,822 65,836 214 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 35 – Earnings per Share Basic Earnings per Share Calculation of the basic earnings per share as at December 31, 2007, was based on the earnings allocated to the ordinary shareholders, in the amount of NIS 4,288,217 thousand (2006 – NIS 847,155 thousand, 2005 – NIS 648,896 thousand), divided by the weighted-average number of ordinary shares outstanding of 50,175 thousand shares (2006 – 48,636 thousand shares, 2005 – 47,145 thousand shares), calculated as follows: For the Year Ended December 31 2006 2005 Before cumulative Cumulative effect of effect of change in change in Total method method 2007 Total Net income for the year Effect of calculating the earnings of investee companies Earnings allocated to the ordinary shareholders 4,253,865 *843,665 *650,204 34,352 3,490 112 4,288,217 847,155 650,316 (1,420) – (1,420) Total 648,784 112 648,896 Weighted-average number of ordinary shares: For the Year Ended December 31 2007 2006 2005 Thousands of Shares Balance as at January 1 Plus weighted-average of debentures exercised for shares Plus weighted-average of shares issued during the year 49,809 366 – 47,164 457 1,015 46,765 380 – Weighted-average number of ordinary shares used for purposes of calculating basic earnings per share 50,175 48,636 47,145 215 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 35 – Earnings per Share (Cont.) Diluted Earnings per Share Calculation of the diluted earnings per share as at December 31, 2007, was based on the earnings allocated to the ordinary shareholders, in the amount of NIS 4,182,420 thousand (2006 – NIS 777,118 thousand, 2005 – NIS 541,601 thousand), divided by the weighted-average number of ordinary shares outstanding after adjustment in respect of all the potentially dilutive ordinary shares of 50,670 thousand shares (2006 – 50,181 thousand shares, 2005 – 49,150 thousand shares), calculated as follows: For the Year Ended December 31 2006 2005 Before cumulative Cumulative effect of effect of change in change in Total method method 2007 Total Net income for the year Effect of calculating the earnings of investee companies Interest expenses on convertible debentures, net of interest expenses Earnings allocated to the ordinary shareholders (diluted) 4,253,865 Total *843,665 *650,204 (1,420) 648,784 (76,638) (72,826) (113,985) – (113,985) 5,193 6,409 7,071 4,182,420 777,248 543,290 – (1,420) 7,071 541,870 Weighted-average number of ordinary shares (diluted): For the Year Ended December 31 2007 2006 2005 Thousands of Shares Weighted-average number of ordinary shares used for purposes of calculating basic earnings per share Effect of conversion of debentures for shares Effect of exercise of options for shares 50,175 495 – 48,636 1,340 205 47,145 1,635 370 Weighted-average number of ordinary shares used for purposes of calculating diluted earnings per share 50,670 50,181 49,150 The average market value of the Company’s shares, for purposes of calculating the dilutive effect of the options for shares, was based on quoted market prices during the period in which the options were outstanding. * Restated due to first-time application of accounting standard – see Note 1ZL(2). 216 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties A. The Company was an affiliated company of Bank Leumi le-Israel B.M. (hereinafter – “Bank Leumi”). In February 2006, Mr. Lev Leviev, the Company’s controlling interest, reached agreement with Bank Leumi according to which the controlling interest acquired the Bank’s holdings in the Company. Upon closing of the transaction in March 2006, the Bank ceased to be an interested party in the Company. The Company and the consolidated companies conducted transactions and continue to conduct transactions on a current basis and in the regular course of business with Bank Leumi and its subsidiaries (hereinafter – “Bank Leumi Group”). B. The data presented below relates to interested and related parties and is included in the consolidated balance sheet. (1) Long-term loans from others Currency Interest U.S. dollar 7% Provision for vacation (2) C. Liabilities for employee severance pay December 31 2007 2006 4,392 – 133 45 1,612 1,597 The data presented below relates to interested and related parties and is included in the consolidated statement of operations. For the Year Ended December 31 2007 2006 2005 Bank Leumi Group – Income from operation and rental of properties Benefits to interested parties – Salaries of interested parties employed by the Company (1) Interested parties not employed by the Company (2), (3), (4) Directors’ insurance – 1,154 6,961 2,334 8,687 4,358 1,692 1,129 1,218 669 681 444 (1) Benefits – salaries and wages (including related expenses), directors’ fees and other benefits, in accordance with Section 64 of the Securities Regulations (Preparation of Annual Financial Statements) – 1993. (2) 2007 – 8 directors (2006 – 7 directors). (3) The amount for 2007 includes management fees in the amount of NIS 543 thousand to a company controlled by an interested party (2006 – NIS 541 thousand, 2005 – NIS 530 thousand). (4) All transactions with interested parties were executed on regular commercial terms. 217 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) D. An agreement was signed between the Company and Danya Cebus, according to which the Company undertook to submit construction work to Danya Cebus, or to cause that construction work be submitted to Danya Cebus, for Danya Cebus’ execution, and Danya Cebus undertook to fully execute such construction work by itself or by means of another company in its Group. The construction work referred to is all the construction work in projects of the Company in which the Company has no partners and/or projects that are to be executed by companies or entities which are wholly owned and controlled (100%) by the Company, except where there is a reason, over which the Company has no control, preventing submission of the work to Danya Cebus and except where public companies are involved. The Company also undertook to submit projects to Danya Cebus or to act to the best of its ability, to cause that projects be submitted to Danya Cebus for execution, where the Company’s share in the project is less than 100% and/or where the projects will be executed by companies or entities in which the Company’s share is less than 100% (including combination agreements) if, considering the rights and obligations of the Company in each such project, the Company has the power and the right to cause that the construction work will be executed by Danya Cebus, and in accordance with the volume of work which the Company will have the power and the right to give to Danya Cebus. Notwithstanding that stated above, it was agreed between the parties, that if Danya Cebus believes that the receipt of certain construction work by it, should be considered as an “exceptional transaction”, which requires the approval of Danya Cebus’ General Shareholders’ Meeting (including a meeting convened at the call of Danya Cebus’ shareholders), in a manner which does not permit Danya Cebus to fulfill its aforementioned obligations, then the submission of the said construction work to Danya Cebus will require the advance approval of the Company. Danya Cebus undertook to execute the construction work that it will receive, by itself or through any other of its wholly owned and controlled entities, as stated above. The price to be paid by the Company in respect of execution of the work will be in accordance with the going market price at the time the work is submitted. The form of the agreement for the measurement of the execution of the projects (measurement by milestones, or measurement according to quantities or an RGI agreement or some other form of agreement) will be according to the usual form of agreement prevailing in the industry or prevailing between the parties. A formal agreement will be concluded between the parties in respect of each project, which will indicate the applicable conditions, as stated above. In the agreement, Danya Cebus undertook to the Company that if Danya Cebus or any of its subsidiaries will want to undertake, either directly or indirectly, real estate initiatives, each of such companies will be permitted to enter into agreements involving real estate initiatives only if the transaction meets each and all of the following conditions: 1. The real estate initiative transaction involves residential construction and Danya Cebus’ share of the transaction does not exceed 200 residential units. 218 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) D. (Cont.) 2. The real estate initiative transaction does not include land development. A real estate initiative transaction in respect of which a building permit, which agrees with the planned construction as envisioned by the transaction, can be obtained within 18 months from the earliest agreement date of the transaction, will be considered as a real estate initiative transaction that does not include land development. 3. Danya Cebus or one of its subsidiaries will also serve as the executing contractor for all the construction of the project that includes the said real estate initiative transaction, even if the initiative transaction relates only to a portion of the project. 4. The real estate initiative transaction constitutes a business opportunity for the Danya Cebus Group and does not constitute a business opportunity for the Company. A transaction that can be considered as a joint business opportunity for both parties, or if it is unclear whether it is a business opportunity for one party or for the other party, will be considered as a business opportunity for the Company, and Danya Cebus will be precluded from undertaking such transaction. 5. The real estate initiative transaction was not included as part of a tender, neither a public tender nor a closed tender, other than a closed tender which will be directed to a Danya Cebus Group company, and will not be directed to any company in the Africa Israel Group. The above notwithstanding, Danya Cebus will be permitted to enter into an agreement involving a residential initiative transaction of a volume not in excess of 100 residential units (Danya Cebus’ share), which will be included as part of a public tender, if the remaining conditions, enumerated in 1–3 above, are fulfilled. Transactions involving real estate initiatives are defined as transactions of any type involving the purchase of real estate rights (including contractual rights for the receipt of real estate rights, other than the purchase of fixed assets for self use) or acquisitions to which Section 9 of the Law for Real Estate Taxation (Land Appreciation, Sale And Purchase), 1963 applies and/or transactions for the purpose of developing real estate and/or transactions involving participation in the proceeds and/or transactions the characteristics of which are those of real estate initiatives and/or the purchase of rights in an entity that is presently engaged in or which will be engaged in the field of real estate initiative transactions, either in Israel or abroad. In respect of each real estate initiative transaction that Danya Cebus and/or one of its subsidiaries will undertake, the Company agrees to render, and Danya Cebus agrees to receive, services for the management of the selling and marketing of the project, in exchange for a fee of 3% of the sales revenues from such project. It was further agreed, that if the Company will waive its above described rights, so that Danya Cebus will be permitted to enter into a real estate initiative transaction relating to rental property, then the Company undertakes to render and Danya Cebus undertakes to receive from the Company, selling, marketing and maintenance management services in exchange for an overall fee of 10% of the sales and/or rental revenues from such project. 219 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) D. (Cont.) Regarding real estate initiative transactions that will be executed by Danya Cebus together with partners and/or through companies in which its rate of holding is less than 100%, the above-mentioned services will be rendered to the project as a whole and/or according to Danya Cebus’ share in the project, and according to the power and the rights which Danya Cebus has, to cause that the above-mentioned services will be rendered by the Company, in accordance with Danya Cebus’ rights and obligations in each such project. If the services will be rendered for a part of a specific project, then the management fees will be paid according to the appropriate proportionate part of the sales revenues. The above-described payments will in no way detract from any undertaking of Danya Cebus to pay management fees in accordance with any other agreement between the parties. The agreement is in force for a period of 5 years, beginning February 2000. Commencing from February 2005 the agreement was extended automatically for an unlimited period of time, however, each party may terminate the agreement by giving 3 months advance written notice to the other party. In addition, provisions were included in the agreement for its cancellation if certain specific circumstances exist if Danya Cebus ceases to be a subsidiary of the Company. The parties to the agreement further agreed that, if Danya Cebus will cease to be a subsidiary of the Company, as such term is defined in the Restrictive Trade Practices Law, 1988, (hereinafter – “the Law”), and that in accordance with the Law as of such date, this agreement will be considered to be a restrictive trade agreement which is in violation of the Law, then it will automatically terminate (unless approval is received from the Commissioner of Restrictive Trade Practices of a request that the parties undertake to submit, of the validity of the provisions of this agreement). In the case of an automatic termination as described above, neither party will have cause for any claim or demand against the other party. It was agreed that any differences of opinion relating to the agreement would be submitted to a single arbitrator, who will be chosen by agreement between the parties. In the event that the parties cannot agree on a mutually acceptable arbitrator, then the arbitrator will be chosen by the senior partners of each of the CPA firms that audit the parties. The rights and obligations of the parties to the agreement are personal, and such rights and obligations may not be assigned to any third party whatsoever. The provisions of the agreement may be altered or cancelled by written mutual agreement. The Company notified Danya Cebus that due to registration of Africa Properties for trading on the stock exchange, the agreement will not continue to apply to Africa Properties. Transactions to be executed in the future by Africa Properties and Danya Cebus will be subject to the approvals required for the transaction, as applicable, in accordance with the Companies Law. 220 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) D. (Cont.) Up to the issuance date of Africa Residences (June 2006), Danya Cebus was not in the practice of bringing contractor transaction with companies from the Africa Group or Africa partnerships that were made in the ordinary course of business and on the customary terms, for approval of the General Meeting of the shareholders. As part of the issuance prospectus of Africa Residences, Africa Residences declared that it is its intention to act to continue the undertaking with Danya Cebus in the framework of its activities (whether projects in which it has no partners or projects in which it has partners), in agreements for execution of construction projects, during the ordinary course of business and on regular market terms. Africa Residences also declared that it intends to sign an updated agreement for arrangement of the undertaking between them as part of a “framework agreement”, within the meaning of this term in the Companies Regulations (Relief in Transactions with Interested Parties), 2000, and that so long as an agreement such as that stated is not duly approved, the undertakings with Danya Cebus will be brought for approval in accordance with the Companies Law. As at the date of this report, Danya Cebus and Africa Residences are negotiating in connection with an agreement as stated. E. Pursuant to the agreement that was signed in February 2000, between the Company and Danya Cebus, the Company undertook to grant to Danya Cebus, individually and/or by means of its subsidiary, management services, consulting and accompaniment in connection with the Cross Israel Highway Project. In exchange, Danya Cebus undertook to pay to the Company, commencing from October 1999, management fees equal to 2.5% of Danya Cebus’ total revenues determined based on Danya Cebus’ share in the total revenues of CJV according to CJV’s adjusted financial statements, including Danya Cebus’ share of the income of the “Contractor” for the Cross Israel Highway Project, but not more than 17.5% of Danya Cebus’ share of CJV’s pre-tax profits based on CJV’s adjusted financial statements, including Danya Cebus’ share of the “Contractor’s” profits from the Cross Israel Highway Project as defined in the Construction Agreement (hereinafter – the “Management Fees”). Danya Cebus will not be liable for payment of Management Fees for its income and/or profits under the subcontract agreement. Calculation of the Management Fees is to be made once a quarter based on Danya Cebus’ adjusted financial statements. The Management Fees are to be paid by Danya Cebus to the Company on a current basis upon receipt of payments by Danya Cebus from CJV or the Contractor, in such a way that from every amount that Danya Cebus receives for its portion in CJV or the Contractor, whether from an advance or final payment, whether during the course of the Project or after its completion, Danya Cebus shall immediately transfer to the Company the proportionate part of the Management Fees as mentioned above, with the addition of linkage differences and interest that will be paid to Danya Cebus, to the extent paid. If Danya Cebus should need to return advances to CJV that it received on account of profits, whether during the course of the Project or after its completion, the Company shall return to Danya Cebus a proportionate part of the Management Fees from any amount that Danya Cebus is required to return as stated. 221 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) E. (Cont.) The agreement is to be in force so long as the CJV agreement remains in force and until conclusion of Danya Cebus’ involvement in the Cross Israel Highway Project and receipt of all the income or payments of any type or kind, that are due to Danya Cebus for the Project in their entirety. F. An agreement was signed between the Company and Africa Properties arranging the areas of activities of the two companies and their legal relationships in this context (hereinafter – “the Activity Areas Agreement”). As part of the Activity Areas Agreement, the Company committed that beginning from September 2004, the date on which the shares of Africa Properties were registered for trading on the Tel-Aviv Stock Exchange (hereinafter – “the Effective Date”), and up to the end of 5 years from the Effective Date, the Company will not engage in rental property activities, as defined in the agreement, throughout the world, except in the United States, Russia and Commonwealth of Nations countries, except in a company as stated that is a “public company” as defined in the Companies Law, 1999 (hereinafter – “the Companies Law”). Notwithstanding that stated above, it was agreed between the parties to the Activity Areas Agreement that the restriction will not apply in certain cases set forth in the agreement, including: – With respect to rental property activities in which the Company and/or a company it controls is/are engaged on the Effective Date. – With respect to rental property activities constituting part of a real estate project, which does not constitute, primarily, a rental property project (such as, commercial centers and residential neighborhoods). – With respect to activities, the execution thereof by Africa Properties or a company it controls will cause a breach of a commitment made to any third party. – With respect to rental property activities on real estate regarding which on the date of acquisition of the rights, it was the intention of the Company or a company it controls, as the case may be, to use it not as rental property or for construction of a rental property. – With respect to rental property activities as a result of a tender (or other similar competitive process) for acquisition of a rental property and/or the management thereof, where Africa Properties does not meet any of its conditions and it is not within its reasonable ability to fulfill a condition as stated. – With respect to an opportunity in the rental property activities area that Africa Properties decided it is not interested in, provided that a decision as stated is approved by Africa Properties in accordance with the provisions of Part Five of the Companies Law regarding approval of an “extraordinary transaction” as defined in the Companies Law. 222 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) F. (Cont.) It was agreed between the parties that if the Company ceases to hold more than 50% in the means of control of Africa Properties, for any reason whatsoever, each of the parties shall be entitled to cancel the agreement during the agreement period (that is, before the end of 5 years from the Effective Date) by means of a written notification to be delivered at least 90 days in advance, as detailed in the Activity Areas Agreement. It was also agreed between the parties that if Africa Properties ceases to be a subsidiary of the Company within the meaning of this term in the Restrictive Trade Practices Law, 1988, (hereinafter – “the Law”), and in accordance with the provisions of the Law, as they were in effect, on the said date, this agreement will be considered a restrictive agreement that is contrary to the provisions of the Law, then the Activity Areas Agreement will automatically be cancelled (unless approval for its existence is received), as detailed in the Activity Areas Agreement. G. In July 2004, Africa Properties signed a management agreement with the Company (with effect from January 2004) for receipt of management, consulting and accompaniment services by the company and its domestic and foreign subsidiaries, as well as with respect to certain joint transactions. The management services include, among others, CEO and director services, financial management, bookkeeping and accounting, internal audit, computer, legal and building maintenance services. In exchange for the maintenance services, Africa Properties is to pay the Company every quarter an amount equivalent to NIS 750 thousand, linked to the Consumer Price Index of December 2003, plus an amount equivalent to 6.5% of the pre-tax income for the quarter based on the company’s quarterly consolidated financial statements. In addition, Africa Properties is to pay the Company the full cost of the salaries of the Company’s employees actually engaged in management of the marketing and maintenance of properties belonging to the Africa Properties Group. The agreement is for a two-year period commencing in January 2004 and will renew automatically for an additional year at the end of each calendar year. Each of the parties may bring the agreement to an end by delivery of a written notification at least 90 days prior to the end of the agreement period. Based on the addendum to the management agreement, dated August 2004, commencing from January 2005 (hereinafter – “the Transfer Date”) the Company employees actually working on the marketing and holding of Africa Properties’ assets were transferred to Africa Properties and they are employed directly by it. The Company committed to Africa Properties to bear all payments relating to employment of the transferred employees up to the Transfer Date and/or in connection with termination of their employment as required by the employment agreement with the transferred employees and pursuant to law, including, and without detracting from that stated above, payments in respect of severance pay of the transferred employees. In addition, the Company has committed to indemnify Africa Properties for any payment it shall bear, directly or indirectly, in respect of the period up to the Transfer Date. Regarding update of the management agreement subsequent to the balance sheet date – see Note 40C(1). 223 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) H. In September 2004, an agreement was signed between Africa Properties and Africa Israel Financing (1985) Ltd. (hereinafter – “Africa Financing”) pursuant to which Africa Properties will be able, with mutual consent, from time to time, to deposit monies with Africa Financing, and from time to time, at the request of Africa Properties and with the consent of Africa Financing, Africa Financing will deposit monies with Africa Properties. These deposits will be of the “on call” variety for a period not in excess of one year from the date of deposit and will bear annual interest at a variable rate based on the prime rate that is in effect from time to time at Bank Leumi less 1.25%. The Company guaranteed all the aforementioned liabilities of Africa Financing. The above-mentioned agreement may be cancelled by means of an advance notice of 3 months and it replaces the conduct of the current financing activities that had been carried on between the parties up to the date of the agreement. In January 2005, this agreement was approved as a framework agreement pursuant to Section 275 of the Companies Law. As at December 31, 2007, the balance of the deposit made by Africa Properties with Africa Financing amounted to about NIS 567 million. Regarding update of the financing agreement subsequent to the balance sheet date – see Note 40C(2). I. Based on an agreement from April 1999 between Memorand Management (1988) Ltd. (hereinafter – “Memorand Management”), a company owned and controlled by Mr. Lev Leviev, the Company’s controlling interest (hereinafter – “the Management Services Agreement”), the following provisions, among others, were stipulated: Memorand Management will provide the Company management services, by means of Mr. Lev Leviev who will serve as Chairman of the company’s Board of Directors. The Management Services Agreement will remain effective until it is cancelled, as follows: – Each party may cancel the Management Services Agreement, for any reason whatsoever, by means of a written notification that will be delivered to the other party 30 days prior to the cancellation date. It is clarified that upon cancellation of the agreement, payment of the management fees to Memorand Management will be discontinued (however there will be no adverse impact on the continued service of Mr. Leviev as Chairman of the company’s Board of Directors). – In addition, in any case of discontinuance of the service of Mr. Leviev as Chairman of the company’s Board of Directors, for whatever reason, the Management Services Agreement will be discontinued immediately upon discontinuance of such service as stated. The consideration for the management services was set at NIS 40 thousand per month (linked to the CPI of January 1999), plus VAT as per law. 224 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) I. (Cont.) The company will provide Mr. Leviev an appropriate vehicle and cellular telephone, and will also bear all expenses and mandatory payments imposed on and/or involved with the vehicle and/or cellular telephone as part of the provision thereof to Mr. Leviev, including payment of the tax in respect of the benefit embedded in provision of the vehicle as stated. In addition, Mr. Leviev is entitled to reimbursement of expenses in the course of performance of his position as Chairman of the company’s Board of Directors, including travel and lodging expenses outside of Israel. The officer liability and indemnification arrangements that apply in the company from time to time, will also apply to Mr. Leviev as an officer of the company. J. Various provisions were determined between the Company and Bank Leumi regarding provision of certain rights in a subsidiary (in which Bank Leumi holds a 20% interest) to Bank Leumi and a list of matters that may be executed only after receiving Bank Leumi’s advance written consent was officially agreed to. In August 2003, the Company entered into another agreement with Bank Leumi, in the framework of which the Company conveyed to Bank Leumi the right to sell to the Company (a “put” option) all its shares in the subsidiary. The right may be exercised at any time up to December 31, 2005 and was extended up to March 8, 2006. The exercise price will be fixed based on a valuation made by an appraiser whose identity was stipulated in the agreement. As part of the process for changing the holdings’ structure of the Company’s rental properties, as stated, shares of the subsidiary were transferred to Africa Properties in accordance with the provisions of the options’ agreement, and Africa Properties undertook in writing all of the Company’s liabilities to Bank Leumi as stated in the above-mentioned agreements, jointly and severally with the Company. In addition, the Company agreed and approved to Africa Properties that if Bank Leumi exercises the “put” option, vis-à-vis the Company, the Company will cause the said shares to be transferred to Africa Properties, subject to the condition that the exercise price in respect of the shares, as determined in the options’ agreement, will be paid by Africa Properties to Bank Leumi in accordance with the conditions of the options’ agreement. In April 2006, Bank Leumi exercised its rights (under the “put” option), pursuant to its notification in March 2006, and sold to Africa Properties all its shares in the subsidiary (that is, 20% of the subsidiary’s issued and paid-up share capital). The exercise price was set at NIS 51,400 thousand. Upon completion of the exercise and payment of the consideration, Africa Properties became the sole owner of the subsidiary’s issued share capital. 225 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) K. In October 2006, the Company’s General Meeting convened to approve a transaction with Ms. Tzvia Leviev, the daughter of Mr. Lev Leviev, the Chairman of the Company’s Board of Directors and its controlling interest. Since October 2000, Ms. Tzvia Leviev has served as the manager of the Marketing Division of the Company’s Residential Division, commencing in January 2006 she has served as manager of the Company’s Shopping Malls Division and in March 2006 she was appointed Deputy CEO of marketing of the Company and of a subsidiary, Africa Residences. In addition, Ms. Tzvia Leviev serves as a member of the Boards of Directors of subsidiaries and related companies of the Company. The General Meeting approved a change of Ms. Tzvia Leviev’s employment conditions with the Company. Pursuant to the revised employment agreement, among other things, Ms. Tzvia Leviev’s compensation will increase from a monthly salary of NIS 52 thousand to a monthly salary of NIS 62 thousand. In addition, Ms. Tzvia Leviev will be entitled to an annual bonus of four monthly salaries (subject to approval by the Company’s Audit Committee and its Board of Directors), as well as provisions for social benefits, a vehicle and other accompanying benefits, in such a manner that her monthly employment cost (not including bonuses as stated) will increase from NIS 67.5 thousand to NIS 80 thousand. The effective period of the revised employment agreement runs from April 1, 2006 up to December 31, 2010. In addition, the General Meeting resolved to confirm bonuses received by Ms. Tzvia Leviev from the Company in connection with her work with the Company from March 2005 and thereafter. Furthermore, a decision was made pursuant to which Africa Residences will issue options to Ms. Tzvia Leviev exercisable for shares of Africa Residences. For details regarding the options’ plan, see Note 2I(3)(a2). L. On November 24, 2006, the Company’s Board of Directors and Audit Committee approved the Company’s undertaking with its controlling interest as follows: a. An undertaking with Mr. Lev Leviev, the controlling interest in the Company, and his wife, Ms. Olga Leviev, in a transaction for sale of the Company’s rights for a capitalized lease from the Israel Lands Administration (hereinafter – “the Administration”) in a land section of the Company in Savyon, on an area measuring 15,023 square meters, for an aggregate consideration of NIS 36.5 million (including VAT), subject to and in accordance with the conditions of the sale agreement to be signed with the purchasers, in the Company’s standard language, subject to adjustments and details. b. The Company’s undertaking with purchasers that are children of the controlling interest in the Company and/or their spouses (hereinafter – “the Additional Purchasers”) in a similar transaction in 8 lots Savyon. The total area amounts to about 7,573 square meters, for an aggregate consideration of NIS 24.3 million (including VAT), subject to and in accordance with the conditions of the sale agreements to be signed with the purchasers, in the Company’s standard language, subject to adjustments and details. In January 2007, the Company’s General Meeting approved the aforementioned sale agreements. 226 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) M. During November and December 2006, the General Meeting of the shareholders of Africa Residences approved an agreement for receipt of portfolio management services from Africa Israel Investment House Ltd. (formerly – Artrade Financial Engineering Ltd.), a company the control of which was acquired, indirectly, by the Company, as well as acquisition of mutual funds managed by a company controlled by the Company at a rate of up to 30% of the value of the securities’ portfolio, in exchange for a commission at an annual rate of 0.25% of the value of the securities’ portfolio (or 0.1% of the value of the securities’ portfolio if the mutual funds are acquired as described above). N. In April 2007, the Company’s Board of Directors approved, after receiving the approval of the Audit Committee, the Company’s undertaking in an agreement for receipt of consulting services from Mr. Nadav Grinshpon (hereinafter – “Mr. Grinshpon”), who serves as a Company director and who is employed by a company controlled by Mr. Lev Leviev, the Company’s controlling interest (hereinafter – “the Consulting Agreement”). Pursuant to the Consulting Agreement, Mr. Grinshpon will provide the Company consulting services in the areas of investments and financing, in accordance with the Company’s directives, including, assistance in examination of the Company’s business opportunities, feasibility analyses, formulation of business outlines in respect thereof and in all that involving the financing of the transactions, and consultation in the area of financing the Company’s activities in general. Mr. Grinshpon will also provide additional services, as will be agreed by the parties from time to time. The consulting services will be provided in the overall scope as will be determined by the Company, however not less than 90 hours per month (not including hours of discussions by the Board of Directors and hours of preparation for such discussions). In exchange for the consulting services, the Company will pay Mr. Grinshpon NIS 30,000, plus VAT as per law, for every calendar month. In addition, Mr. Grinshpon will be granted 100,000 non-marketable options, exercisable for 100,000 of the Company’s ordinary shares, pursuant to an options’ plan, the highlights of which are detailed in Section G., below. Subject to receipt of all the approvals required by law, the Consulting Agreement will be valid for a period of 12 months from the date it enters into effect. The period of the Consulting Agreement will be automatically extended every year, for additional periods of 12 months each. The undertaking in the Consulting Agreement was approved by the General Meeting of the Company’s shareholders. 227 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) O. In April 2007, the Company’s Board of Directors decided (after receiving the approval of the Company’s Audit Committee) to approve a plan for issuance of options (hereinafter – “the Plan”) to Mr. Nadav Grinshpon, who serves as a Company director and who is employed by a company controlled by Mr. Lev Leviev, the Company’s controlling interest. The Plan was approved by the General Meeting of the Company’s shareholders and it requires the approval of the Tax Authorities. Pursuant to the Plan, the Company will issue to a trustee for the offeree 100,000 non-marketable options, exercisable for 100,000 of the Company’s ordinary shares of NIS 0.1 par value (subject to adjustments), constituting as at the signing date of the financial statements (assuming exercise of all the options) about 0.2% of the Company’s issued share capital. This calculation is theoretical since, as a practical matter, in any case of exercise of the options, the full number of the exercise shares will not be issued but, rather, only that number of exercise shares reflecting the benefit component in the options exercised, as such number is calculated on the exercise date of those options as detailed below. The exercise period of the options is as follows: 20,000 options are exercisable commencing from the end of the two years from the date of their issuance (hereinafter – “the Effective Date”), 20,000 options are exercisable commencing from the end of the three years from the Effective Date, 20,000 options are exercisable commencing from the end of the four years from the Effective Date, 20,000 options are exercisable commencing from the end of the five years from the Effective Date and 20,000 options are exercisable commencing from the end of the six years from the Effective Date. Each portion of the options is exercisable commencing from the beginning of the relevant exercise period and up to the end of three years from that date. In general, the offeree’s right to exercise the options pursuant to the Plan is contingent on the offeree being a director of the Company and the Consulting Agreement referred to in Section F., above being in effect on the date of exercise. The exercise price of each option is NIS 367. The exercise price is linked to increase in the representative rate of exchange of the U.S. dollar compared with the representative rate of exchange of the U.S. dollar on April 1, 2007 (NIS 4.155 for U.S.$1), and will bear interest at the 12-month Libor rate commencing from May 31, 2006 and up to the exercise date (hereinafter – “the Exercise Price”). The Exercise Price will serve solely for determining the amount of the benefit as detailed below and will not actually be paid to the Company. On the date of exercise, a calculation will be made of the difference between: (A) the closing price on the stock exchange of one ordinary share of NIS 0.1 of the Company on the trading day preceding the exercise date, multiplied by the number of the said exercise shares deriving from the options exercised (adjusted as stated above) and (B) the Exercise Price of the options exercised on that date, multiplied by the number of options exercised; and the amount of the monetary benefit to the offeree will be determined in respect of this difference, on the exercise date. 228 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) O. (Cont.) After calculation of the monetary benefit, the Company will issue to the trustee on behalf of the offeree only that number of exercise shares the total market value of which (based on the closing price of a Company share on the stock exchange on the trading day preceding the exercise date) equals the amount of the monetary benefit. The exercise shares will be issued against payment of their par value. Issuance of the options under the Plan will require the Company to record an expense in its financial statements, in the amount of the value of the benefit embedded in the options in accordance with the generally accepted accounting principles applying to the Company. The average fair value of each option was calculated based on the Black and Scholes formula and, accordingly, the average economic value of each option is NIS 106.9. The main assumptions that served as the basis for calculation of the economic value, as stated, are: a share price of NIS 389.4; exercise price as described above; discount rate ranging between 4.0% and 4.4%; expected life of the option ranging between 3 and 7 years: and an annual standard deviation ranging between 33.8% and 36.7%. Based on the above calculation, as at the signing date of the financial statements, the fair value of the options is about NIS 11 million. In the period of the report, the Company recorded an expense of about NIS 2 million. P. In June 2006, as part of its preparations to issue securities to the public as part of an IPO (initial public offering), a number of agreements were signed with Africa Residences as detailed below: (1) Pursuant to a management agreement signed in June 2006, between the Company and Africa Residences, the Company provides to Africa Residences, by itself or by means of its subsidiaries, management, consulting, and office accompaniment and administration services (hereinafter – “the Management Services”), in exchange for an unlinked quarterly fee of NIS 1.1 million. The management agreement entered into effect on July 1, 2006, and runs for a period of five years commencing from the aforesaid date. Pursuant to approval of the Company’s Board of Directors and the Audit Committee from March 2007 and approval of the General Meeting from April 2007, Africa Residences entered into an agreement with the Company revising the agreement for receipt of management services from the Company whereby the quarterly management fees will be reduced from NIS 1.1 million to NIS 350 thousand, Africa Residences will not be entitled to receive computer and communications equipment from the Company, it will purchase from the Company the computer and communications equipment its uses based on the depreciated value thereof on the Company’s books in exchange for a consideration of about NIS 121 thousand and the possibility included in the original management services’ agreement to reduce its scope will be cancelled. Revision of the agreement entered into effect commencing from January 1, 2007. 229 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) P. (Cont.) (2) Pursuant to the addendum to the management services’ agreement (see Section (1) above), in August 2006 the Company employees that are effectively engaged in Africa Residences’ matters will be transferred to Africa Residences such that they will be employed directly by it, subject to their advance, written consent to the transfer. The Company committed to Africa Residences to bear the full amount of the payments relating to employment of the Residential Division employees up to the transfer date and/or in connection with termination of their employment as required by the employment agreements with the Residential Division employees and in accordance with law, including (and without detracting) amounts for purposes of severance payments to the Residential Division employees. In addition, the Company committed to indemnify Africa Residences in respect of every payment it bears, directly or indirectly, relating to the period up to the transfer date. (3) In June 2006, an agreement was signed between the Company and Africa Residences covering the areas of their activities and their legal relationships in this context (hereinafter – “the Activities Boundary Agreement”). Under the terms of the Activities Boundary Agreement, the Company committed that, commencing from the registration date of Africa Residences’ shares for trading (hereinafter – “the Effective Date”) and up to the end of five years, it will not engage in residential real estate initiation activities in the State of Israel and the Region (as this term is defined in the Income Tax Ordinance, hereinafter – “the Restricted Areas”) and will not hold an interest in the control group of another company that is engaged in residential real estate initiation activities in the Restricted Areas, except for a company as stated that is a “public company” as this term is defined in the Companies Law. Notwithstanding that stated above, it was agreed by the parties to the Activities Boundary Agreement that the restriction shall not apply in any one of the following situations: – With respect to residential real estate initiation activities that the Company and/or a company controlled by it are involved in on the Effective Date, including (in order to remove all doubt), in connection with assets earmarked for residential purposes that were acquired by the Company and/or a company controlled by it prior to the Effective Date and/or that were managed by one of them prior to the Effective Date. – With respect to residential real estate initiation activities in the framework of a real estate project that does not, principally, constitute a property earmarked for residential purposes as defined above (such as, residential units in office buildings or hotels). – With respect to residential real estate initiation activities regarding which execution thereof by Africa Residences or a company controlled by it will cause the breach of a commitment made by Africa Residences to any third party whatsoever. 230 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) P. (Cont.) (3) (Cont.) – With respect to residential real estate initiation activities on real estate regarding which on the acquisition date of the rights therein it was the intention of the Company and/or a company controlled by it, as the case may be, not to make use thereof as a property earmarked for residential purposes. – With respect to residential real estate initiation activities resulting from a tender (or other similar competitive process) for acquisition of a property earmarked for residential purposes and/or management of its construction and the marketing thereof, regarding which Africa Residences does not meet one or more of the conditions thereof and it is not within its reasonable capability to meet such condition/s. – With respect to a business opportunity in the residential real estate initiation activities area that Africa Residences decided it is not interested in. – With respect to activities in the housing for the elderly area. From its side, Africa Residences committed that commencing from the Effective Date it will not engage in real estate activities outside of the Restricted Areas, unless the Company has given its approval for such engagement. It was agreed between the parties that if the Company ceases to hold an interest in Africa Residences’ control group, for any reason whatsoever, each of the parties to the agreement will be permitted to cancel the agreement within the agreement period (i.e., prior to the end of five years from the Effective Date). In addition, it was agreed between the parties that if Africa Residences ceases to be a “subsidiary” of the Company, within the meaning of this term in Restrictive Business Practices Law, 1988, and if in accordance with the provisions of the Restrictive Business Practices Law, as they will be in effect as at the said date, this agreement constitutes a restrictive agreement in violation of the provisions of the Restrictive Business Practices Law, then the Activities Boundary Agreement will automatically become ineffective (unless approval is received as required by the Restrictive Business Practices Law for fulfillment of these provisions based on a request the parties undertake to submit), as detailed in the Activities Boundary Agreement. (4) In June 2006, agreements were signed between Africa Residences and Africa Israel (Financing) 1985, Ltd. (a subsidiary company, hereinafter – “Africa Financing”) pursuant to which Africa Residences will be permitted, with mutual agreement, from time to time, at Africa Residences’ request and with the consent of Africa Financing, to borrow money from Africa Financing or to deposit money with Africa Financing. 231 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) P. (Cont.) (4) (Cont.) The loans and deposits will be of the “on call” type, for a period not in excess of one year and will bear variable interest at the prime rate that is in effect, from time to time, at Bank Leumi L’Israel less 1.25% per year. The maximum amount of the loans that Africa Residences may receive from Africa Financing under this agreement, at any given time, may not exceed NIS 250 million, and the maximum amount of the deposits that Africa Residences may deposit with Africa Financing, at any given time, may not exceed 33% of its shareholders’ equity. The loan agreement will be effective for a period of five years from the registration date of Africa Residences’ shares for trading on the stock exchange (June 2006), unless it is cancelled by one of the parties at an earlier time. The deposit agreement will be effective for a period of five years from the date of its approval by the General Meeting (December 2006), unless it is cancelled by one of the parties at an earlier time. The Company will be a guarantor of Africa Financing’s liabilities under these agreements. (5) In June 2006, an agreement was signed between the Company and Africa Residences pursuant to which the Company committed to irrevocably assign and endorse to Africa Residences, all of the Company’s rights and liabilities to provide project management services in respect of projects detailed in the agreement. The agreement for assignment of rights in project management agreements entered into effect upon registration of Africa Residences’ shares for trading on the stock exchange. (6) In June 2006, a project management agreement was signed between the Company and Africa Residences pursuant to which the Company committed to transfer to Africa Residences the management of two projects (“New Savyon” and “Kiryat Hasavyonim”) that are located on land regarding which the Company is the rights’ owner and regarding which on the signing date of this agreement there were no existing project management agreements. In exchange for the management services, as stated above, it was agreed that the Company will pay Africa Residences an amount equal to 4.75% of the total receipts (not including VAT) obtained from sale of the units in the project. The project management agreement entered into effect in June 2006. 232 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) P. (Cont.) (7) In June 2006, an agreement was signed between the Company and Africa Residences pursuant to which Africa Residences will provide economic services and Urban Planning Scheme and land registration services (hereinafter – “the Services”) to the Company. The Services are to be provided to the Company by the employees of Africa Residences’ Economics Department and of the Urban Planning Scheme and Land Registration Services Department, in exchange for the payment of unlinked quarterly management fees in the amount of NIS 150 thousand. The annual scope of the Services to be provided to the Company is not to exceed 30% of the aggregate employment hours of the employees of the departments. This agreement is contingent on transfer of the Residential Division Employees, pursuant to the addendum to the Management Agreement (see Section D., above), and it will be valid for a period of two years from the transfer date of the employees as stated and will renew automatically for an additional year at the end of every calendar year. Pursuant to approval of the Company’s Board of Directors and the Audit Committee from March 2007 and approval of the General Meeting from April 2007, the scope of the services provided by the Urban Planning Scheme and Land Registration Services Department (only) from the equivalent of 30% of a full-time position on an annual basis to the equivalent of 50% of a full-time position and the total quarterly consideration will increase from NIS 150 thousand to NIS 350 thousand, commencing from January 1, 2007. (8) In June 2006, an agreement was signed between the Company and Africa Residences for use of a trademark pursuant to which Africa Residences was granted the right to use the trademark, with no limitation as to time and for no consideration, in the course of its business and in the areas of its activities, so long as the Company holds more than 50% of the voting rights at the Company’s General Meeting. (9) In June 2006, Africa Residences decided to provide an indemnification commitment to officers relating to its prospectus (hereinafter – “the Indemnification Decision”). The indemnification commitment will apply to every liability or monetary expense imposed on the officer stemming from his actions, as detailed in the Indemnification Decision. The cumulative amount of the indemnification to be paid by Africa Residences to all parties entitled to indemnification in respect of a monetary liability pursuant to a court decision may not exceed 25% Africa Residences’ shareholders’ equity based on the latest annual financial statements published prior to the actual payment date of the indemnification. In addition, under the terms of the underwriting agreement, Africa Residences committed to indemnify the underwriters for a liability imposed on them in connection with the prospectus, in accordance with the conditions set forth in the underwriting agreement. The amount of the indemnification may not exceed NIS 520 million. 233 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 36 – Interested and Related Parties (Cont.) P. (Cont.) (10) In July 2007, the Board of Directors and the Audit Committee of Africa Residences approved an undertaking with Danya Cebus in a contracting agreement in connection with Savyonei Ramat Aviv (hereinafter – “the Project”). Pursuant to the agreement, Danya Cebus will serve as the main contractor with respect to Buildings 7, 8 and 9, which are being constructed, in equal shares by Africa Residences and a third party as part of a joint venture, in exchange for an overall consideration of about NIS 65 million (non including VAT), subject to possible changes in the scope of the project and adjustment of the consideration. In September 2007, the agreement was approved by the General Meeting of Africa Residences. (11) During 2006, the General Meeting of the shareholders of Africa Residences approved an agreement for receipt of portfolio management services from Africa Israel Investment House Ltd. (formerly – Artrade Financial Engineering Ltd.), a company the control of which was acquired, indirectly, by the Company, as well as acquisition of mutual funds managed by a company controlled by the Company at a rate of up to 30% of the value of the securities’ portfolio, in exchange for a commission at an annual rate of 0.25% of the value of the securities’ portfolio (or 0.1% of the value of the securities’ portfolio if the mutual funds are acquired as described above). (12) Pursuant to approval of the Company’s Board of Directors and the Audit Committee from March 2007 and approval of the General Meeting from April 2007, the Company entered into an agreement with Africa Residences for provision of various management services to projects that are and/or were owned by the Company and/or its related companies, pursuant to which Africa Residences will provide the Company various services in connection with projects in which the Company and/or its related companies have and/or had rights, in exchange for quarterly management fees in the amount of NIS 300 thousand (subject to the amount of the services provided). The agreement entered into effect on January 1, 2007. Q. Regarding liabilities and guarantees in respect of a project of Derech Eretz (an affiliated company) – see Note 2I(5). R. Regarding a joint venture with the controlling interest in the real estate area – see Note 2I(1)(a3). S. Regarding an option on shares of Africa Properties granted to Bank Leumi – see Note 2I(2)(A). 234 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting A. Products and Services The reporting format of the Company reflects the principal and material source of risks and reward to which the Company is exposed. The reporting format includes a primary report (according to products and services) and a secondary report (geographic), according to the main geographic source of revenues and risks, as stated above. The accounting principles implemented in preparing the segment information correspond with the generally accepted accounting principles applied in the preparation of the Company’s consolidated financial statements. 2007 Real estate development Construction and contracting Infrastructures Rental properties Industry Other Adjustments Consolidated 2,637,900 – 2,637,900 747,940 90,082 838,022 907,356 – 907,356 2,538,750 – 2,538,750 1,426,591 – 1,426,591 4,520,259 – 4,520,259 – (90,082) (90,082) 12,778,796 – 12,778,796 2,543,029 766,675 1,072,104 128,627 1,260,267 735,453 – 6,506,155 – 92,274 – – – – (92,274) – 2,543,029 94,871 858,949 (20,927) 1,072,104 (164,748) 128,627 2,410,123 1,260,267 166,324 735,453 3,784,806 (92,274) 2,192 6,506,155 6,272,641 23,482 71,389 6,658 (27,585) 8,077 (172,825) 66,640 2,343,483 49,920 116,404 61,057 3,723,749 – 2,192 215,834 6,056,807 – 14,901 Revenues Sales outside the group Inter-segment sales Total revenues Allocated costs Costs not constituting revenue in another segment Costs constituting revenue in another segment Total allocated costs (before administrative and general expenses) Gross profit Administrative and general expenses Segment results Income (losses) from affiliated companies (730) Unallocated expenses 3,554 (3,304) 95,938 – 110,359 88,630 Operating income before financing 6,078,536 Financing expenses, net 610,937 Operating income after financing 5,467,599 Taxes on income (622,298) Minority interest in earnings of subsidiaries, net (591,436) Net income 4,253,865 235 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting (Cont.) A. Products and Services (Cont.) 2006 Hotels Rental and properties leisure* Real estate development Construction and contracting Infrastructures Sales outside the group 2,275,391 789,811 478,615 424,813 Inter-segment sales Total revenues – 2,275,391 90,980 880,791 – 478,615 1,200,335 762,976 – Industry Other Adjustments Consolidated 347,693 387,200 301,105 – 5,004,628 – 424,813 – 347,693 – 387,200 – 301,105 (90,980) (90,980) – 5,004,628 450,717 208,209 167,608 227,189 71,952 – 3,088,986 81,790 – – – – – (81,790) – Revenues Allocated costs Costs not constituting revenue in another segment Costs constituting revenue in another segment Total allocated costs (before administrative and general expenses) Gross profit Administrative and general expenses Segment results Income (losses) from affiliated companies 1,200,335 844,766 450,717 208,209 167,608 227,189 71,952 (81,790) 3,088,986 1,075,056 36,025 27,898 216,604 180,085 160,011 229,153 (9,190) 1,915,642 20,656 1,054,400 7,996 28,029 4,345 23,553 11,207 205,397 141,171 38,914 133,582 26,429 – 229,153 – (9,190) 318,957 1,596,685 696 16,457 – 130,670 (6,643) (6,015) Unallocated expenses (6,931) – 128,234 65,262 Operating income before financing 1,659,657 Financing expenses, net 424,933 Operating income after financing 1,234,724 Taxes on income (189,738) Minority interest in earnings of subsidiaries, net (201,321) Net income 843,665 * Restated due to first-time application of accounting standard – see Note 1ZL(2). 236 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting (Cont.) A. Products and Services (Cont.) 2005 Hotels Rental and properties leisure* Real estate development Construction and contracting Infrastructures 2,017,054 633,013 157,117 305,013 – 2,017,054 116,145 749,158 – 157,117 1,216,319 608,453 – Industry Other Adjustments Consolidated 283,030 429,337 250,790 – 4,075,354 – 305,013 – 283,030 – 429,337 – 250,790 (116,145) (116,145) – 4,075,354 142,182 139,597 142,163 258,048 17,824 – 2,524,586 105,774 – – – – – (105,774) – 714,227 34,931 142,182 14,935 139,597 165,416 142,163 140,867 258,048 171,289 17,824 232,966 (105,774) (10,371) 2,524,586 1,550,768 7,269 27,662 1,524 13,411 6,695 158,721 119,273 21,594 172,347 (1,058) – 232,966 – (10,371) 326,678 1,224,090 759 13,998 (17,679) – 231,155 Revenues Sales outside the group Inter-segment sales Total revenues Allocated costs Costs not constituting revenue in another segment Costs constituting revenue in another segment Total allocated costs (before administrative and general expenses) 1,216,319 800,735 Gross profit Administrative and general expenses 19,570 Segment results 781,165 Income (losses) from affiliated companies (331) Unallocated expenses Operating income before financing Financing expenses, net Operating income after financing Taxes on income Minority interest in earnings of subsidiaries, net Cumulative effect of change in accounting method Net income (7,590) – 220,312 46,813 1,397,589 268,379 1,129,210 (312,724) (166,282) (1,420) 648,784 * Restated due to first-time application of accounting standard – see Note 1ZL(2). 237 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting (Cont.) A. Products and Services (Cont.) 2007 Real estate development Construction and contracting 12,519,680 Infrastructures Rental properties Industry Other Adjustments Consolidated 1,358,164 125,400 11,260,691 1,442,256 1,837,406 132,937 28,676,534 – 340,858 309,578 3,251 336,402 – 1,548,582 Additional Information Segment assets Equity and other investments 558,493 Unallocated assets 10,624,156 Total consolidated assets Segment liabilities 40,849,272 9,682,305 851,484 1,038,431 705,317 1,398,176 110,107 28,374 13,814,194 Unallocated liabilities 20,027,064 Total consolidated liabilities 33,841,258 Capital investments 2,991,645 332,135 30,666 1,849,329 339,846 272,125 (27,856) 5,787,890 30,282 3,285 303 10,970 21,356 33,666 (25,450) 77,412 724,604 188,331 228,472 787,013 485,041 738,087 – Depreciation and amortization Minority interest in earnings 238 3,151,548 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting (Cont.) A. Products and Services (Cont.) Rental properties 2006 Hotels and leisure Industry Other Adjustments Consolidated 63,401 2,287,736 1,051,400 288,775 1,256,665 21,763 14,230,871 323,378 127,760 6,098 400,309 4,938 – 1,133,598 Real estate development Construction and contracting Infrastructures 8,867,394 393,737 266,896 4,219 Additional Information Segment assets Equity and other investments Unallocated assets 3,406,268 Total consolidated assets Segment liabilities 18,770,737 4,408,841 266,551 50,408 128,327 70,745 135,738 991,430 (88,613) Unallocated liabilities 9,999,973 Total consolidated liabilities Capital investments 5,963,427 15,963,400 1,414,814 8,487 4,185 374,973 73,932 12,206 24,490 (17,684) 1,895,403 64,574 4,620 2,885 44,604 31,211 24,104 4,583 – 176,581 614,692 210,011 127,264 116,116 48,399 – – – 1,116,482 Depreciation and amortization Minority interest in earnings 239 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting (Cont.) A. Products and Services (Cont.) Rental properties 2005 Hotels and leisure Industry Other Adjustments Consolidated 199,932 2,092,951 1,017,748 328,531 305,001 32,022 11,312,873 272,048 49,020 12,888 401,378 – 977,695 Real estate development Construction and contracting Infrastructures 7,264,364 72,324 217,763 3,215 Additional Information Segment assets Equity and other investments 21,383 Unallocated assets 3,236,803 Total consolidated assets Segment liabilities 15,527,371 5,160,427 276,373 54,016 82,654 74,245 146,234 1,731,745 40,689 Unallocated liabilities 5,984,293 Total consolidated liabilities Capital investments 7,566,383 13,550,676 103,761 9,139 – 2,254,938 83,394 11,826 13,344 2,043 2,478,445 26,618 9,784 – 52,121 38,074 4,920 9,400 (6,808) 134,109 614,627 164,583 40,850 50,937 33,284 51,933 – 956,214 Depreciation and amortization Minority interest in earnings 240 – Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 37 – Segment Reporting (Cont.) B. Set forth below is a breakdown of sales by geographical segments based on location of customers (export destinations): For the Year Ended December 31 2006 2007 Israel Europe North America Other 4,842,237 1,512,690 2,873,645 3,550,225 12,778,797 2,506,287 1,373,445 382,957 741,939 5,004,628 Below is a breakdown of assets and capital investments by geographical segments based on location of the assets: Total Segment Assets As at December 31 2006 2007 Israel Europe North America Other 14,431,523 14,483,220 10,986,545 947,984 40,849,272 *7,442,001 3,044,755 7,481,494 802,487 18,770,737 Capital Investments As at December 31 2006 2007 Israel Europe North America Other 745,667 2,527,954 2,511,817 2,452 5,787,890 241,659 1,277,917 375,827 – 1,895,403 * Restated due to first-time application of accounting standard – see Note 1ZL(2). 241 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments The Company has exposure during the regular course of business to changes in interest rates, exchange rates, inflation, raw material prices, other prices and prices of securities in and outside of Israel. The Company makes use of derivative financial instruments in order to reduce the exposure to these risks. A. Credit Risks The income of the Company and its subsidiaries derives mainly from sales to customers in Israel, the United States, Russia and countries in Eastern Europe. The managements of the Company and its subsidiaries monitor the customer debts on a current basis and the financial statements include specific provisions for doubtful debts that properly reflect, in the estimations of the managements, the loss embedded in those debts the collection of which is doubtful. Debts and revenues receivable relating to customers in the construction and real estate segment are secured, for the most part, by the various properties acquired by the aforesaid customers since such properties are not transferred into their names until their debts have been paid. B. Interest Risks The Company’s interest rate risk stems from short-term loans and long-term loans and debentures. The Company has loans at variable and fixed interest rates and, therefore, its financial results (financing expenses) are exposed to cash flow risks due to an interest rate change. The Company has commenced a process of exchanging shekel loans with CPI-linked shekel loans. The transactions into which the Company enters with respect to fixed/variable interest are transactions relating to a change in the foreign currency interest rates. Such transactions are not for hedging purposes. The tables on the following page present the book values of the derivative financial instrument groups, which are exposed to fair value risk and/or cash flow risk in respect of interest rates, based on the earlier of the repayment or price renewal dates. 242 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments (Cont.) B. Interest Risks (Cont.) December 31, 2007 Note Instruments bearing fixed interest Long-term receivables Debentures Convertible debentures Loans from banks: Shekel – unlinked Shekel – linked U.S. dollar Euro Other Loans from others Instruments bearing variable interest Long-term receivables Loans from banks: Shekel – unlinked Shekel – linked U.S. dollar 4 15 15 15 Averag e effectiv e rate (%) Total 5 4.2–5.9 5.1–5.2 6.5 5.5 7 7 15 4 4 Libor + 1.8–2 Up More to than Not yet determined 1 year 1–2 years 2–3 years 1,520,914 8,760,209 58,260 278,207 617,839 57,322 42,175 605,124 938 992,722 628,689 116,958 698,044 157,815 218,293 13,151,904 – – 99,846 – – 2,311 1,055,525 86,958 121,319 17,112 – – 1,065 874,691 – 3–4 years 4–5 years 5 years – 765,013 – – 1,043,492 – – 1,376,322 – 258,116 4,352,419 – 942,416 – – – 148,887 – – – 62 913,962 – – – 128,946 – 8,919 1,181,357 – 40,404 – – – 3,067 1,419,793 401,351 318,079 – – – – 5,329,965 504,413 – – 569,098 157,815 202,869 2,376,611 – – – 488,008 – – 488,008 557,187 228,085 73,957 – 364,513 228,085 25,784 – 92,933 – – – – – – – 6,390,409 2,103,197 611,492 3,024,186 651,534 – – – 779,928 37,979 40,774 136,661 8,659,031 12,196 37,979 40,774 1,477 2,269,580 293,159 – – 42,828 1,540,077 39,898 – – – 3,089,868 40,674 – – 6,117 791,258 41,363 – – 6,689 48,052 15 3.4–4.6 5.8 Libor + 1–3 3M Eurobar 6.1–7.8 Euro Czech Koruna Other Loans from others 7 352,638 – – 79,550 432,188 – – – – 488,008 December 31, 2006 Note Instruments bearing fixed interest Long-term receivables Debentures Convertible debentures Loans from banks: Shekel – unlinked Shekel – linked U.S. dollar Euro Loans from others Instruments bearing variable interest Long-term receivables Loans from banks: U.S. dollar Euro Swiss franc Loans from others 4 15 15 15 15 4 15 Averag e effectiv e rate (%) Total 6 5 77,509 (5,031,507) (92,373) 5 5 8 6 5 (388,140) (429,199) (1,453,180) (23,331) (21,373) (7,361,594) Up More to than Not 5 years yet determined 1 year 21,929 (583,448) (58,204) 1–2 years 2–3 years 3–4 years 4–5 years 2,838 (602,310) (32,372) 21,280 (594,428) (1,797) – (298,438) – – – (582,181) (2,370,702) – – 31,462 – – – (7,106) (50,221) (192,237) – (1,367,944) (436) (436) (9,213) – (679,593) (2,199,567) – (70,258) (85,236) (436) – (730,875) – (25,931) – (436) – (324,805) – (381,034) (11,475) (79,077) – – (436) (21,151) – – (594,092) (2,851,964) – – – – (12,160) 19,302 6 544,683 544,683 – – – – – – 6 6 4 5 (335,289) (572,365) (28,679) (2,281) (393,931) (335,289) (572,365) (28,679) (2,281) (393,931) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 243 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments (Cont.) C. Foreign Currency Risks The Company has loans and deposits in various currencies. Fluctuations in the rates of exchange (mainly in relation to the U.S. dollar and the euro) of the currencies have a positive or negative impact on the Company’s financing income and expenses. The Company operates in various different countries, wherein the reporting currency is not the Israeli shekel (the reporting currency in the foreign countries in which the Company operates is generally U.S. dollar or the euro). As a result, in a case of a change in the real exchange rates of the shekel vis-à-vis the euro or the dollar, there is a risk to the Company’s reported results and its shareholders’ equity. Some of the payments for which the Company is obligated (mainly in the construction segment), which generally relate to the cost of employing foreign workers, acquisition of certain raw materials and import from overseas of construction inputs and/or equipment, are linked directly or indirectly to foreign currency rates. Changes in the foreign currency exchange rates could impact the Company’s activities even indirectly by increasing the prices of raw materials and other inputs and as a result increasing the cost of the undertaking with suppliers, subcontractors and other service providers. Therefore, changes in foreign currency exchange rates could impact the Company’s activities and its results. In addition it is noted that the Company operates in the market for foreign currency financial derivatives. The results of the activities in this market have an impact on the Company’s present and future results. Some of the transactions the Company undertakes are for economic hedging purposes, in order to hedge its financing expenses and cash flows paid against loans and deposits in foreign currency. The scope of the hedging on the loans is determined from time to time in accordance with the discretion of the Company’s party responsible for risks. D. Fair Value of Financial Instruments The following table details the book values and fair values of groups of financial instruments presented in the financial statements not in accordance with their fair values: December 31, 2007 Book Fair Value Value Debentures (including convertible debentures) Liabilities to banks and others December 31, 2006 Book Fair Value Value 8,818,469 8,834,002 *– *– 16,603,509 16,445,605 8,708,600 8,465,971 The fair value of the long-term loans received is based on a calculation of the present value of the cash flows at the customary interest rate for similar liabilities having similar characteristics. * As at December 31, 2006 the book value of the debentures, the convertible debentures and the other liabilities 244 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments (Cont.) E. Sensitivity Analysis The book value of the cash and cash equivalents, short-term investments, marketable securities, trade receivables, other receivables and debits, credit from banks and others, liabilities to contractors, suppliers and service providers, payables and other credits, debentures, convertible debentures and other liabilities corresponds to or approximates their fair values. As part of management of the interest, index and foreign currency risks, the Group strives to reduce the impact of short-term fluctuations on its earnings. Nonetheless, in the longterm, changes in the foreign currency and interest rates impact the Company’s earnings. As at December 31, 2007, the Company estimates that an increase of one percent in the interest rate will cause a decrease in the Group’s pre-tax income of NIS 129,801 thousand. The calculation includes the impact of the Group’s interest rate SWAP transactions. In addition, the Company estimates that an increase of one percent in the rate of exchange of the dollar will cause a decrease in the Group’s pre-tax income of NIS 8,130 thousand for the year ended December 31, 2007. The calculation includes the impact of the Group’s derivative financial instruments. 245 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments (Cont.) F. Report according to Linkage Bases December 31, 2007 Foreign currency Israeli currency Unlinked Linked to the CPI Linked to the building inputs index Euro Dollar Investments in affiliated and 66,070 293,585 – 11,313 6,260 other companies – – – – – Fixed assets Long-term loans 147,247 263,849 1,047,983 – 253,770 and debit balances – – – – – Real estate Real estate for – – – – – investment Real estate for investment under – – – – – construction Current assets Inventory of buildings for sale – – – – – Work in progress, net – – – – – Other inventory – – – – – Deferred tax asset – – – – – Trade receivables 514,248 251 204,749 14,558 1,302,092 Other receivables and debit balances 253,108 173,064 – 4,954 1,360,146 Marketable securities 684,429 32,845 – – 646,400 Short-term investments 62,095 – – 101,943 647,378 Cash and cash equivalents 520,149 142,080 – 191,914 3,667,845 Other assets and deferred expenses – – – – – 2,247,346 905,674 1,252,732 324,682 7,883,891 Total assets -------------- -------------- -------------- -------------- -------------Long-term liabilities Receipts on account of options in subsidiary – – – – – Debentures (417,775) (7,188,625) – – (518,422) Convertible debentures – (18,486) – – – Liabilities to banks (423,940) (1,853,070) – (1,418,246) (4,361,045) Other liabilities (26,111) (22,547) (132,414) (45,506) (79,452) Deferred tax liability – – – – – Liabilities for employee severance pay, net (24,090) – – – – Current liabilities Credit from banks and others (1,620,051) (2,546,133) – (404,184) (3,171,271) Contractors and suppliers (573,374) (220,294) (12,750) (73,583) (483,246) Other payables and credit balances (380,506) (77,491) – (380,571) (512,090) Deposits, net, less work in progress – – – – – (3,465,847) (11,926,646) (145,164) (2,322,090) (9,125,526) Total liabilities -------------- -------------- -------------- -------------- -------------Total excess assets (liabilities) (1,218,501) (11,020,972) (1,107,568) (1,997,408) (1,241,635) 246 Other Joint venture in securities – – – – 1,171,354 2,075,000 1,548,582 2,075,000 – – – 2,488,250 1,730,715 2,488,250 – – 8,358,268 8,358,268 – – 8,125,485 8,125,485 – – – – 32,519 – – – – – 4,448,193 4,559 489,153 449,516 – 4,448,193 4,559 489,153 449,516 2,068,417 113,643 – – 148,536 17,866 – 83,409 Other items Total – 1,916,191 11,276 1,512,210 – – 811,416 – – – 4,605,397 – 247,437 ----------- – 148,536 ----------- 217,920 27,838,974 -------------- – – – (204,535) (44,939) – – – – – – – (62) – – – – (1,348,184) – – – (24,090) (250,065) – – (7,991,704) (97,919) – – (1,461,166) (183,929) – – (1,534,587) – (781,387) ----------- – – ----------- (533,950) 148,536 217,920 40,849,272 --------------- (62) (8,124,822) (18,486) (8,260,836) (350,969) (1,348,184) (15,332) (15,332) (1,363,578) (29,130,238) -------------- --------------26,475,396 11,719,034 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments (Cont.) F. Report according to Linkage Bases (Cont.) December 31, 2006 Foreign currency Israeli currency Unlinked Investments in affiliated and other companies Fixed assets Long-term loans and debit balances Real estate Current assets Inventory of buildings for sale Other inventory Deferred tax asset Trade receivables Other receivables and debits balances Marketable securities Short-term investments Cash and cash equivalents Other assets and deferred expenses Total assets Long-term liabilities Receipts on account of options Debentures Convertible debentures Liabilities to banks Other liabilities Deferred taxes Liability for employee severance pay, net Current liabilities Credit from banks and others Contractors and suppliers Payables and other credit balances Advances, net, less construction in process Total liabilities Total excess assets (liabilities) Linked to the CPI Linked to the building inputs index Euro Dollar Other Other items Total – – 744,157 6,748,297 1,133,598 6,748,297 9,105 – 361,311 – – – – – 19,025 – 105,310 – 518,610 – – – – – 470,313 – 1,217 – – 1,562,316 1,095,450 1,562,316 – – – 53,529 – – – 22,116 – – – 194,270 – – – 14,004 – – – 601,414 – – – 63,335 2,456,752 95,187 243,619 – 2,456,752 95,187 243,619 948,668 161,716 816,161 77,702 845,079 40,781 3,447 – – – – – – 23,273 – 13,365 72,709 1,105,503 427 900,097 270,609 29,869 7,259 9,000 15,672 – 14,380 – – 1,361,142 841,674 1,000,164 1,204,069 – 2,068,602 -------------- – 946,265 -------------- – 194,270 ----------- – 123,351 ----------- – 3,367,388 -------------- – 126,352 ----------- 86,823 11,951,531 -------------- 86,823 18,777,759 -------------- – – – 303,689 35,087 – – 3,941,059 32,792 590,844 11,394 – – – – – 153,637 – – – – 444,563 22,046 – – 507,000 – 1,759,482 8,898 – – – – 36,514 2,283 – 19,919 – – – – 208,815 19,919 4,448,059 32,792 3,135,092 233,345 208,815 18,014 – – – – – – 18,014 1,313,860 360,675 129,938 1,449,031 – 112,011 – 124,123 42,926 2,193,476 218,473 197,795 304,692 3,886 52,064 – – – 5,340,163 713,735 586,138 – 2,161,263 -------------(92,661) – 6,137,131 -------------(5,190,866) – 320,686 ----------(126,416) – 399,439 ----------(273,087) 10,763 239,497 -------------11,712,034 247 79,104 6,578 51,404 – – 603,695 4,885,124 ----------- -------------(480,344) (1,517,736) 10,763 14,746,835 -------------4,030,924 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 38 – Information with respect to Financial Instruments (Cont.) G. Currency-Based Financial Instruments The Group has entered into various transactions with respect to currency-based financial instruments. Set forth below are open transactions as at the balance sheet date: Currency Exchange Transactions Consolidated Expiration Date Currency to be Received Currency to be Paid Amount 2/08 2/08 1/08 1/08 NIS Dollar Euro Dollar Dollar NIS Dollar Euro 115,380 134,610 3,205 1,132 Fair Value** Company Amount Fair Value** 10,543 (20,439) 221 1 42,306 – – – 2,919 – – – 96,150 76,920 – – 6,670 – – – – – – – – (29,913) (2,109) (129) 57,690 115,380 – – – (9,749) – – (305) (2,145) – – – – – – Options Purchased 1/08–4/08 1/08–2/08 4/09 2/08 6/08 4/08 Dollar NIS Rumanian Lira Ruble Euro Euro NIS Dollar Euro 374,985 249,990 127,332 1,810 14,715 627 Dollar NIS Dollar 47,005 11,318 28,296 555 215 556 Options Sold 2/08 1/08–5/08 4/08 6/08 NIS Dollar Euro Euro Dollar NIS Dollar NIS 153,840 394,215 28,296 16,978 Interest Exchange Transactions 10/18 12/12 Dollar Euro Dollar Euro 76,920 311,256 Index Future Transactions 9–11/08 NIS NIS 40,000 353 * Most of the transactions are not for commercial purposes but serve as a hedge against exposure relating to existing liabilities. However, since these transactions do not comply with all the criteria applying to hedge transactions under generally accepted accounting principles, the results of these transactions are reflected in the statement of operations on a current basis. ** The transactions are stated in the financial statements based on fair value. 248 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 39 – Data in Nominal Historical Values for Tax Purposes A. Accounting principles applied in presentation of data in nominal historical values for tax purposes: 1. These financial statements were prepared on the basis of historical cost. 2. These financial statements include Company data only. 3. Commencing with the financial statements as at December 31, 2004, investments in investee companies are presented without the Company’s share in the earnings (losses) of capital reserves of those companies that were created commencing with 2004. 4. These financial statements were prepared without an allocation of taxes as required by Accounting Standard No. 19 regarding “Taxes on Income”. 5. In these financial statements the Company chose the cost method pursuant to Accounting Standard No. 16 regarding “real estate for investment”. 249 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 39 – Data in Nominal Historical Values for Tax Purposes (Cont.) B. Balance Sheets December 31 2006 2007 Investments in investee and other companies Real estate for investment Real estate for investment under construction Fixed assets Long-term loans and other debit balances Real estate Current assets Inventory of buildings for sale Trade and other receivables and debit balances Marketable securities Short-term investments Cash and cash equivalents Other assets and deferred expenses Shareholders’ equity Long-term liabilities Capital note Debentures Convertible debentures Liabilities to banks Other liabilities Liability in respect of employee severance benefits, net Current liabilities Credit from banks and others Contractors and suppliers Other payables and credit balances * ** 7,038,915 -----------3,830 -----------3,008 -----------16,870 -----------147,669 -----------39,104 ------------ 5,300,662 ------------**3,487 ------------**3,082 ------------** *18,398 ------------144,288 ------------42,859 ------------- 145,012 1,291,817 8,898 5,735 30,885 3,136 1,485,483 -----------8,734,879 108,383 102,368 14,380 5,000 96,880 *1,665 328,676 ------------5,841,452 66,385 ------------ 546,855 ------------- 114,308 6,119,812 17,548 77,496 20,189 4,165 6,353,518 ------------ 114,308 3,190,067 29,197 76,200 53,828 3,474 3,467,074 ------------- 2,211,740 6,631 96,605 2,314,976 -----------8,734,879 950,722 5,936 870,865 1,827,523 ------------5,841,452 Restated due to first-time application of accounting standard – see Note 1ZL(2). Reclassified due to first-time application of accounting standard – see Note 1ZL(3) and Note 1ZL(4). 250 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 39 – Data in Nominal Historical Values for Tax Purposes (Cont.) C. Statements of Operations For the Year Ended December 31 2006 2005 2007 Revenues Construction and real estate transactions Rental and operation of properties Other income Financing income, net Costs and expenses Construction and real estate transactions Maintenance, supervision and management of real estate and other properties General and administrative expenses Financing expenses, net Other expenses Income (loss) from operating activities before taxes on income 99,466 4,700 88,416 – 192,582 ---------- 107,095 4,714 64,413 – 176,222 ---------- 91,998 12,547 73,560 119,716 297,821 ---------- 88,520 73,244 85,881 6,121 70,421 171,993 13,769 350,824 ---------- 10,055 56,472 31,760 12,033 183,564 ---------- 14,958 42,369 – 742 143,950 ---------- (158,242) Tax benefit (taxes on income) 907 Net (loss) income for the year (157,335) 251 (7,342) 153,871 (7,972) (96,619) (15,314) 57,252 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 39 – Data in Nominal Historical Values for Tax Purposes (Cont.) D. Statements of Changes in Shareholders’ Equity Balance as at January 1, 2005 Net earnings for the year Conversion of debentures into shares Realization of capital reserve Dividend paid Dividend declared subsequent to the balance sheet date Balance as at December 31, 2005 Loss for the year Capital component Issuance of shares Conversion of debentures into shares Capital reserve in respect of options to employees Dividend paid Dividend declared subsequent to the balance sheet date Balance as at December 31, 2006 Loss for the year Conversion of debentures into shares Capital reserve in respect of options to employees Dividend paid Dividend declared subsequent to the balance sheet date Balance as at December 31, 2007 Share Capital Capital Reserves Dividend Declared after the Balance Sheet Date 4,677 – 171,407 – 200,000 – – – 58,966 57,252 40 30,922 – – – 30,962 (4,103) – – (200,000) – – – – (4,103) (200,000) – – Capital Component in respect of Convertible Debentures Retained Earnings Total 435,050 57,252 – – 200,000 – (200,000) – 4,717 – – 195 198,226 – – 386,018 200,000 – – – – – 1,375 – (83,782) (15,314) – – 319,161 (15,314) 1,375 386,213 69 49,524 – – – 6,300 – – (473) – 49,120 – (200,000) – – – – 6,300 (200,000) – 360,000 – (360,000) – 4,981 – 640,068 – 360,000 – 902 – (459,096) (157,335) 546,855 (157,335) 64 41,432 – (331) – 41,165 (4,300) – – (360,000) – – – – (4,300) (360,000) – – – – 400,000 – 5,045 677,200 400,000 571 252 (400,000) (1,016,431) – 66,385 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 39 – Data in Nominal Historical Values for Tax Purposes (Cont.) E. Share Capital (1) Composition: Authorized December 31 2007 2006 NIS NIS Ordinary shares of NIS 0.1 par value 7,000,000 7,000,000 Issued and Paid-Up December 31 2007 2006 NIS NIS 5,045,061 4,980,918 (2) In March 2000, 43,185 non-marketable options were issue to the Company’s CEO, exercisable for 43,185 of the Company’s shares of NIS 0.1 par value each. The options are exercisable up to December 31, 2008 in exchange for an exercise premium that, as at December 31, 2005, amounts to NIS 229.2 (after adjustments for dividends distributed). This computation is theoretical since, in practice, in every case of an exercise of the options, the full amount of the exercise shares that can be purchased upon exercise of the options, as described above, will not be issued, but only those exercise shares that reflect the benefit component to be derived therefrom on the exercise date. The benefit component is the difference between the exercise price of each option and the opening market price of one share of a par value of NIS 0.1 on the date of exercise. The price that will actually be paid by the offeree will only be the amount of the par value of the shares he will be issued. The allotment of the options to the CEO is accordance with Section 102 of the Income Tax Ordinance. In 2006, the Company’s CEO, who retired in August 2006, exercised 43,185 options, which constitute all the options granted to him pursuant the options’ plan, for 384,640 of the Company’s ordinary shares of NIS 0.1 par value, in exchange for their par value. The weighted-average price per share on the exercise date was NIS 220 per share. (3) In November 2003, the Company issued to institutional investors, debentures convertible into 2,458,000 of the Company’s shares. As at December 31, 2007, the balance of the debentures not yet converted is convertible into 287,380 shares. See Note 16C. (4) In June 2005, after all the required approvals were received, the Company completed execution of a first level, ADR (American Depository Receipt) plan in the United States relating to Company shares, together with a U.S. bank. As part of this plan, the bank issued deposit certificates in respect of Company shares that are offered for sale in the United States by the said bank and that are traded “over the counter”, in the ratio of two deposit certificates for one Company share. Since the deposit certificates are not registered in the United States in the various locations for trading securities, the Company is not required to submit additional reports in the United States beyond those it was previously required to submit. 253 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 39 – Data in Nominal Historical Values for Tax Purposes (Cont.) E. Share Capital (Cont.) (5) In May 2006, a private offering of the Company’s shares was completed, in the framework of which the Company issued 1,573,030 ordinary shares of NIS 0.1 par value each constituting 3.2% of the Company’s issued and paid-up share capital after the issuance and 3.1% of the Company’s issued and paid-up share capital on a fully diluted basis. The net proceeds from aforesaid issuance amounted to about NIS 386 million. (6) In December 2006, the Company’s Board of Directors, the Audit Committee and the General Meeting approved a plan for issuance of non-marketable options pursuant to which 392,630 non-marketable options will be issued to the Company’s CEO exercisable for 392,630 of the Company’s ordinary shares of NIS 0.1 par value each (subject to adjustments). In December 2007, the options were foreclosed due to the Company’s prior CEO leaving his position prior to their vesting date. Pursuant to the provisions of the employment contract between the Company and the CEO, if the amount of the monetary benefit actually deriving to the offeree from exercise of the first portion is less than $1.5 million (hereinafter – “the Minimum Benefit Amount”), the offeree will be entitled to a monetary grant in the amount of the difference. In a case of discontinuance of the CEO’s employment by the Company prior to the vesting of the first portion, except in circumstances justifying the discontinuance pursuant to law without severance pay compensation, the CEO will be entitled to receive a one-time grant in the amount of the Minimum Benefit Amount. A provision for the full amount of the Minimum Benefit Amount was included in the Company’s financial statements. (7) In April 2007, the Company issued to Mr. Nadav Grinshpon, who serves as a Company director and who is employed by a company controlled by Mr. Lev Leviev, 100,000 non-marketable options exercisable for 100,000 of the Company’s ordinary shares of NIS 0.1 par value each (subject to adjustments). For details of the options’ plan – see Note 36O. 254 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date A. In January–February 2008, the Boards of Directors, Audit Committees and General Meetings of the Company (for itself and for its private subsidiaries that are not subsidiaries of another public company in the Company Group, hereinafter – “the Private Companies”), Africa Properties, Danya Cebus, and Africa Industries, together with private companies of the Company’s controlling interest, approved a usage arrangement between them and AFI Development regarding use of the jet owned by AFI Development for the consideration and on the conditions as set forth below. The jet will serve the Company’s officers and other position holders (including officers of the Company’s parent company, including, the Chairman of the Board of Directors of Africa Israel and the controlling interest therein and in the Company) in their business activities in various countries and regions throughout the world in consideration of agreed-to tariffs, as detailed below: (1) The price to be paid to the owners in respect of a flight on the jet is $5,000 for every actual flight hour on the jet. (2) The price to be paid to the owners in respect of staying expenses of the jet and its crew outside of the jet’s home airport is $2,000 for every day stayed. (3) Reimbursement of special expenses incurred in connection with the flights, vis-à-vis third parties, shall be paid against receipts presented with no limitation as to amount. (4) In the case of a flight that serves the matters of a number of parties who are participants in the arrangement, the parties in question shall arrange between themselves division of the payment for use of the jet by means of consent, and absent consent – the division shall be arranged by the owners. (5) The Audit Committee of the Company and of each of the public subsidiaries shall discuss once a year the tariffs for use of the jet and their correspondence to market conditions. If the Audit Committee determines that the arrangement’s tariffs are significantly different than the market tariffs, the parties shall act to update the Arrangement’s tariffs and to re-approve them pursuant to the provisions of the Companies Law. In the framework of the Arrangement, each of the parties shall approve an annual budget for use of the jet (without taking into account payments for reimbursement of expenses) (hereinafter – “the Annual Budget”). It is clarified that the annual budget does not constitute a commitment by any of the parties for actual use of the jet but, rather, merely a budgetary framework for possible use of the jet. The annual budget for each additional year in the budget period will be increased by up to 10% every year. Increase of the annual budget shall be accomplished by approval of the Audit Committee. Accordingly, there will be no need to bring each flight for separate approval, so long as there has been no deviation from the annual budget. If there has been a deviation from the annual budget, the extraordinary quota shall be brought to the Company’s Audit Committee and its Board of Directors pursuant to Regulation 1(3) of the Companies Regulations (Relief in Transactions with Interested Parties), 2000. 255 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) A. (Cont.) The arrangement shall be effective for 5 periods of one year each commencing from January 1, 2008 and thereafter, however it may be brought to an end at the end of each of year of the arrangement by means of a notice delivered at least 30 days prior to the end of each of the arrangement’s periods. B. In October 2007, Africa Industries signed a memorandum of understanding with the shareholders of the Apogey Group, which includes a number of companies registered in Russia (hereinafter – “the Apogey Group”), in connection with acquisition of a 65% ownership interest in the Group in exchange for a consideration of about $12.3 million, as detailed below. The Apogey Group is engaged in steel trade in Russia by means of 13 branches it owns. The Apogey Group employs about 200 persons. The scope of the Apogey Group’s sales in 2007 was about 200 thousand tons of steel with a total turnover of about $140 million. Africa Industries estimates that the total turnover in 2008 will reach about $150 million and the Apogey Group’s net income is expected to come to about $5 million. In February 2008, after completion of a comprehensive due diligence examination and approval of the Board of Directors of Africa Industries, a detailed agreement was signed for acquisition of 65% of the ownership of the Apogey Group. As part of the agreement, acquisition was made of 65% of the ownership of Cloudwalk Holdings Ltd., a company registered in Cyprus that holds full ownership of several Russian companies constituting the Apogey Group, which operates in Russia. Also as part of the agreement, the sellers were given a “put” option for three years to sell the balance of their holdings in the Cyprus company (35%). The “put” option may be exercised by them by means of advance notice of 6 months to the company and its period begins from the end of 3 years from the closing date and up to the end of 6 years from the closing date (at which time the option will expire). The exercise price of the “put” option was set at an amount equal to 35% of the company’s value that will be determined based on a multiplier of 5 to the company’s net income in the three years that preceded the exercise date of the “put” option. In addition, as part of the agreement, Africa Industries was given a “call” option for the balance of the Cyprus company’s shares (35%). The “call” option may be exercised by Africa Industries commencing from the fifth year from the closing date and up to the sixth year from the closing date (at which time the option will expire). The exercise price of the “call” option was set at an amount equal to 35% of the company’s value that will be determined based on a multiplier of 5 to the company’s net income in the three years that preceded the exercise date of the “put” option plus 15%. Furthermore, in the framework of the agreement, the parties signed a shareholders’ agreement covering the manner of managing the Cyprus company. 256 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) B. (Cont.) In March 2008, the acquisition was completed and from this time Africa Industries holds 65% of the shares of Cloudwalk Holdings Ltd. In consideration for the acquisition, Africa Industries paid an aggregate amount of about $12.2 million, broken down as follows: the amount of about $5.9 million in exchange for 65% of the shares of Cloudwalk Holdings Ltd. and the balance of about $6.3 million against provision of a capital note to Cloudwalk Holdings Ltd. Consolidation of the activities of the Apogey Group will commence from February 1, 2008. By means of the aforesaid acquisition, Africa Industries intends to expand its international activities in the steel sectors, including establishment of Steel Service Centers and the integration thereof into in the Apogey Group’s existing marketing and distribution set-up, while taking advantage of the accelerated growth rate and high demand presently existing in Russia. C. In February 2008, the Company signed a number of agreements with Africa Properties as detailed below. These agreements were approved by the Audit Committee and the Board of Directors of Africa Properties, and they require approval by the General Meeting of Africa Properties’ shareholders in accordance with Section 275 of the Companies Law. (1) Company’s undertaking with Africa Properties in an agreement for provision of management services – In the framework of the new agreement for provision of management services, the Company will provide to Africa Properties itself and/or through its subsidiaries, management, consulting and accompaniment services in connection with Africa Properties and its subsidiaries in and outside of Israel, effective from January 1, 2008 (hereinafter – “the New Management Services Agreement”). The New Management Services Agreement will replace the existing management services agreement between the Company and Africa Properties (see Note 36G, above) relating to provision of management services. The services pursuant to the New Management Services Agreement are to be provided in the areas detailed below: Chairman of the Board of Directors services, company CEO services, CFO services, services to the manager of the Ramit-Aviv Shopping Mall and to the manager of the Savyonim Shopping Mall, directors services (excluding outside directors), current management consulting services for ongoing and strategic business transactions (business development) of the company Group, internal audit, through the internal auditor of Africa Investments, computer network management services of the company Group, treasury and bookkeeping services, secretariat services for the companies in the company Group registered in Israel, administration, personnel and office rental services for the Company’s headquarters in Yehud (including accompanying expenses) (hereinafter – “the Management Services”). 257 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) C. (Cont.) (1) (Cont.) In addition, commencing from the later of April 1, 2008 or from the approval date of the New Management Services Agreement by the General Meeting of Africa Properties’ shareholders (in accordance with the provisions of the Companies Law, 1999) (hereinafter – “the Transfer Date”), 8 employees of the Company will be transferred to the Company (hereinafter – “the Transferred Employees”) who are actually engaged in, as at the date of this report, only provision of services under the existing management services agreement to the Africa Properties Group, in such a manner that they will be employed directly by the Company, subject to receipt of the consent of the Transferred Employees for the said transfer, in writing. In consideration for provision of the management services, Africa Properties is to pay the Company the following amounts: – Quarterly management fees in an amount equivalent to NIS 750 thousand (linked to the index). – An amount equal to 4% of the quarterly net income, net of the tax effect on the income based on Africa Properties’ quarterly consolidated financial statements, that is, plus Africa Properties’ share in the provision for taxes recorded in the financial statements of Africa Properties and of the companies in Africa Properties Group. Since the Management Fees were determined without taking into account the cost of the salaries of the Transferred Employees, Africa Properties is to pay the Company, on the date of the transfer, the full cost of the salaries of the Transferred Employees in respect of the period from January 1, 2008 (the date of entry into effect of the New Management Services Agreement) and up to the Transfer Date. In a case where Africa Properties and/or its subsidiary issues shares of Africa Properties and/or its subsidiary to a third party, who is not the controlling interest in Africa Properties or in an entity it controls, in a private or public offer, in and/or outside of Israel, Africa Properties shall pay the Company a special bonus, in an amount equivalent to 0.75% of the net proceeds from the issuance (that is, net of underwriting expenses, stamping, fees of professional advisors, etc., incurred directly in connection with the issuance). It is agreed that if Africa Properties will employ a CEO and/or Chairman of the Board of Directors and/or CFO and/or a manager of the Ramit-Aviv Shopping Mall and/or a manager of the Savyonim Shopping Mall directly, outside of the framework of the New Management Services Agreement, the quarterly Base Management Fees to be paid to the Company by Africa Properties will be reduced by the amounts provided in the agreement for each of the positions. 258 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) C. (Cont.) (1) (Cont.) It is hereby clarified that expenses and payments to third parties that are involved with the management and activities of the companies in Africa Properties Group are not included in as part of the Management Services and the Company will not bear them. If the Company pays or incurs an expense, as stated, for any reason whatsoever, Africa Properties shall indemnify it for such payment or expense as stated. The Company committed to Africa Properties to pay the full amount of the payments in connection with employment of the Transferred Employees up to the Transfer Date and/or with respect to termination of their employment as required by the employment agreements with the Transferred Employees and in accordance with all law, including and without detracting payments for purposes of covering severance benefits of the Transferred Employees. In this context, the Company committed to indemnify Africa Properties for any payment Africa Properties bears relating to the Transferred Employees, directly or indirectly, in respect of the period up to the Transfer Date (hereinafter – “the Indemnification Commitment”). It was agreed that the Indemnification Commitment will not apply in respect of additional severance benefits due to wage increases of any of the Transferred Employees that enter into effect after the Transfer Date, if any. The Indemnification Commitment will remain in force even in a case where the New Management Services Agreement comes to an end. It was further agreed that notwithstanding that stated in the agreement signed between Africa Properties and the Company in February 2008, which arranged the matter of transfer of an additional 10 employees of the Company to a subsidiary of AFI Europe (hereinafter – “the Agreement for Transfer of the Employees to AFI Europe”), the Company’s indemnification commitment provided as part of the Agreement for Transfer of the Employees to AFI Europe will not apply in respect of payment of severance benefits stemming from a wage increase of any of the employees transferred under the Agreement for Transfer of the Employees to AFI Europe that takes place after the actual transfer date of the employees (that is March 1, 2008). This agreement shall enter into effect commencing from January 1, 2008 (hereinafter above and below – “the Effective Date”). This agreement shall be valid for a period of two years commencing from the Effective Date and shall renew automatically for three additional periods of one year each. Notwithstanding that stated above, it is hereby agreed that each of the parties shall be permitted to bring the New Management Services Agreement to and end by means of a written notice delivered to the other side at least 90 days prior to the end of the agreement period. 259 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) C. (Cont.) (2) Africa Properties’ undertaking with Africa Israel Financing (1995) Ltd. in a financing agreement – Pursuant to the financing agreement between Africa Properties and Africa Financing from September 2004 (see Note 36H), Africa Properties entered into a “framework transaction” with Africa Financing, on terms identical to the terms of the first framework agreement except for a number of changes. Set forth below are the highlights of the new framework agreement: Pursuant to the financing agreement, Africa Properties may, with the advance consent of the two sides, deposits monies from time to time with Africa Financing and Africa Financing will receive the monies as stated as deposits (hereinafter – “the Deposit of the Company”). Similarly, Africa Financing may, with the advance consent of both sides, deposits monies from time to time with Africa Properties and Africa Properties will receive the monies as stated as a loan (hereinafter – “the Deposit of Africa Financing”) (hereinafter together – “the Deposit” or “the Deposits”). In addition, at Africa Properties’ request and with the consent of Africa Financing, Africa Financing will deposit monies with Africa Properties from time to time and Africa Properties will receive the monies as stated as a loan by means of a deposit (hereinafter – “the Loan” or “the Loans”), all according to the terms detailed below: The deposits and loans will be of the “on call” variety for a period not in excess of one year from the date of deposit and will bear annual interest at a variable rate based on the prime rate that is in effect from time to time at Bank Leumi (hereinafter – “the Interest”). The maximum amount of the Deposits to be deposited by one side with the other pursuant to the financing agreement shall be as follows: A. The maximum amount of the Deposits to be deposited by Africa Financing with Africa Properties, at any given time, shall not exceed Africa Properties’ shareholders’ equity as it will be from time to time based on Africa Properties’ financial statements. B. The maximum amount of the Deposits to be deposited by Africa Properties with Africa Financing, at any given time, shall not exceed 35% of Africa Properties’ shareholders’ equity as it will be from time to time based on Africa Properties’ financial statements. Africa Financing undertakes not to use the Deposits, or any part thereof, for purposes of acquisition of Africa Properties’ shares. 260 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) C. (Cont.) (2) (Cont.) Approval of the financing agreement as a “framework transaction” shall be valid for a period of 5 years, unless the financing agreement is cancelled by either of the parties on an earlier date by means of sending a written notice to the other party three months in advance. Every year during the period of the financing agreement Africa Properties’ Audit Committee and its Board of Directors will examine the terms of the Interest. In a case where in the opinion of the Audit Committee and/or Board of Directors the conditions provided in Regulation (5)1 of the Relief Regulations are not fulfilled (that is, the Interest is on market conditions, in the ordinary course of business, and it does not adversely affect Africa Properties’ benefit), Africa Properties will not enter into new transactions with Africa Financing (a Loan or Deposit), pursuant to the financing agreement beyond those existing at the time of the deliberation by the Board of Directors and/or the Audit Committee (hereinafter – “the Balance of the Deposits”), this being up to the time of receipt of approval of Africa Properties’ competent authorities, pursuant to Section 275 of the Companies Law, 1999. The conditions of the financing agreement will continue to apply to the Balance of the Deposits. (3) Further to that stated in the Management Agreement with Africa Properties, in the framework of which 10 employees of the Company are effectively engaged solely in provision of services to AFI Europe, AFI Europe, intends, by means of its subsidiary, to employ the said employees directly, as described below: Pursuant to the Agreement, commencing from March 1, 2008 (hereinafter – “the Transfer Date”) 10 employees of the Company will be transferred (hereinafter – “the Transferred Employees”) that are effectively engaged, as at the balance sheet date, solely in provision of services to a subsidiary of AFI Europe, in such a manner that they will be employed directly by the subsidiary of AFI Europe (hereinafter – “the Employee Transfer Agreement”). The Company has received the written consent of the Transferred Employees for their transfer as stated to AFI Europe. Commencing from the Transfer Date, Africa Properties will deduct, during the period of the existing management agreement, from the quarterly management fees it pays to the Company based on the existing management agreement, the full amount of the actual employment cost of the Transferred Employees, in every quarter of the existing management agreement, including in respect of provisions for provident funds and advance education funds, to the extent they exist (hereinafter – “the Manner of the Calculation”). 261 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) C. (Cont.) (3) (Cont.) If the New Management Agreement (as described in Section (1) above) is approved by the General Meeting of Africa Properties’ shareholders, in such a manner that it enters into effect commencing from January 1, 2008, Africa Properties will bear the full cost of the salaries of the Transferred Employees in respect of the period commencing from January 1, 2008 and up to the Transfer Date, and will indemnify the Company for the cost of the salaries of the Transferred Employees that the Company bore for the period from January 1, 2008 and up to the Transfer Date (including in respect of provisions for provident funds and advance education funds, if any). In addition, the Company undertakes to Africa Properties to pay the full amount of the payments in connection with employment of the Transferred Employees up to the Transfer Date and/or in connection with termination of their employment as required by the employment agreements with the transferred employees and in accordance with law, including and without limitation, payments for purposes of the payment of severance pay to the Transferred Employees. In this context, the Company undertakes to indemnify Africa Properties in respect of any payment borne directly or indirectly by Africa Properties relating to the Transferred Employees in respect of the period up to the Transfer Date (hereinafter – “the Indemnification Commitment”). It was agreed that the Indemnification Commitment will remain intact up to the date of approval of the New Management Agreement, which will arrange, among other things, the Company’s commitment to provided indemnification to Africa Properties in connection with the Transferred Employees as well. D. In January 2008, Africa Properties signed an agreement for acquisition of land in Petach Tiqwa, on an area measuring about 20 dunams having construction rights for about 49 thousand square meters of built-up space in exchange for a consideration of about NIS 86.5 million. Africa Properties intends to act to obtain approvals for doubling the building rights on the land, to raze the old buildings and to construct a business park that will include office and commercial space on the ground floors. E. In March 2008, the Audit Committee and Board of Directors of Danya Cebus approved the undertaking of Danya Cebus with Africa Israel Financing in an agreement for the reciprocal deposit of monies between the these two companies. Pursuant to the financing agreement, Danya Cebus will be able, with the advance agreement of both parties, to deposit monies, from time to time, with Africa Financing and Africa Financing will receive monies, as stated, as deposits. Similarly, Africa Financing will be able, with the advance agreement of both parties, to deposit monies, from time to time, with Danya Cebus and Danya Cebus will receive monies, as stated, as a loan by means of a deposit. The deposits and loans will be of the “on call” variety for a period not in excess of one year from the date of deposit and will bear annual interest at a variable rate based on the prime rate that is in effect from time to time at Bank Leumi (hereinafter – “the Interest”). Calculation of the interest will be made once a month. The interest conditions will be examined every year during the period of the financing agreement by the Audit Committee and Board of Directors of Danya Cebus. 262 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) E. (Cont.) The maximum amount of the deposits Africa Financing will make with Danya Cebus, at any given time, may not exceed NIS 200 million. The maximum amount of the deposits Danya Cebus will make with Africa Financing, at any given time, may not exceed 35% of Danya Cebus’ shareholders equity based on Danya Cebus’ financial statements. The Company is a guarantor of fulfillment of Africa Financing’s obligations under the financing agreement. The financing agreement is subject to obtaining the approval of the General Meeting of Danya Cebus’ shareholders in accordance with the provisions of the Companies Law. F. In January 2008, the Company issued, pursuant to a shelf prospectus it published in May 2007 and by means of expansion of a marketable series (Series U) that was originally issued in September 2007 (see Note 16(D)(1)(Q), marketable, unsecured, registered debentures (Series U) in the total principal amount of about NIS 750 million. The debentures are scheduled for repayment in five equal semi-annual payments commencing from September 2012, are linked to the CPI and bear annual interest at the rate of 4.8% payable semi-annually. G. Further to the loss recorded by Danya Cebus in 2007, in the amount of about NIS 149 million (see Note 2I(6)), set forth below is Danya Cebus’ reference to the anticipated consequences of the said loss on the conduct of its business. – In Danya Cebus’ estimation, in general, the said loss is not expected to have a significant adverse effect on the continued conduct of its business, although it will cause an immediate significant reduction in its shareholders’ equity. – In all that related to Danya Cebus’ current activities as an executing contractor in the construction and infrastructures areas, activities of this type generally do not involve significant investments of shareholders’ equity. – Regarding Danya Cebus’ ability to submit bids in large tenders, which many times involve threshold conditions with respect to the contractor’s minimum shareholders’ equity, sometimes these tenders permit reliance on the Company’s financial data. In addition, based on past experience, Danya Cebus estimates that where necessary it will be able to obtain financial backing from the Company in order to comply with the threshold conditions in all that related to financial strength. – As at a date proximate to the date of this report, Danya Cebus does not have cash flow problems, it is paying its liabilities as they come due and in light of, among other things, the large cash balances it has as at the date of this report it does not foresee a problem in meeting its future obligations on time or in financing its current operations. – As stated in Note 40E, Danya Cebus entered into a framework agreement with Africa Financing for provision of financing in an amount of up to NIS 200 million, subject to approval of the General Meeting of Danya Cebus’ shareholders, which is expected to be held on April 9, 2008, as stated above, as at the date of this report Danya Cebus has large cash balances and the above-mentioned arrangement constitutes additional financing that Danya Cebus may utilized based on its needs. 263 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) G. (Cont.) – H. On March 2, 2008, the Board of Directors of Danya Cebus made a decision whereby for purposes of strengthening and expanding Danya Cebus’ shareholders’ equity, Danya Cebus will execute a fundraising effort. Taking into account the scope of the expected loss, Danya Cebus’ management intends to recommend to the Board of Directors to make a private tender offer of Danya Cebus’ shares to institutional investors and to the Company, in an aggregate scope of between NIS 150 million to NIS 200 million. This fundraising, if executed, is expected to bring Danya Cebus’ shareholders’ equity to the amount at which it stood prior to the aforesaid loss. A foreign subsidiary of the Company (hereinafter – “the Subsidiary”) and AFI Development, signed an agreement whereby the Subsidiary sold to AFI Development all its holdings, at the rate of 88%, in AFI Ukraine (see Note 2(I)(1)(d)), and the foreign partner, which held the other 12%, sold its share to AFI Russia. As part of the transaction, as stated, the rights acquired by AFI Ukraine during March 2007 in a land parcel measuring about 46 dunams in the City of Zafruzia in the Ukraine were not included. The Subsidiary intends sell the above-mentioned rights to a third party. The aggregate consideration to be paid by AFI Development in the framework of the aforesaid transaction comes to about US$30.2 million. AFI Ukraine signed several agreements with a foreign-company third party (hereinafter – “the Seller”) for establishment of a number of foreign companies in which AFI Ukraine will hold between 60% and 92.5% (hereinafter – “the Joint Companies”), and acquisition through the Joint Companies of rights in a number of land parcels on an aggregate area measuring about 426 hectares. As at the date of this periodic report, the Joint Companies completed acquisition of land parcels having an aggregate area of about 121 hectares out of the real estate. AFI Ukraine intends to construct a number of large projects on the real estate having different zoning designations, which are expected to include a large commercial center residential buildings and parking facilities. The aggregate consideration to be paid by AFI Development in the framework of the aforesaid real estate acquisition is estimated, as at the balance sheet date, at about US$119 million (estimated based on the cost price). Africa Hotels signed an agreement with AFI Development whereby AFI Development will acquire all of Africa Hotels’ holdings, at the rate of 100%, in a foreign subsidiary (hereinafter – “the Subsidiary”), which holds indirectly all the rights in two hotels under construction in Kislovodosk and a hotel under construction in Zilzennovodosk (see Note 2(I)(1)(h)). It is noted that in the framework of the transaction as stated, the Subsidiary’s holdings in its foreign subsidiaries that handle Africa Hotels’ activities in Germany and Rumania will not be included, which the Subsidiary intends to transfer to another of its subsidiaries. 264 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) H. (Cont.) In addition, Africa Hotels signed an agreement with AFI Development whereby AFI Development will acquire all of Africa Hotels’ holdings, at the rate of 50%, in a foreign subsidiary in Cyprus (hereinafter – “the Additional Subsidiary”), which holds indirectly all the rights in the Plaza Hotel in Kislovodosk. It is noted that in the framework of the transaction as stated, the Additional Subsidiary’s holdings in its foreign subsidiaries that handle the management and operation activities of the hotel as stated will not be included, which will continued to be owned by Africa Hotels. In addition, it was agreed that Africa Hotels will provide technical services to the hotels under construction Kislovodosk and Zilzennovodosk. Further, the parties undertook that up to no later than 180 days prior to conveyance of the hotels under construction in Kislovodosk and Zilzennovodosk they will sign management agreements pursuant to which Africa Hotels will provide management services to the said hotels. All of the above is in exchange for a consideration of $70 million (which was determined in accordance with an outside appraisal that estimated the value of the properties at $72.1 million). The above-mentioned agreements are intended to centralize the hotel activities of the Company Group in Russia under AFI Development. In March 2008, AFI Development reached agreement with wholly owned foreign subsidiaries of Danya Cebus (hereinafter – “the Seller”) with respect to acquisition of the Seller’s share in a joint company held by AFI Development and the Seller (in the proportion of 60% – AFI Development and 40% – the Seller) (hereinafter – “the Joint Company”). The Joint Company holds a joint venture that owns real estate rights in a city in the Faram District in Russia, and which is engaged in the development and construction of residential projects in Faram (see Note 2(I)(1)(i)). As part of the transaction, if closed, the Seller will sell all its rights in the Joint Company (including its rights to receive loans it made for financing the Faram project) for an aggregate consideration of about $11 million. The agreement is contingent on receipt of the approvals required by law, including approval by Danya Cebus’ competent authorities pursuant to Section 275 of the Companies Law. I. In February 2008, there was an explosion in Alon’s refinery in Big Springs, Texas, as a result of which the refinery was closed. The refinery is undergoing repairs and renovations and is gradually returning to its production capacity. J. In January 2008, a class action claim was filed against Dor-Alon and additional fuel companies, in an aggregate amount of about NIS 132 million, where Dor-Alon’s share is about NIS 8.8 million. The plaintiff contends that the fuel companies unlawfully collected a service premium of NIS 2 for tank filling services on the Sabbath and festival days. A response on behalf of the company to the request for certification of the claim as a class action has not yet been submitted. 265 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 40 – Events Occurring Subsequent to the Balance Sheet Date (Cont.) K. In February 2008, a statement of claim in the estimated amount of about NIS 1.1 billion was filed against the Blue Square, AM:PM and other defendants, along with a request for certification as a class action. According to that contended in the statement of claim, the defendants violated the provisions of the Consumer Protection Law when they misled the plaintiff to believe that the eggs it is buying under the name “Super Fresh Eggs” are different than the “regular” eggs, and as a result it was caused to pay for the “Super Fresh Eggs” a price higher than the price of the “regular” eggs by about 70%. It is further contended in the statement of claim that the defendants hid from the shelves the “regular” eggs and thus forced the plaintiff to buy the “Super Fresh Eggs”. L. From the balance sheet date and up to March 17, 2008, NIS 1,742.39 par value debentures (Series B) of Africa Properties were converted into 13 ordinary shares of NIS 1 par value of Africa Properties. M. Subsequent to the balance sheet date, the Company declared distribution of a dividend in the amount of about NIS 400,000 thousand. 266 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS Pursuant to the provisions of Accounting Standard No. 29, “Adoption of International Financial Reporting Standards (IFRS)” (hereinafter – “Standard 29”), commencing with the financial statements for the first quarter of 2008, the Company is required to prepare its financial statements in accordance with IFRS (hereinafter – “the Mandatory Adoption Date”). Standard 29 provides that an entity that prepares its financial statements for the first time in accordance with IFRS on the Mandatory Adoption Date is to include in the notes to the annual financial statements for the year ended December 31, 2007, the balance-sheet data as at December 31, 2007 and the statement of operations’ data for the year then ended prepared in accordance with IFRS. In this context, the Securities Authority issued FAQ6, “Disclosure Required in the Financial Statements for the Year Ended December 31, 2007 Regarding the Adoption of IFRS” (hereinafter – “FAQ6”), which specifies the disclosures that are to be included in the financial statements for December 31, 2007. This note includes all the financial data required in accordance with Standard 29 and FAQ6 to which the recognition, measurement and presentation principles of IFRS have been applied. This note was prepared on the basis of the presently known international accounting and reporting standards and the clarifications thereto (hereinafter – “IFRS”), which were issued and will be in effect, or that may be adopted early, on the date of the Group’s first annual report according to IFRS, December 31, 2008, and that formed the basis for the Company’s accounting policy. The IFRS that will be in effect or that may be adopted in the annual financial statements for the year ending December 31, 2008 are subject to changes and the issuance of further interpretations and, therefore, cannot be accurately determined. Accordingly, the accounting principles that will be applied in respect of the periods presented will be determined finally only when the first financial statements are prepared according to IFRS as at December 31, 2008. The tables and notes hereunder provide an explanation of the effects of the transition from Israeli GAAP to IFRS on the Group’s financial position and results of operations: 267 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) Note Investments in investee and affiliated companies Fixed assets Real estate for investment e, k, m a, b, c, e, f, h, j, k Israeli GAAP January 1, 2007 December 31, 2007 Impact of transition to IFRS Impacts reflected as part of adoption of new accounting standards Impact of in Israel Other Israeli transition in 2007 Impacts IFRS GAAP to IFRS Thousands of New Israeli Shekels 1,133,598 (36,154) 6,748,297 (5,610,057) 828,361 2,112,114 IFRS 1,925,805 1,548,582 3,660,696 (359,254) 778,986 2,075,000 (616,418) 1,458,582 a, I, k, – 5,251,674 (2,284,697) 2,966,977 8,358,268 (1,601,164) 6,757,104 Real estate for investment under construction a, e, f, h, k – 2,664,745 (529,750) 2,134,995 8,125,485 (413,218) 7,712,267 Deferred tax asset p, q – – 13,284 Long-term loans and receivables j, k 1,095,450 – (55,031) 1,040,419 e, f, g, k 1,562,316 – (97,985) d, e, f, g, k, p 2,456,752 – Real estate Current assets Inventory of buildings for sale Construction work in process, net Real estate held for sale Other inventory Deferred taxes Trade receivables Other receivables and debit balances Marketable securities Short-term investments Cash and cash equivalents Other assets and deferred expenses i k p, q d, k, p – – 95,187 243,619 948,668 – – – 20,658 – 13,284 – 452,474 452,474 1,730,715 104,549 1,835,264 1,464,331 2,488,250 (85,445) 2,402,805 286,551 2,743,303 4,448,193 428,326 4,876,519 – 1,373,125 (88,011) (264,277) (688,773) – 1,373,125 7,176 – 259,895 4,559 – 489,153 449,516 2,068,417 – – (114,520) (449,516) (1,320,284) 4,559 – 374,633 – 748,133 k k k 1,361,142 841,674 1,000,164 – – – (86,538) (1,655) (2,963) 1,274,604 840,019 997,201 1,916,191 1,512,210 811,416 (77,274) (350) (72,494) 1,838,917 1,511,860 738,922 k 1,204,069 8,151,275 – 20,658 (37,447) 490,012 1,166,622 8,661,945 4,605,397 16,305,052 (103,060) (1,709,172) 4,502,337 14,595,880 86,823 6,663 28,847 122,333 217,920 18,777,759 2,297,529 19,109,075 40,849,272 c, h, k 268 (1,966,213) 192,397 (1,563,883) 410,317 39,285,389 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) Note Shareholders’ equity Share capital and premium Premium on shares Other capital reserves Equity component of convertible debentures Translation differences Dividend declared subsequent to the balance sheet date Retained earnings Total capital allocated to the Company’s shareholders Minority interest n 368,049 759,375 32,165 – – – – – (6,995) p 902 (187,822) – – (902) 187,822 – – Liabilities Debentures Convertible debentures Liabilities to banks Other liabilities Deferred tax liability Employee benefits Provisions 368,113 800,807 33,917 571 (821,270) – – (8,747) (571) 171,727 368,113 800,807 25,170 – (649,543) 350,000 1,490,708 – 890,525 (350,000) (282,756) – 2,098,477 400,000 6,225,876 (400,000) (90,901) – 6,134,975 p 2,813,377 1,217,547 890,525 724,752 (452,831) (216,826) 3,251,071 1,725,473 7,008,014 4,711,020 (328,492) (101,231) 6,679,522 4,609,789 4,030,924 1,615,277 (669,657) 4,976,544 11,719,034 (429,723) 11,289,311 – (19,919) – 62 (62) l 19,919 k g q k p 4,448,059 32,792 3,135,092 233,345 208,815 18,014 – – – – 23,497 561,174 – – 465 1,800 (733,353) (35,980) (492,830) (1,569) 119,345 4,448,524 34,592 2,401,739 220,862 277,159 16,445 119,345 8,124,822 18,486 8,260,836 350,969 1,348,184 24,090 – 464 2,666 (1,150,155) 82,112 (347,586) (1,486) 48,710 8,125,286 21,152 7,110,681 433,081 1,000,598 22,604 48,710 8,076,117 584,671 (1,142,122) 7,518,666 18,127,387 (1,365,275) 16,762,112 Total non-current liabilities Credit from banks and others Contractors and suppliers Other payables and credit balances, including derivatives Net deposits in respect of construction work Total current liabilities 368,049 759,375 25,170 IFRS p r Total shareholders’ equity Receipts on account of options and equity component in respect of convertible debentures in subsidiaries Israeli GAAP January 1, 2007 December 31, 2007 Impact of transition to IFRS Impacts reflected as part of adoption of new accounting standards Impact of in Israel Other Israeli transition in 2007 Impacts IFRS GAAP to IFRS Thousands of New Israeli Shekels k – 5,340,163 – (309,316) 5,030,847 7,991,704 (337,273) 7,654,431 k, p 713,735 – (96,560) 617,175 1,461,166 (187,320) 1,273,846 a, k, l, m, p 586,138 97,581 (113,191) 570,528 1,534,587 (175,237) 1,359,350 10,763 6,650,799 – 97,581 384,552 (134,515) 395,315 6,613,865 15,332 11,002,789 931,007 231,177 946,339 11,233,966 18,777,759 2,297,529 (1,966,213) 19,109,075 40,849,272 d, p 269 (1,563,883) 39,285,389 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) Income Adjustments for 2007 Note Revenues From construction and real estate transactions From rental and operation of properties From operation of hotels From industry and textiles Company’s share in income of affiliated companies, net Increase in fair value of real estate for investment Other income t, v, z g, m, p, v, z 4,293,196 498,740 368,361 1,862,931 (1,263,349) (42,273) (52,859) (499,924) 3,029,847 456,467 315,502 1,363,007 m, p g, k, m, p, z c, z 110,359 2,040,010 3,715,559 12,889,156 -------------- 853,269 (699,792) (60,698) (1,765,626) ------------ 963,828 1,340,218 3,654,861 11,123,530 -------------- 195,267 329,386 1,726,117 6,670,796 -------------- (32,761) (37,007) (525,762) (2,112,664) ------------ 162,506 292,379 1,200,355 4,558,132 -------------- – 88,630 51,194 7,421,557 10,119 140,932 (31,657) 119,394 10,119 229,562 19,537 259,218 1,172,990 562,053 610,937 -------------- 276,775 359,605 (82,830) ------------ 1,449,765 921,658 528,107 -------------- Costs and Expenses In respect of construction and real estate transactions Operation, supervision and management of real estate and properties Operation of hotels In industry and textiles 4,420,026 Gross profit Selling and marketing expenses Administrative and general expenses Amortization of other assets and deferred expenses Financing expenses Financing income Financing expenses, net j, l, s, u, y, za j, l, s, u, y, za 5,467,599 Income before taxes on income Taxes on income Impact of Israeli transition GAAP to IFRS IFRS Thousands of New Israeli Shekels zg (622,298) 310,474 (49,858) 5,778,075 (672,156) Net income 4,845,301 260,616 5,105,917 Allocated to: The Company’s shareholders The minority interest Net income 4,253,865 591,436 4,845,301 110,284 117,983 260,616 4,396,498 709,419 5,105,917 270 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) Set forth below are notes explaining the main adjustments deriving to reporting in accordance with IFRS. The impact of the adjustments described below on the deferred taxes is detailed in Note zg, below. Impacts reflected as part of adoption of new accounting standards in Israel in 2007: a. In accordance with generally accepted accounting principles in Israel (Israeli GAAP), up to December 31, 2006 real estate for investment was presented at depreciated cost as part of the Company’s fixed assets. Pursuant to IFRS and at the Company’s election, real estate for investment is presented separately in the balance sheet based on its fair value. Changes in the fair value are recorded in the statement of operations in every reporting period. The impact of the transition as at January 1, 2007 is a decrease in the fixed assets of about NIS 5,596,372 thousand, presentation of real estate for investment under construction in the amount of about NIS 2,664,745 thousand and real estate for investment in the amount of about NIS 5,155,267 thousand (based on appraisers’ valuations), an increase in the provision for deferred taxes, net, of about NIS 540,516 thousand, an increase in the minority interest in the amount of about NIS 725,729 thousand and an increase in retained earnings of about NIS 896,570 thousand. In addition, the Company recorded provisions for completion in the amount of about NIS 96,407 thousand. The impact was reflected as part of adoption of Israeli Accounting Standard No. 16 regarding “Real Estate for Investment” commencing from January 1, 2007. b. In accordance with Israeli GAAP, up to December 31, 2006, operating equipment was treated as base inventory, that is, the initial acquisition was recorded to fixed assets whereas subsequent replacements of the operating equipment were recorded as a current expense. Pursuant to IFRS, operating equipment is treated as a depreciable asset. Therefore, upon the transition to IFRS the financial statements were restated. The amount of about NIS 7,022 thousand was removed from the fixed assets against reduction of the minority interest by about NIS 982 thousand and reduction of the retained earnings by about NIS 6,040 thousand. The impact was reflected as part of adoption of Israeli Accounting Standard No. 27 in Israel commencing from January 1, 2007. c. Pursuant to IFRS, capitalized computer programs and software development costs, which do not constitute an integral part of the related hardware, is treated as an intangible asset. Therefore, upon the transition to IFRS, the book balance as at January 1, 2007, in the amount of about NIS 6,663 thousand, relating to capitalized computer programs and software development costs, was reclassified from the “fixed assets” category to the “intangible assets” category. The impact was reflected as part of adoption of Israeli Accounting Standard No. 30 in Israel commencing from January 1, 2007. Other Impacts d. In accordance with Israeli GAAP, revenues from sales of residential units by entrepreneurial contractors are recognized over the construction period of the units subject to the project’s percentage of completion having reached at least 25% and the accumulated sales’ proceeds having reached at least 50% of the project’s revenues. Pursuant to IFRS, revenues from sales of residential units by entrepreneurial contractors will be recognized upon delivery of the units to the purchasers. 271 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) d. (Cont.) As a result, as at January 1, 2007, the construction work in process grew by about NIS 316,001 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 172,004 thousand, the trade receivables declined by about NIS 600,481 thousand, the customer deposits increased by about NIS 293,848 thousand, the minority interest decreased by about NIS 191,543 thousand, and the balance of the retained earnings fell by about NIS 213,864 thousand. As at December 31, 2007, the inventory of buildings for sale grew by about NIS 1,673,309 thousand, the trade receivables declined by about NIS 1,258,395 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 97,241 thousand, the customer deposits increased by about NIS 974,843 thousand, the minority interest decreased by about NIS 121,167 thousand, and the balance of the retained earnings fell by about NIS 187,272 thousand. In addition, during the year ended December 31, 2007, there was a decrease in sales’ revenues of about NIS 1,146,650 thousand. e. In accordance with Israeli GAAP, the Company capitalized credit costs only in respect of assets the construction period of which exceeded three years, or those whose construction period or the scope of the investment therein is unusual compared with the construction period or the scope of the investment that is customary for assets of this type in the same line of business. Pursuant to IFRS, the Company elected to capitalize credit costs to all projects requiring a significant period of time to bring them to a state of completion since, in the Company’s estimation, capitalization, as stated, produces greater periodic correspondence between the expenses and the benefit produced from the asset. As a result, as at January 1, 2007, the inventory of buildings for sale increased by about NIS 167,269 thousand, the “real estate” category grew by about NIS 5,209 thousand, the investment in affiliated companies increased by about NIS 5,607 thousand, the provision for deferred taxes, net, increased by about NIS 48,423 thousand, the minority interest increased by about NIS 54,056 thousand, and the balance of the retained earnings increased by about NIS 64,659 thousand. As at December 31, 2007, the inventory of buildings for sale increased by about NIS 144,315 thousand, the “real estate” category grew by about NIS 42,470 thousand, the investment in affiliated companies increased by about NIS 13,069 thousand, the provision for deferred taxes, net, increased by about NIS 49,484 thousand, the minority interest increased by about NIS 50,356 thousand, and the balance of the retained earnings increased by about NIS 86,800 thousand. In addition, there was a decline in the financing expenses of about NIS 16,177 thousand and an increase in the equity income of about NIS 2,079 thousand for the year ended December 31, 2007. In addition, due to differences in the definition of credit costs that may be capitalized, as at January 1, 2007, the real estate for investment under construction decreased by about NIS 10,068 thousand and the fixed assets declined by about NIS 1,063 thousand. As at December 31, 2007, the real estate for investment under construction decreased by about NIS 8,264 thousand and the fixed assets declined by about NIS 1,063 thousand. 272 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) f. In accordance with Israeli GAAP, certain selling, marketing, administrative and general expenses in respect of the sale of residential units were capitalized to the inventory of buildings for sale and to real estate for investment under construction. Pursuant to IFRS, these expenses are recorded in the statement of operations as incurred. In addition, certain expenses were classified to fixed assets. As a result, as at January 1, 2007, the balance of the inventory of buildings for sale decreased by the amount of about NIS 105,204 thousand, the real estate for investment under construction declined by about NIS 1,787 thousand, the fixed assets increased by about NIS 1,670 thousand, the payables and other credit balances grew by about NIS 533 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 31,422 thousand, the minority interest fell by about NIS 31,386 thousand and the balance of the retained earnings decreased by about NIS 43,047 thousand. As at December 31, 2007, the balance of the inventory of buildings for sale decreased by the amount of about NIS 120,073 thousand, the balance of the real estate declined by about NIS 5,354 thousand, the fixed assets increased by about NIS 1,584 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 34,173 thousand, the minority interest fell by about NIS 34,611 thousand and the balance of the retained earnings decreased by about NIS 55,143 thousand. In addition, during the year ended December 31, 2007, there was an increase in the selling and marketing expenses of about NIS 8,416 thousand, an increase in the administrative and general expenses of about NIS 3,730 thousand, and a decrease in the tax expenses of about NIS 598 thousand. g. In accordance with Israeli GAAP, combination transactions were presented at the amount of the expected cost of the construction services. Changes in the estimate of the cost of the construction services during execution of the project were also recorded to the cost of the project. Pursuant to IFRS, combination transactions, as stated, were restated according to the fair value of the transaction on the execution date of the exchange (the date of conveyance of the land). In receipts combination transactions, wherein the Company commits to transfer cash based on the amount of the price at which the residential units to be built on the land are sold, the said financial liability is re-measured based on the cash flows expected to be paid, discounted by the original interest rate of the liability each period, and changes in the liability are recorded on the statement of operations. As a result, as at January 1, 2007, the balance of the liability to sellers of real estate declined by the amount of about NIS 21,765 thousand, the inventory of buildings for sale increased by about NIS 14,251 thousand, the real estate decreased by about NIS 47,016 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 1,169 thousand, the minority interest declined by about NIS 1,447 thousand and the balance of the retained earnings decreased by about NIS 8,384 thousand. As at December 31, 2007, the balance of the liability to sellers of real estate declined by the amount of about NIS 25,797 thousand, the inventory of buildings for sale increased by about NIS 1,255 thousand, the real estate decreased by about NIS 42,055 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 398 thousand, the minority interest declined by about NIS 2,954 thousand and the balance of the retained earnings decreased by about NIS 11,651 thousand. 273 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) g. (Cont.) In addition, during the year ended December 31, 2007, financing expenses of about NIS 7,757 thousand were recorded in respect of revaluation of liabilities in receipts combination transactions as stated. h. In accordance with Israeli GAAP, lands leased from the Israel Lands Administration are classified as fixed assets and are not depreciated. Pursuant to IFRS, such lands are not considered lands owned by the Company, the lease payments are classified as deferred expenses and they are amortized over the period of the lease, including the option to extend the lease period, if on the date of the lease undertaking it was reasonably certain that the option would be exercised. As a result, as at January 1, 2007, there was an increase in the deferred expenses of about NIS 76,472 thousand, a decrease in the fixed assets of about NIS 103,754 thousand, a decrease in real estate for investment under construction of about NIS 77,721 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 23,102 thousand, the minority interest declined by about NIS 30,842 thousand and the balance of the retained earnings decreased by about NIS 50,609 thousand. As at December 31, 2007, there was an increase in the deferred expenses of about NIS 75,413 thousand, a decrease in the fixed assets of about NIS 115,325 thousand, a decrease in real estate for investment under construction of about NIS 3,054 thousand, the balance of the provision for deferred taxes, net, declined by about NIS 912 thousand, the minority interest declined by about NIS 1,672 thousand and the balance of the retained earnings decreased by about NIS 30,793 thousand. i. In accordance with Israeli GAAP, as at January 1, 2007 assets held for sale, in the amount of about NIS 1,373,125 thousand, are presented as part of real estate for investment. Pursuant to IFRS and subject to such assets meeting the IFRS’s recognition criteria, these assets are presented separately in the balance sheet, based on the lower of their book values or fair values less selling expenses. j. Subsidiaries have concession agreements (B.O.T.) with government entities in the framework of which the subsidiaries have constructed the Highway 431 project and the student dormitories project in Jerusalem. In addition, as part of the agreements the subsidiaries operate these properties in exchange for fixed and variable payments, as provided in the concession agreements. In accordance with Israeli GAAP, commencing from 2006, a financial asset was recognized in the financial statements in respect of Highway 431 reflecting the customers’ debt, where the said financial asset bears interest based on the project’s weighted-average cost of capital. In accordance with Israeli standards, the student dormitories project was treated as a fixed asset. Under IFRS, an interest-bearing financial asset is recognized in the financial statements reflecting the customers’ debt. The interest rate on the financial asset is based on the customers’ riskless rate of interest plus an interest rate reflecting the risk associated with constructing and operating the facility. Further, recognition of a financial asset under IFRS takes place at the start of construction of the facility. 274 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) j. (Cont.) The impact of the transition as at January 1, 2007 is reflected in an increase in the short-term and long-term financial assets, in the amount of about NIS 66,366 thousand, a decline in the fixed assets of about NIS 69,409 thousand, a decrease in the balance of the provision for deferred taxes, net, of about NIS 761 thousand, a decrease in the minority interest of about NIS 651 thousand and a decrease in the balance of the retained earnings of about NIS 1,631 thousand. The impact of the transition as at December 31, 2007 is reflected in an increase in the short-term and long-term financial assets, in the amount of about NIS 160,363 thousand, a decline in the fixed assets of about NIS 250,111 thousand, a decrease in the balance of the provision for deferred taxes, net, of about NIS 4,011 thousand, a decrease in the minority interest of about NIS 1,840 thousand and a decrease in the balance of the retained earnings of about NIS 6,546 thousand. k. In accordance with Israeli GAAP, companies over which the Company has joint control are presented based on the proportionate consolidation method. Pursuant to IFRS, a choice may be made to present the investments in companies as stated, based on the proportionate consolidation method or according to the equity method of accounting. The Company chose to present its investments in jointly-controlled companies using the equity method of accounting in light of the fact that the proportionate consolidation method is expected to be cancelled under IFRS in 2009. Therefore, the Company’s proportionate share in the assets, liabilities, revenues and expenses of jointly-controlled companies was eliminated and, instead, the investment therein was presented in the category “investments in investee companies” based on the equity method. The impact of the transition as at January 1, 2007 was reflected in an increase in the category “investments in investee companies” based on the equity method of about NIS 945,325 thousand, a decrease in the total assets of about NIS 2,250,148 thousand, and a decrease in the total liabilities of about NIS 1,304,823 thousand. The impact of the transition as at December 31, 2007 was reflected in an increase in the category “investments in investee companies” based on the equity method of about NIS 2,136,530 thousand, a decrease in the total assets of about NIS 4,261,969 thousand, and a decrease in the total liabilities of about NIS 2,125,439 thousand. In addition, during the year ended December 31, 2007, there was an increase in the equity earnings of about NIS 819,734 thousand. l. In accordance with Israeli GAAP, options issued to investors with an exercise premium linked to the CPI are presented as shareholders equity. Pursuant to IFRS, options of this type are classified as liabilities and are presented based on their fair values at every balance sheet date where the changes in the fair value are recorded in the statement of operations every period. The impact of the transition as at January 1, 2007 is a decrease in the category “receipts on account of options” in the amount of about NIS 19,806 thousand, an increase in the category “liabilities in respect of options” of NIS 57,593 thousand, a decrease in the minority interest of NIS 11,821 thousand, and a decrease in retained earnings of NIS 25,966 thousand. 275 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) l. (Cont.) As at December 31, 2007, due to exercise of the options, the “premium on shares” category increased by about NIS 37,787 thousand, against a decrease in the minority interest of NIS 11,821 thousand, and a decrease in retained earnings of NIS 25,966 thousand. m. In accordance with Israeli GAAP, liabilities for employee severance benefits are recognized on the basis of the full liability, assuming that all the employees will be dismissed on conditions entitling them to the full severance benefits, without taking into account capitalization rates, future salary increases and future employee attrition. In addition, liabilities for vacation and sick leave are calculated on the basis of estimates of utilization and redemption, respectively. On the date of transition to IFRS, all the net liabilities in respect of post-retirement benefits of employees and other long-term benefit plans are measured in accordance with the provisions of IAS 19, “Employee Benefits”. Post-retirement benefits in respect of defined benefit plans are measured on the basis of actuarial estimates and capitalized amounts. The measurement difference as at January 1, 2007, in the amount of about NIS 9,581 thousand, was recorded to the retained earnings’ balance (net of tax). The impact of the transition to IFRS as at January 1, 2007 is reflected in an increase in the balance of the investment in affiliated companies of about NIS 8,562 thousand, an increase in the liability for employee benefits of about NIS 946 thousand, a decrease in payables and other credit balances of about NIS 1,679 thousand, and a decrease in the provision for deferred taxes, net, of about NIS 283 thousand. As at December 31, 2007, there was an increase in the balance of the investment in affiliated companies of about NIS 6,994 thousand, an increase in the liability for employee benefits of about NIS 113 thousand, a decrease in payables and other credit balances of about NIS 5,985 thousand, and an increase in the provision for deferred taxes, net, of about NIS 19 thousand, an increase in the minority interest of about NIS 890 thousand and an increase in the retained earnings of about NIS 10,864 thousand. In addition, there was a decrease in the administrative and general expenses for the year ended December 31, 2007 of about NIS 445 thousand. The Company elected to recognize actuarial gains and losses directly in the shareholders’ equity section in the “retained earnings” category, in accordance with the alternatives existing in IAS 19, since based on this alternative the balance sheet reflects the fair value of the net liabilities to employees as at the cutoff date. Furthermore, under this alternative the statement of operations more properly reflects the Company’s activities in that it prevents fluctuations stemming from actuarial gains and losses. n. In accordance with Israeli GAAP, the Company recognized share-based payment transactions commencing from January 1, 2006 in respect of grants made after March 15, 2005, provided they did not vest up to January 1, 2006. Based on the relief provision included in IFRS 1, share-based payments made after November 7, 2002 that had not yet vested as at January 1, 2007 are treated retroactively pursuant to the provisions of IFRS 2. The Company granted share-based payments settled by means of shares in 2004. 276 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) n. (Cont.) In addition, in the absence of specific provisions in IFRS, the Company elected to record the increase in the shareholders’ equity due to the recording of expenses relating to share-based payments in the “retained earnings” category. Therefore, as at January 1, 2007, the Company recorded a capital reserve in respect of options to employees, in the amount of about NIS 6,995 thousand to the balance of the retained earnings. As at December 31, 2007, a capital reserve, as stated, in the amount of about NIS 9,654 thousand to the retained earnings’ balance. In addition, in 2007, pursuant to IFRS, salaries’ expenses in the amount of NIS 907 thousand were recorded against retained earnings. o. The Company elected the relief provision included in IFRS 1 relating to business combinations whereby it will apply IFRS 3 solely with respect to business combinations that took place after January 1, 2007 (the transition date to IFRS). p. Pursuant to the provisions of IFRS, the Company reclassified: (a) The minority interest, in the amounts of about NIS 1,725,473 thousand and NIS 4,609,789 thousand, as at January 1, 2007 and December 31, 2007, respectively, from a separate category between the long-term liabilities and the shareholders’ equity to a category in the shareholders’ equity section. (b) In accordance with Israeli GAAP, a dividend declared subsequent to the balance sheet date and up to the approval date of the financial statements was presented in the shareholders’ equity section as a separate category called “dividend proposed or declared subsequent to the balance sheet date”, against the balance of the retained earnings. Pursuant to IFRS, only disclosure is required to be given in respect of a dividend as stated without making a classification in the equity section. As at January 1, 2007 and December 31, 2007, there was an increase in the balance of the retained earnings and a decrease in the dividend declared subsequent to the balance sheet date presented in the shareholders’ equity, in the amounts of about NIS 360,000 thousand and about NIS 400,000 thousand, respectively. (c) In accordance with Israeli GAAP, deferred taxes were classified as current or non-current assets in accordance with the classification of the assets in respect of which they were created. Pursuant to IFRS, deferred taxes are classified as non-current items, even if the date of their expected realization is in the short-term. Therefore, upon the transition to IFRS, the balances of the short-term deferred taxes as at January 1, 2007 and December 31, 2007, in the amounts of about NIS 13,284 thousand and about NIS 452,474 thousand, respectively, were reclassified from the “deferred taxes” category in the current assets section to the “deferred taxes” category in the non-current assets section. 277 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) p. (Cont.) (d) Deposits from customers that based on Israeli GAAP were presented as a deduction from the inventory of buildings held for sale and as part of the “trade receivables” category, in the total amounts of about NIS 101,463 thousand and about NIS 157,728 thousand, as at January 1, 2007 and December 31, 2007, respectively, were reclassified to the “deposits from customers” category. (e) Pursuant to the relief provision allowed under IFRS 1, translation differences created prior to the transition date to IFRS in respect of foreign activities, were recorded to the balance of the retained earnings on the transition date to IFRS. (f) Pursuant to IFRS, provisions are to be presented as a separate category in the balance sheet. The impact of the transition as at January 1, 2007 and December 31, 2007 was reflected in reclassifications, in the amounts of about NIS 119,345 thousand and about NIS 48,710 thousand, respectively, from the “payables and other credit balances” category to a separate category. (g) Financing income, in the amount of NIS 921,658 thousand, was reclassified to a separate category in the statement of operations. q. Contrary to Israeli GAAP, under IFRS, financial instruments classified as being available for sale are recognized as assets for liabilities based their fair values. The impact as at December 31, 2007 was reflected in an increase of about NIS 5,611 thousand in a capital reserve in respect of available for sale assets against a decrease in the retained earnings in the same amount. r. Pursuant to IFRS, a liability is to be recognized in respect of a “put” option held by the minority interest to sell their shares in a subsidiary to the Company. The liability as at December 31, 2007 amounts to about NIS 77,527 thousand against a decrease in the minority interest of about NIS 25,204 thousand and a decrease in the retained earnings of about NIS 52,323 thousand. s. In June 2007 a subsidiary acquired an additional 50% of the shares of an affiliated company in which it held, prior to the said acquisition, 50%, and as a result it rose to control. In accordance with Israeli GAAP, goodwill and fair value adjustments (excess cost) are calculated for each acquisition for the addition portion acquired. Pursuant to IFRS, where business combinations are made in stages, the fair values of the identifiable assets, liabilities and contingent liabilities of the acquired entity are likely to be different on the date of each acquisition transaction. Therefore, on the date control is obtained, all assets, liabilities and contingent liabilities of the acquired entity are to be revalued to their fair values as at such date. The difference created as a result of revaluing the prior acquisitions on the date control, is obtained is recorded in a capital reserve. As a result of that state above, the impact of the transition as at December 31, 2007 is an increase in the balance of the intangible assets, in the amount of about NIS 38,935 thousand, an increase in the provision for deferred taxes, in the amount of about NIS 9,735 thousand, and an increase in a capital reserve in the amount of about NIS 29,200 thousand. 278 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) t. The concession contract signed between the State and Derech Eretz in connection with the main section of the Highway ensures proceeds from the toll fare, the linkage basis of which is composed of changes in the Israeli Consumer Price Index, and multiplies the change in the U.S. Consumer Price Index by the change in the shekel – U.S. dollar (hereinafter – “the Dollar”) exchange rate, which creates an embedded derivative regarding the dollar amount under IFRS. In accordance with Israeli GAAP, separation of embedded derivatives from hybrid contracts is not required. Pursuant to IFRS, under certain circumstances embedded derivatives are to be culled out of hybrid contracts and presented based on their fair values at every balance sheet date, where changes in the fair values are to be recorded on the statement of operations each period. Derech Eretz received an opinion from an economic expert regarding the Dollar being an acceptable currency for use in the Israeli economy in 1999, pursuant to which the Dollar constituted was an acceptable currency for use in the Israeli economy in 1999 (the year in which the agreements were signed in connection with the main section), since at that time the Dollar was the currency in which (or linked to the exchange rate of which) transaction prices were denominated in many sectors of the Israeli economy, the Dollar was used in regulatory activities and in advertisements of official entities in Israel and the Dollar was dominant in import and export transactions and capital import and export transactions. In the opinion of the management of Derech Eretz, the Dollar was an acceptable currency for use in the Israeli economy in 1999 and, therefore, the economic characteristics and risks of the Dollar are tightly knitted with the host contract. Accordingly, under IAS 39 the embedded dollar derivative is not to be separated from the host contract. On March 30, 2008, the Professional Committee of the Standards Institute (hereinafter – “the Committee”) addressed the matter whether the Dollar was an acceptable currency for use in the Israeli economy, and if so with respect to which period, and if and when did it cease being an acceptable currency. The Committee has not yet completed its deliberations. In light of the opinion of Derech Eretz and the opinion of the economic expert, the impact of separation of the embedded derivative was not reflected in the balance sheet in accordance with IFRS as at January 1, 2007 and as at December 31, 2007 and in the statement of operations in accordance with IFRS for the year ended December 31, 2007. If it is determined otherwise by the Committee, the Company will include in its financial statements the impact of separation of the embedded derivative, which in the opinion of the management of Derech Eretz is expected to have a significant impact on the financial statements. The Company has not numerically quantified the said impact. u. As a result of adjustment of the financial statements of affiliated companies to IFRS, as at January 1, 2007 and December 31, 2007 the Company recorded a decrease in the investment in affiliated companies against a decrease in the retained earnings, in the amounts of about NIS 155,025 thousand and about NIS 122,676 thousand. For the year ended December 31, 2007 there was an increase in the equity income of about NIS 32,349 thousand. The main impacts of IFRS on the affiliated companies are set forth below: 279 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) u. (Cont.) 1) In respect of the Cross Israel Highway: Derech Eretz has a concession contract between it and the State for paving the Cross Israel Highway, operating the Highway and executing expansions of the Highway. In accordance with Israeli GAAP, Derech Eretz presents a financial asset including costs incurred during construction of the main section, including financing costs, less customer payments recorded up to the substantial completion date of the main section. The financial asset includes a liability to the State in respect of its entitlement to receive 49% of the principal and interest repayments relating to the debt to the shareholders (hereinafter – “the Subordinated Debt”). The financial asset bears interest determined by use of the project’s overall weighted-average cost of capital, where the receipts relating to the financial asset are split into an “interest income” component and “principal repayment” component. Derech Eretz’s operating income were calculated based on the operating and maintenance expenses recorded on the statement of operations in the reported period plus a fixed margin. The rate of the operating margin is about 17% and was determined by taking into account the anticipated cash flows and the rate of return on the financial asset. Costs in respect of expansion of the Highway were treated in accordance with Israeli GAAP as a financial asset. Pursuant to IFRS, Derech Eretz applies IFRIC 12, “Service Concession Arrangements”, pursuant to which a financial asset is recognized constituting the unconditional contractual right (excluding contingencies relating to provision of construction and operation services) of the Company to receive payments from the State and/or based on its instruction (hereinafter – “the Guaranteed Amount”), based on a stabilization mechanism for the toll revenues based on the State’s forecast of the vehicle travel on the Highway. The balance of the Guaranteed Amount covers a certain percentage of Derech Eretz’s fixed and variable operating expenses. Therefore, Derech Eretz will recognize minimum operating revenues in the amount of the Guaranteed Amount relating to the said operation while revenues in excess of the minimum amount are recorded based on the scope of the actual vehicle travel on the Highway. The financial asset bears an interest rate determined based on the States’ risks, plus an interest rate reflecting the risk relating to construction and operation of the Highway. Recognition of the financial asset is from the commencement date of construction of the main section based on the rate of progress of the construction and, accordingly, from this date, Derech Eretz records financing income and expenses on the statement of operations. In addition, financing expenses are not capitalizes to the financial asset but, rather, recorded on the statement of operations. 280 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) u. (Cont.) 1) In respect of the Cross Israel Highway: (Cont.) Costs in respect of future expansions of the Highway will be treated in accordance with IFRS as an intangible asset and will be amortized on a straight-line basis commencing from the end of its construction and over the period of its operation. On January 12, 2006, the Second Addendum to the Concession Contract was signed between the State and Derech Eretz, pursuant to which the concession will include an additional section of the Highway – Project Section 18. In accordance with Israeli GAAP, Derech Eretz presents a financial asset in respect of Project Section 18, commencing from June 24, 2007 (the date of the financial close). Pursuant to IFRS, in respect of Project Section 18 Derech Eretz presents a mixed model including a financial asset and an intangible asset commencing from the date of the financial close. The intangible asset will be amortized over the operation period of Section 18. The financial asset constitutes an unconditional asset of the Company to receive payments from the State and/or based on its instruction pursuant to the State’s forecast of the vehicle travel in respect of Section 18, whereas the intangible asset, which constitutes the balance of the construction cost of Section 18 in excess of the amount recorded to the financial asset, as stated, represents Derech Eretz’s right to collection toll charges from the users of the Highway. Financing expenses on an intangible asset: Pursuant to IFRS and in accordance with IAS 23, Derech Eretz chose to capitalize financing expenses on the intangible asset. Financing expenses are capitalized up to the date on which the asset is ready for its intended use (the end of the construction period). Provision for material maintenance of the Highway: Pursuant to IFRS, Derech Eretz records in its books a liability for major maintenance of the Highway commencing from the completion date of its construction. The aforesaid liability is measured in accordance with IAS 37, based on the fair value of the anticipated future expense, which accrues over the period up to the anticipated date of execution of the liability. 281 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) u. (Cont.) 1) In respect of the Cross Israel Highway: (Cont.) The State’s option: Pursuant to the provisions of the concession contract an agreement was signed between the State, the company and the company’s shareholders, pursuant to which the company granted to the State, for no consideration, 49 options for profit participation certificates (hereinafter – “the Options”), which convey to their holders a right to acquire participation certificates in 49% of every dividend distribution by the company and participation certificates for 49% of the principal and interest repayments in respect of the subordinated debt. In accordance with Israeli GAAP and as a result of provision of long-term loans granted by the shareholders, in 2004, the company recorded a liability to the State constituting the entire liability to the State in respect of its entitlement to receive 49% of the principal and interest repayments, against the financial asset. The liability to the State is linked to the index, bears interest of 8% and in accordance with the terms of the subordinated debt a repayment date has not yet been scheduled for it. Pursuant to IFRS, the entire consideration for issuance of the Options will be recorded based on the fair value on the grant date as an intangible asset (constituting a right to collect toll fees from users of the Highway). The liability in respect of the option is split into two separate options: an equity option that is treated in accordance with IFRS 2, “Share-Based Payments”, and a liability option that is treated in accordance with IAS 39. Accordingly, the fair value of the equity option on the grant date was recorded to retained earnings and thereafter this option is not revalued. The liability option is measured based on fair value in every period where changes in the fair value are recorded in each period on the statement of operations. The exercise premium of the option to the State is allocated, for the most part, to the liability portion, in accordance with the proportion of the shareholders’ investment between the shareholders’ equity and the subordinated debt, as was done in the past. In addition, during the construction period of the main section, the change in the fair value of the option may not be capitalized to the intangible asset. The intangible asset will be amortized commencing from the end of the construction period. 2) An affiliated company uses the “last-in, first-out” (LIFO) for valuing the fuel inventory it owns. This inventory valuation method is not permitted in accordance with IFRS and, therefore, the affiliated company has started, under the international standards, to value the inventory using the “first-in, first-out” (FIFO) method. 282 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) u. (Cont.) 3) In accordance with Israeli GAAP, an affiliated company did not record a provision for deferred taxes in respect of temporary differences relating to land arising in a business combination that took place prior to January 1, 2005. Under the international standards, a provision for deferred taxes is to be recorded in respect of temporary differences. 4) Embedded Derivatives: The concession contract signed between the State and Derech Eretz in connection with the main section of the Highway ensures proceeds from the toll fare, the linkage basis of which is composed of changes in the Israeli Consumer Price Index, and multiplies the change in the U.S. Consumer Price Index by the change in the shekel – U.S. dollar (hereinafter – “the Dollar”) exchange rate, which creates an embedded derivative regarding the dollar amount under IFRS. In accordance with Israeli GAAP, separation of embedded derivatives from hybrid contracts is not required. Pursuant to IFRS, under certain circumstances embedded derivatives are to be culled out of hybrid contracts and presented based on their fair values at every balance sheet date, where changes in the fair values are to be recorded on the statement of operations each period. Derech Eretz received an opinion from an economic expert regarding the Dollar being an acceptable currency for use in the Israeli economy in 1999, pursuant to which the Dollar constituted was an acceptable currency for use in the Israeli economy in 1999 (the year in which the agreements were signed in connection with the main section), since at that time the Dollar was the currency in which (or linked to the exchange rate of which) transaction prices were denominated in many sectors of the Israeli economy, the Dollar was used in regulatory activities and in advertisements of official entities in Israel and the Dollar was dominant in import and export transactions and capital import and export transactions. In the opinion of the management of Derech Eretz, the Dollar was an acceptable currency for use in the Israeli economy in 1999 and, therefore, the economic characteristics and risks of the Dollar are tightly knitted with the host contract. Accordingly, under IAS 39 the embedded dollar derivative is not to be separated from the host contract. On March 30, 2008, the Professional Committee of the Standards Institute (hereinafter – “the Committee”) addressed the matter whether the Dollar was an acceptable currency for use in the Israeli economy, and if so with respect to which period, and if and when did it cease being an acceptable currency. The Committee has not yet completed its deliberations. In light of the opinion of Derech Eretz and the opinion of the economic expert, the impact of separation of the embedded derivative was not reflected in the balance sheet in accordance with IFRS as at January 1, 2007 and as at December 31, 2007 and in the statement of operations in accordance with IFRS for the year ended December 31, 2007. 283 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) u. (Cont.) 4) Embedded Derivatives: (Cont.) If it is determined otherwise by the Committee, the Company will include in its financial statements the impact of separation of the embedded derivative, which in the opinion of the management of Derech Eretz is expected to have a significant impact on the financial statements. The Company has not numerically quantified the said impact. v. Accounting treatment of index-linked financial instruments The Company has balances of index-linked financial instruments. In the estimation of the Company’s management, based on a draft position paper published by the Standards Board, there are a number of possible alternative accounting treatments with respect to index-linked financial instruments. For purposes of preparation of this note, the Company adopted the accounting treatment whereby the book value of the instrument and the payments deriving therefrom are revalued in every period based on the actual rate of increase in the index and, therefore, there is no need for an adjustment between the values of the instruments pursuant to Israeli GAAP and the values thereof under the international standards. The matter of measurement of index-linked financial instruments under the international standards is being examined and in this framework the Professional Committee of the Israeli Accounting Standards will request the position of the International Financial Reporting Interpretation Committee (IFRIC) regarding the accounting treatment index-linked assets and liabilities under the international standards. In light of that stated above, it is possible that it will be determined that the said accounting treatment is not permissible under the international standards and that a different accounting treatment, whereby the inflationary expectations are taken into account in measuring the financial instrument, would be more appropriate (regarding this matter, see Provisions AG7 and AG8 of International Standard No. 39). Should such a determination ultimately be made, the Company will be required to examine the significance of such a decision, as stated, including transitional rules, if any, on its financial statements and the accompanying notes as were published and will be published until the said decision is made, under the international standards. 284 Africa Israel Investments Ltd. Notes to the Financial Statements At December 31, 2007 Note 41 – Explanation Regarding the Effects of the Transition to IFRS (Cont.) w. The said changes increased (decreased) the liability for deferred taxes as presented below, based on the tax rates that will apply on the date of their utilization: Lands leased from the Administration Real estate for investment Revenues from sale of residential units Capitalization of credit costs Cancellation of capitalization of selling, marketing, administrative and general expenses Combination transactions Benefits to employees Exit from the consolidation BOT arrangements Other Note January 1 2007 December 31 2007 h a d e (23,102) 540,516 (172,004) 48,423 (912) – (97,241) 49,584 f g m k j (31,422) (1,169) (283) (67,468) (761) (28,855) 263,875 (34,173) (398) 19 (261,181) (4,011) (34,626) (382,939) The impact of the transition to IFRS on the statement of operations for the year ended December 31, 2007 was an increase in tax expenses, which were previously reported for the period, in the amount of NIS 49,858 thousand. x. The impact of the said changes on the balance of the retained earnings: Fixed assets Real estate for investment Options to investors Benefits to employees Lands leased from the Administration Revenues from sale of residential units Capitalization of credit costs Cancellation of capitalization of selling, marketing, administrative and general expenses BOT arrangements Dividend declared subsequent to the balance sheet date Combination transactions Capital reserve in respect of options to employees Reserve for translation differences PUT options Securities available for sale Other impacts Total adjustments to capital 285 Note January 1 2007 December 31 2007 b a l m h d e (6,040) 896,570 (25,966) 9,581 (50,609) (213,864) 64,659 – – – 10,864 (30,793) (187,272) 86,800 f j (43,047) (1,631) (55,143) (6,546) p g 360,000 (8,384) 400,000 (11,651) n n 6,995 (187,822) – – (37,648) 762,794 9,654 – (52,323) (5,611) (67,078) 90,901 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Contracting and Construction Danya Cebus Ltd. (3) (37) Cebus Rimon Industrial Construction Ltd. (18) Danya Cebus Projects (2003) Ltd. (18) 74.82 100 100 74.82 100 100 Industry, Trade and Communications Africa Israel Trade & Agencies Ltd. (1) (7) Anglo Saxon Real Estate Agency (Israel 1992) Ltd. (37) Africa Israel Energy Ltd. (37) Africa Israel Industries Ltd. (3) Packer YDPZ Ltd. (3) (9) Negev Ceramics (3) (9) Shlomo Rappaport & Co. Ltd. (123) Negev Ceramics Marketing (1982) Ltd. (123) Maklef 51 Ltd. (123) Negev Ceramics Marketing Nazareth Ltd. (123) Elgal Marketing Com Ltd. (123) N.D.R. Design Ltd. (123) P.L.H. Lighting Engineering Ltd. (122) Packer YDPZ Steel Services Ltd. (122) Packer YDPZ Metals Ltd. (122) Packer YDPZ Profiles Ltd. (122) Packer YDPZ Profiles Marketing Ltd. (122) Packer YDPZ Galvan Works Ltd. (122) Packer YDPZ Steel Dyke Ltd. (122) Packer YDPZ Quality Steel Ltd. (122) Imku YDPZ Industries Ltd. (122) Novo Flooring & Design S.R.L. (123) SID-PAC Steel and Construction Products S.R.L. (124) Kos Gas SID-PAC Bulgaria S.A. (124) Packer YDPZ Investments Ltd. (122) Contact Ziwad Electronics Ltd. (122) Packer Plada Investments (1963) Ltd. (9) Packer Plada Trading (1981) Ltd. (9) Earsfield Special Steels B.V. Earsfield Steels Limited (9) N. Packer Ltd. (9) Packer Plada Financing and Issuances (1982) Ltd. (9) Alon – The Israel Fuel Company Ltd. (2) Dor Alon Energy Israel (1988) Ltd. (92) (3) Dor Alon Tiful Gas Stations (93) Alon USA Energy Inc. (92) (94) Dor Alon Fast Food Limited Partnership (92) Alon Delek Food Division Ltd. 100 100 51 67.49 68.24 70.25 100 100 50 50 50.1 50 25 100 100 100 100 100 100 75 100 100 50 100 25 100 50 100 100 100 100 100 100 26.15 90 100 72.28 100 100 100 100 51 67.49 68.24 70.25 100 100 50 50 50.1 50 25 100 100 100 100 100 100 75 100 100 50 100 25 100 50 100 100 100 100 100 100 26.15 90 100 72.28 100 100 286 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Dor Food Chains Holdings Ltd. (92) Alon Retailing Ltd. (51) The Blue Square Israel Ltd. (3) (19) The Blue Square Network – Properties and Investments Ltd. (3) (103) 100 100 70 80 100 100 70 80 Christina America Inc. (4) (47) Gottex Models Ltd. (4) (47) Gottex Models (U.S.A.) Corp. (11) Gottex Trademarks (Registered Partnership) (11) Gottex Fashions Ltd. (138) 100 100 100 100 100 100 100 100 100 100 Mapal Communications Ltd. (2) Africa Israel Communications Ltd. Af-Ran Ltd. (4) (39) Tadiran Telecom Ltd. (20) Tadiran Telecom Inc. (40) Tadiran Holding Inc. (48) Kunming Tadiran Telecommunication Equipment Co. Ltd. (40) 4 Harbor Court, LLC (39) Vash Telecanal Ltd. (2) Melraz Media (2001) Ltd. Yovelim Personnel Ltd. (18) 20 50.1 50 85.7 100 100 51 75 46.19 100 100 20 50.1 50 85.7 100 100 51 75 46.19 100 100 Real Estate Development Africa Israel Residences Ltd. (3) (6) E.M.T. Neve Savyon Ltd. (4) Renanot Enterprises & Investments Ltd. (4) Afriram Ltd. (2) Mishtalot Savyon Ltd. Armon Hahagmon Ltd. (Kasar El-Motoran) (4) Nazareth Church Commercial Center (2006) Ltd. (119) 74.95 33.3 50 40 21 50 63 74.95 33.3 50 40 21 50 63 Rental Properties Africa Israel Properties Ltd. (3) (6) Kiryat Hamada Migdal Ha-Emek Ltd. (5) Haifa Quarries Ltd. (2) Af-Sar Ltd. (28) Flamingo Ltd. (28) Givat Savyon Ltd. (28) One Half Jubilee Ltd. (28) Meqarqe’e Merkaz Ltd. (28) Cebus Rimon Building Industries and Development Ltd. City Center (M.A.T.) Management Ltd. (49) Mercaz Savyonim Management and Holdings Ltd. (28) Aviv Shopping Mall Management and Holdings Ltd. (50) Lev Talpiot Management and Holdings Ltd. (38) A.L.A. Management and Operations (2005) Ltd. (4) 68.72 100 45 100 100 85 100 73.4 100 100 100 100 40 50 68.72 100 45 100 100 85 100 73.4 100 100 100 100 40 50 287 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Financing Africa Israel (Finance) 1985 Ltd. Africa Israel Financing and Investments (Securitization 1) Ltd. Africa Israel Financing and Investments (2004) Ltd. Africa Israel Financial Properties and Strategies Ltd. Strategic and Financial Properties (N.P.E.) Ltd. (59) Bet Savyon Ltd. Africa Israel Investments House Ltd. (59) Africa Israel Issuances Ltd. (104) Africa Israel Mutual Funds Management Ltd. (104) Africa Israel Financial Products Ltd. (104) Africa Israel Investments Portfolio Management Ltd. (104) 100 100 100 100 100 100 94.17 100 100 100 100 100 100 100 100 100 100 94.17 100 100 100 100 Hotels Africa Israel Tourism Holdings Ltd. Africa Israel Hotels Ltd. Tiberias Hot Springs Co. Ltd. (41) Jordan Hotel M.H.Y. Ltd. (41) AKD Projects & Construction (1990) Ltd. (41) Afdor Ltd. (8) Eilat Patio Hotel Ltd. (8) Massechet Eilat Ltd. (8) Kalia Investments & Development Ltd. of The North Dead Sea Ltd. P.D. Hotels Ltd. (41) Mamtina Ltd. (4), (42) Ashlon Africa – Registered Partnership (4), (91) Etzion Gever – Limited Partnership (4), (42) Nouana Limited (4), (91) Terelle LLC (43) Eitan (Cyprus) Ltd. (41) Eitan (Russia) Ltd. (56) Eitan K. Ltd. (56) Eitan Ozerkovskaya1 Ltd. (56) Craespon Ltd. (43) Sanatorium Plaza (57) SPC Plaza Ltd. (57) Eitan (Germany) Ltd. (56) Mafico Ltd. (56) (60) Mafico & Co. GmbH KG (Partnership) Mafico Holdings (60) Myth Investment & Development S.R.L. (56) S.C. Palas Hotels S.R.L. (60) 100 100 99.9 99.9 100 100 100 100 33.3 100 37.07 50 37.07 50 100 100 100 100 100 50 50 50 100 100 100 100 60 60 100 100 99.9 99.9 100 100 100 100 33.3 100 37.07 50 37.07 50 100 100 100 100 100 50 50 50 100 100 100 100 60 60 288 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Infrastructure Derech Eretz Highways (1997) Ltd. (2) Derech Eretz Highways Management Corporation Ltd. (2) Derech Eretz Construction Joint Venture Limited Partnership (4) (18) Derech Eretz Telecom Ltd. (58) Netivei Hayovel Ltd. (18) Derech Eretz Joint Venture 18 (4) (18) Danya Cebus Factories Ltd. (18) Derech Eretz Highways Section 18 (2007) Ltd. (58) Netivei Hayovel (Hasharon) Ltd. (18) 37.5 24.5 33.3 100 100 50 100 100 100 37.5 24.5 33.3 100 100 50 100 100 100 Foreign Investment Companies Africa Israel International Holdings Ltd. (10) Africa Israel International Investments (1997) Ltd. (10) Africa Israel International Properties (2002) Ltd. (28) Danya International Holdings Ltd. (18) 100 100 100 100 100 100 100 100 The Netherlands Africa-Israel (East Europe) Investments B.V. – Financing (17) A.I.E.E. Overschie B.V. – Real Estate (21) F. Findings Realities B.V. – Holdings (15) Lentjee Holdings B.V. – Holdings (24) SEA B.V. – Holdings (4), (17) AFI Europe B.V. (21) AFI Wilanow Holdings (105) AFI Properties Berlin B.V. (105) AFI Properties Development B.V. (105) AFI Properties Logistics B.V. (105) AFI Properties B.V. (105) Danya Dutch B.V. – Holdings (26) 100 100 100 100 50 100 100 100 100 100 100 100 100 100 100 100 50 100 100 100 100 100 100 100 Cyprus Moonbeam Enterprises Ltd. – Holdings (25) Sifrocal Ltd. – Financing (23) Bellgate Construction Ltd. – Holdings (16) Stilo Overseas Ltd. – Services (23) Parcost Ltd. – Services (23) Topcrest Ltd. – Financing (23) AFI Development – Holdings (13) Borenco Enterprises (16) Olpek Holdings Ltd. (16) Westtec Four Winds Limited (4) (16) Severus Trading Ltd. (16) Talena Development Ltd. (16) Temalis Ltd. (16) Scotson Ltd. (16) 100 100 100 100 100 100 71.2 100 50 50 100 100 100 100 100 100 100 100 100 100 71.2 100 50 50 100 100 100 100 289 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Slytherin Development Ltd. (16) AFI Ukraine Ltd. (13) Kayiri Trade & Invest Ltd. (16) Rognerstar Finance Ltd. (16) Beslaville Management Ltd. (16) Amakri Management Ltd. (125) Jaquetta Investment Ltd. (125) Guzela Ltd. (16) Kaniloa Investments Ltd. (16) Sherzinget Ltd. (16) Hermieison Investments Ltd. (16) Bioka Investments Ltd. (16) Bastet Estates Ltd. (16) Rubiosa Management Ltd. (16) Sewaka Holdings Ltd. (16) Amerone Development Ltd. (16) Bundle Trading Ltd. (16) Buidola Properties Ltd. (16) Faringer Enterprises Ltd. (105) Controceni Investments Ltd. (105) AFIEM Cyprus Ltd. (105) Danya Cebus Cyprus Ltd. (26) Krusto Enterprises Limited (16) (26) Rumbrol Trading Limited (26) 100 100 100 100 95 100 100 100 100 100 100 90 100 100 100 100 100 100 80 100 100 100 100 80 100 100 100 100 95 100 100 100 100 100 100 90 100 100 100 100 100 100 80 100 100 100 100 80 Russia Stroyinkom R LLC (12) M.D.C. Ltd. (13) Stroyinkom k LLC (12) Mystroy LLC (16) Avtostoyanka Tverskaya Zastava LLC (16) Crown Invest. LLC (16) Tine Management LLC (16) Tine Investment LLC (16) Inzhstory AG LLC (16) Incomstroy AG LLC (16) Elit – Business LLC (36) Rapo LLC (95) Pso Dorokhovo LLC (36) (100) Semprex LLC (16) Ultrainvest LLC (96) Ultrastory LLC (96) Aristeya LLC (97) MKPK JSC (97) Lessy Prof LLC (16) Corin Development (16) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98.2 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 98.2 100 100 290 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Ozerkovka LLC (98) Rostraconsult CJSC (99) Armamd JSC (129) Bizar LLC (16) Volga Land Development LLC (130) Cristall Development LLC (16) Volga Stroyinkom Development LLC (130) North Investments LLC (12) Favorit LLC (134) Fima Gloria CJSC (131) Nordservice LLC (133) KO Project LLC (135) KO Development LLC (136) Titon LLC (137) Zheldoruslugi LLC (128) Izdatesltvo Nedra JSC (102) Crown Consult LLC (16) Stroyincom Ecologiya LLC (35) Real Project LLC (128) AFI RUS LLC (16) MTOK CJSC (132) UMM “Stroyenergomekhanizatsiya” JSC (137) Danya Cebus Rus (27) Kama Gate CJSC (106) Danya Cebus PM (107) New Road 2008 (18) 100 100 100 50 100 100 100 100 100 100 100 100 76 100 100 90.17 100 100 100 100 98.6 100 100 50 100 50 100 100 100 50 100 100 100 100 100 100 100 100 76 100 100 90.17 100 100 100 100 98.6 100 100 50 100 50 Hungary AFI Europe Hungary Kft (105) Pro-Mot Hungaria Kft (105) Szeplinget Kft (105) Akar-Lak (105) 100 50 100 100 100 50 100 100 Luxembourg AFI (East-Central Europe) Developments Sarl (17) 100 100 BVI Intrastar International Ltd. Galway Consolidated Ltd. (44) Bugis Finance Ltd. (102) 50 100 100 50 100 100 Serbia and Montenegro Airport City Belgrade d.o.o. (44) Airport City Property Management d.o.o. (121) 85 100 85 100 291 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Czech Republic AFI Europe Czech Republic s.r.o. – Real Estate (105) M.I.C.C. Prague s.r.o. (105) Adut s.r.o. (105) Broadway Creseus s.r.o. (105) Flora – Sen s.r.o. (81) Balabenka s.r.o. (105) Praha – Jeruzalem s.r.o. (14) Flora Management Group (105) Bohemia – Sen s.r.o. (105) National Technological Park (81) Nofim Czech Republic s.r.o. (61) Tulipa Modranska Rokle s.r.o. – Real Estate (105) Tulipa Rokytka s.r.o. – Real Estate (105) Tulipa Vohovice s.r.o. – (105) 100 64 63 100 50 100 100 100 100 50 100 100 100 100 100 64 63 100 50 100 100 100 100 50 100 100 100 100 Poland Novo Maar SP. Z.O.O. (105) Czerwone Maki Project SP. Z.O.O. (105) B.S.R. Polska Wilanow SP. Z.O.O. (139) AFI Management SP. Z.O.O. (105) 100 100 30 100 100 100 30 100 Bulgaria AFI Europe Bugaria Eood (105) Vitosha Gardens Eood (105) Malina Gardens Eood (105) Lagera Eood (105) Plovdiv Logistic Center (105) Varna New Co. (105) 100 100 100 100 75 100 100 100 100 100 75 100 Rumania Controceni Park S.A. (82) Star Estate SRL (105) Europe Logistic (105) AFI Europe Management SRL (105) ROI Management SRL (105) Premier Solution & Team SRL (105) Tulip Management SRL (105) Plaza Arad Imobiliar SRL (105) Danya Cebus Rom (29) 98.4 100 100 100 100 100 100 100 100 98.4 100 100 100 100 100 100 100 100 Philippines Africa Israel Investment (Philippines) (30) Africa Israel Properties (Philippines) (90) Cyberzone Properties Inc. (101) Fli-Aiip Inc. (120) 100 100 40 40 100 100 40 40 292 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Latvia SIA AFI Management (105) SIA AFI Investment (105) SIA A.R. Holdings (105) SIA B.R. Holdings (105) SIA Anninmuizas IPASUMS (105) 100 100 100 100 100 100 100 100 100 100 Germany AFI Germany GmbH (105) AFI Germany Investment GmbH (105) Harel Grundstucks GmbH (105) Peerly Grundstucks GmbH (105) Margalit Grundstucks GmbH (105) Margalit Teltower Damm Grundstucks GmbH (140) 100 100 70 70 70 70 100 100 70 70 70 70 The Ukraine Or Avner LLC (126) ABG Socidatel (127) Budinkom LLC (125) 100 100 100 100 100 100 48.95 100 100 100 100 65 100 65 65 100 65 100 65 49 49 49 52 65 65 65 100 65 65 65 49 48.95 100 100 100 100 65 100 65 65 100 65 100 65 49 49 49 52 65 65 65 100 65 65 65 49 United States Savyon L.P. (31) A.I. Holdings (USA) Corp. (30) A.I. Properties and Development (USA) Corp. (46) A.I. Properties 23 Wall Managers LLC (32) A.I. Properties 23 Wall Owners LLC (116) A.I. & Boymelgreen LLC (32) W Squared LLC (63) W Squared Managers LLC (32) 10 Chelsea LLC (32) 60 Spring Street LLC (64) Spring Lafayette LLC (32) 20 Pine Street LLC (67) 20 Pine Street Managers LLC (32) Atlantic Court LLC (33) Atlantic Court Management LLC (33) AC Property Mgt. Inc. (33) 35 Front Street LLC (32) 84 Front Street LLC (32) 84 Front Street Management LLC (32) 15 Broad LLC (32) 15 Broad Street LLC (65) 15 Broad Street Managers LLC (32) Beachfront Community LLC (32) Beachfront Community Management LLC (32) Empire Stores LLC (33) 293 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % AI & Boymelgreen Gowanus LLC (32) Gowanus Village LLC (53) Gowanus Village I LLC (53) Gowanus Village II LLC (53) JP Gowanus LLC (53) JP Brooklyn Managers LLC (77) 800 Pacific LLC (32) 85 Adams LLC (32) 85 Adams Street LLC (66) 85 Adams Street Managers LLC (32) 341–347 Broadway LLC (32) AI & Boymelgreen of Florida LLC (72) Contralto LLC (73) 159 NE 7th Avenue LLC (73) Baritone LLC (73) Tech Garage LLC (73) Leviev Boymelgreen Elenen Biscayne LLC (54) Symphony II LLC (54) Leviev Boymelgreen of Nevada LLC (74) Metroflag Cable LLC (75) Metroflag BP LLC (76) Metroflag SW LLC (78) Horizen Brickell LLC (54) 92 Laight AI Properties LLC (32) LB Herald Ventures LLC (54) Scribe LLC (115) Park Fifth Associates LLC (118) Leviev Fulton Club LLC (111) LFC Mezz LLC (111) AI Fulton LLC (32) HRPV-I LLC (109) HRP Myrtle Beach Partners LLC (110) HRP Myrtle Beach Holdings LLC (112) HRP Myrtle Beach Operations LLC (113) LBN–HD LLC (55) Metroflag Management LLC (114) 23 Wall Commercial Owners LLC (32) Brickell Park Garage LLC (73) Brickell Ridge LLC (73) Olympia Florida LLC (54) Seagull Garage LLC (73) Prime Garage LLC (73) Eagle Garage LLC (73) Tenor LLC (73) Liberty Garage LLC (73) Arena Garage LLC (73) 55 67 67 67 67.67 50 65 65 100 65 65 65 100 100 100 100 100 100 32.5 50 50 50 100 100 100 50 60 50 50 100 25 73.68 92.5 100 100 50 65 100 100 100 100 100 100 100 100 100 294 55 67 67 67 67.67 50 65 65 100 65 65 65 100 100 100 100 100 100 33 50 50 50 100 100 100 50 60 50 50 100 25 73.68 92.5 100 100 50 65 100 100 100 100 100 100 100 100 100 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % Internet Garage LLC (73) Liberty II Garage LLC (73) Market Garage LLC (73) Independence Garage LLC (73) Brickell Park Garage I LLC (73) Brickell Park Garage II LLC (73) Brickell Corridor LLC (73) 1680 Meridian Avenue LLC (73) Renaissance Garage LLC (73) 100 Ocean Garage LLC (73) 19 N.E. 9th Street LLC (73) N.E. Tenth Street LLC (73) Irene Garage LLC (73) Leviev Boymelgreen Marquis Developers LLC (73) Wall Street Commercial Owners LLC (32) Leviev Boymelgreen 1101 Brickell LLC (68) Leviev Boymelgreen Brickell Developers LLC (68) 14 Wall Street Mezz LLC (32) 14 Wall Street Holdings 1 LLC (69) Spring Street Commercial Owners LLC (32) 14 Wall/Spring Mezz LLC (70) 14 Wall/Spring Street LLC (71) L.B. Broad Lessees LLC (32) Broad Street Lessors LLC (32) AI Broad Lessors LLC (32) AI Florida Holdings Inc. (46) N.E. Miami Court LLC (54) Block 42 Acquisition LLC (73) Leviev Boymelgreen Vitri Developers LLC (73) Leviev Boymelgreen Soleil Developers LLC (73) Leviev Boymelgreen Performing Arts Complex (73) Leviev Boymelgreen Marquis Hotel LLC (54) AI Nevada Holdings, Inc. (46) LBN – Cable LLC (55) LBN – BP LLC (55) LBN – SW LLC (55) LBN – HD LLC (55) LBN – POLO LLC (55) Metroflag Polo LLC (79) Metroflag HO LLC (89) AILA Corp. (46) Afrinam LLC (80) Cable Center LLC (83) Cap/Tor LLC (83) TL Owner LLC (84) HD Owner LLC (84) SW Owner LLC (85) 295 100 100 100 100 100 100 100 100 100 100 100 100 100 100 65 100 100 65 100 65 100 100 65 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 50 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 65 100 100 65 100 65 100 100 65 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 100 50 100 100 100 100 100 Africa Israel Investments Ltd. Appendix – List of Active Group Companies Rate of Ownership and Control by Holding Company as at the Balance Sheet Date Ownership Control % % HM Owner LLC (86) AI Times Square LLC (32) AI Round Times LLC (32) AI Square Times Limited Partnership (88) AI Times Square Limited Partnership (141) AI 229 West 43rd Street JV L.P. (141) AI 229 West 43rd Street GP LLC (141) AI 229 West 43rd Street Corp (“TRS”) (141) AI 229 West 43rd Street L.P. (141) AI 229 West 43rd Street Junior Mezzanine LLC (141) AI 229 West 43rd Street Intermediate Mezzanine LLC (141) AI 229 West 43rd Street Senior Mezzanine LLC (141) AI 229 West 43rd Street LLC (141) AI Spring Clock LLC (142) AI Clock LLC (142) AI 14 Wall Corporation (46) AI Apthorp (32) Apthorp Management LLC (143) Apthorp Holdings LLC (144) Apthorp Mezzanine LLC (144) Apthorp Associates LLC (144) AI Broad Corp. Broad Street San Francisco LLC (145) AI Nevada Holdco LLC (74) AI Nevada TIC, LLC (146) Walccs Las Vegas, LLC (147) AI Arizona Inc. (46) AI Phoenix, LLC (148) AI – B.S.R., LLC (149) 85 Adams Street (66) 85 Adams Street Managers (32) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 50 50 100 100 100 100 49 100 100 50 100 65 Holds directly or indirectly some of the companies in the Industry and Trade group. Affiliated company, the investment in which is included on the equity basis. The shares of this company are traded on the Tel-Aviv Stock Exchange. Companies under joint control consolidated by the proportionate consolidation method. Subsidiary of Givat Savyon Ltd. The debentures of this company are traded on the Tel-Aviv Stock Exchange. Holds directly or indirectly the companies in the Hotels group. Subsidiaries of AKD Projects (1990) Ltd. Subsidiary of Packer Industries Ltd. Holds the international companies operating overseas. Subsidiaries of Gottex Models Ltd. Subsidiary of Borenco Enterprises. Subsidiary of Moonbeam Enterprises Ltd. Subsidiary of Adut s.r.o. 296 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 50 50 50 100 100 100 100 49 100 100 50 100 65 Africa Israel Investments Ltd. Appendix – List of Active Group Companies (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) (30) (31) (32) (33) (34) (35) (36) (37) (38) (39) (40) (41) (42) (43) (44) (45) (46) (47) (48) (49) (50) (51) (52) (53) (54) (55) (56) (57) (58) (59) (60) (61) (62) (63) (64) (65) (66) Subsidiary of SEA B.V. Subsidiary of AFI Development Ltd. Subsidiary of Africa Israel International Holdings Ltd. Subsidiary of Danya Cebus Ltd. Subsidiary of Alon Retail Ltd. Investee company of Af-Ran Ltd. Subsidiary of Africa Israel International Properties (2002) Ltd. Proportionately consolidated company of Africa Israel International Investments (1997) Ltd. Subsidiary of Africa Israel (East Europe) Investments BV. Subsidiary of AFI (East – Central Europe) Developments sarl. Subsidiary of Lentjee B.V. Subsidiary of Danya International Holdings. Subsidiary of Rumbrol Trading Limited. Subsidiary of Africa Israel Properties Ltd. Subsidiary of Danya Dutch B.V. Subsidiary of Africa Israel International Investments (1997) Ltd. Partnership held by the Company and presented on the equity method. Subsidiary of A.I. Properties and Developments (USA) Corp. Affiliated company of A.I. Properties and Developments (USA) Corp. Subsidiary of Crowher S.A. Subsidiary of Olpek Ltd. Subsidiary of StroyIncome K. Subsidiary of Trade and Agencies Ltd. Subsidiary of Flamingo Ltd. Held by Africa Israel Communications Ltd. Subsidiary of Tadiran Telecom Ltd. Subsidiary of Africa Israel Hotels Ltd. Held by Jordan Hotels M.H.Y. Ltd. Subsidiary of Nouana Limited. Subsidiary of Intrastar International Ltd. Subsidiary of 2024590 Ontario Inc. Subsidiary of AI Holdings (USA) Corp. Subsidiary of F. Findings Realties B.V Subsidiary of Tadiran Telecom Inc. Subsidiary of Haifa Quarries Ltd. Subsidiary of Meqarqe’e Merkaz Ltd. Held by Dor Food Chains Holdings Ltd. Held by Bronfman–Alon Ltd. Subsidiary of AI & Boymelgreen Gowanus LLC. Subsidiary of AI & Boymelgreen of Florida LLC. Subsidiary of Leviev Boymelgreen of Nevada LLC. Subsidiary of Eitan (Cyprus) Ltd. Subsidiary of Craespon Ltd. Subsidiary of Derech Eretz Highways (1997) Ltd. Subsidiary of Africa Israel Financial Properties and Strategies Ltd. Partner in Mafico & Co. GmbH KG Partnership. Subsidiary of Faringer Enterprises Ltd. Subsidiary of Danya Proforma. Subsidiary of W Squared Managers LLC. Subsidiary of Spring – Lafayette LLC. Subsidiary of 15 Broad Street Managers LLC. Subsidiary of 85 Adams Street Managers LLC. 297 Africa Israel Investments Ltd. Appendix – List of Active Group Companies (67) (68) (69) (70) (71) (72) (73) (74) (75) (76) (77) (78) (79) (80) (81) (82) (83) (84) (85) (86) (87) (88) (89) (90) (91) (92) (93) (94) (95) (96) (97) (98) (99) (100) (101) (102) (103) (104) (105) (106) (107) (108) (109) (110) (111) (112) (113) (114) (115) (116) (117) (118) Subsidiary of 20 Pine Street Managers LLC. Subsidiary of Wall Street Commercial Owners LLC. Subsidiary of 14 Wall Street Mezz LLC. Subsidiary of Spring Street Commercial Owners LLC. Subsidiary of 14 Wall / Spring Mezz LLC. Subsidiary of AI Florida Holdings Inc. Subsidiary of Olympia Florida LLC. Subsidiary of AI Nevada Holdings Inc. Proportionately consolidated company of LBN – Cable LLC. Proportionately consolidated company of LBN – BP LLC. Company held by JP Gowanus, LLC. Proportionately consolidated company of LBN – SW LLC. Proportionately consolidated company of LBN – PoLo LLC. Proportionately consolidated company of AILA Corp. Proportionately consolidated company of AFI Europe N.V. Ltd. Subsidiary of Controceni Investment Ltd. Subsidiary of Metroflag Cable LLC. Subsidiary of Metroflag BP LLC. Subsidiary of Metroflag SW LLC. Subsidiary of Metroflag Polo LLC. Subsidiary of 2024589 Ontario Inc. Partnership held by AI Times Square, LLC and AI Rond Times, LLC. Proportionately consolidated company of LBN–HD, L.L.C. Partnership held by International Properties. Held by Africa Israel Hotels Ltd. Held by Alon – The Israel Fuel Company Ltd. Held by Dor Energy Israel (1988) Ltd. The shares of this company are traded on the stock exchange in New York. Held by Ultrainvest, Ultrastroy, Inzhstroy LLC. Subsidiary of Slytherin Development Ltd. Subsidiary of Severus Trading Ltd. Held by Tain Investments, Incomestroy AG. Subsidiary of Scotson Ltd. Investee company of Tain Investments. Held by Africa Israel Properties (Philippines). Subsidiary of Talena Development Ltd. Held by The Blue Square Israel Ltd. Held by Africa Israel Investments House Ltd. Held by AFI Europe N.V. Investee company of Krusto Enterprises Limited. Subsidiary of Danya Cebus Cyprus Ltd. Subsidiary of AI Properties 23 Wall Managers LLC. Affiliated company of AI Myrtle Beach LLC. Subsidiary of HRPV-I. Held by AI Fulton LLC. Subsidiary of by HRP Myrtle Beach Partners LLC. Held by HRP Myrtle Beach Holdings LLC. Held by LBN Management LLC. Held by LB Herald Venture LLC. Subsidiary of AI Properties 23 Wall Managers LLC. Subsidiary of LFC Mezz LLC. Subsidiary of AFRINAM LLC. 298 Africa Israel Investments Ltd. Appendix – List of Active Group Companies (119) (120) (121) (122) (123) (124) (125) (126) (127) (128) (129) (130) (131) (132) (133) (134) (135) (136) (137) (138) (139) (140) (141) (142) (143) (144) (145) (146) (147) (148) (149) Subsidiary of Armon Hahagmon (Caesar of Mutran) Ltd. Investee company of Africa Israel Investments (Philippines). Held by Airport City Belgrade d.o.o. Held by Packer YDPZ Ltd. Held by Negev Ceramics Ltd. Held by Yimko YDPZ Industries Ltd. Subsidiary of AFI Ukraine Ltd. Held by Amakri Management Ltd. and Jaquetta Investments Ltd. Held by Or Avner LLC. Subsidiary of Beslaville Management Ltd. Subsidiary of Maystroy LLC. Subsidiary of Cristall Development LLC. Subsidiary of Hermielson Investments Ltd. Subsidiary of Bundle Trading Ltd. Subsidiary of Bioka Investments Ltd. Subsidiary of Keyiri Trade & Invest Ltd. Subsidiary of Buildola Properties Ltd. Subsidiary of KO Project LLC. Subsidiary of Rognerstar Finance Ltd. Subsidiary of Gottex Trademarks. Held by AFI Wilanow Holdings B.V. Subsidiary of Margalit Grundstucks GmbH. Held directly and indirectly by AI Square Times Limited Partnership. Held directly and indirectly by 14 Wall\Spring Mezz, LLC. Held by AI Apthorp, LLC. Held by Apthorp Management, LLC. Subsidiary of AI Broad Lessors, LLC. Subsidiary of AI Nevada Holdco, LLC. Subsidiary of AI Nevada Tic, LLC. Subsidiary of AI Arizona Inc. Subsidiary of AI Phoenix LLC. 299 Africa Israel Investments Ltd. Financial Statements At December 31, 2007