20-F 1 v439022_20f.htm FORM 20-F

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

 

(Mark One)

 

¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

 

OR

 

¨SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report ________

 

Commission file number 1-14426

 

ALON BLUE SQUARE ISRAEL LTD.
(Exact name of Registrant as specified in its charter)
 
Israel
(Jurisdiction of incorporation or organization)
 
Europark Yakum, France Building, Yakum 6097200 Israel
(Address of principal executive offices)
 
Zehavit Shahaf, General Counsel and Corporate Secretary
Tel: (972)-9-9618504; Fax: (972)-9-9618636
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of class   Name of each exchange on which
registered
American Depositary Shares, each representing ten Ordinary Shares (1)   New York Stock Exchange, Inc.
     
Ordinary Shares, par value NIS 1.0 per share (2)   New York Stock Exchange, Inc.

 

(1)Evidenced by American Depositary Receipts.
(2)Not for trading, but only in connection with the listing of the American Depositary Shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 

(Title of Class)

 

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

65,954,427 Ordinary Shares, par value NIS 1.0 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes ¨ No x

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act 1934.

 

Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

x Yes ¨ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP ¨

 

International Financing Reporting Standards as issued by the International Accounting

Standards Board x

 

Other ¨

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 ¨ Item 18 ¨

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ¨ No x

 

 

 

 

INTRODUCTION

 

Unless otherwise indicated, as used in this Annual Report, (a) the term “Alon Blue Square” or the “Company” means Alon Blue Square Israel Ltd., (b) the terms “we,” “us” and “our,” mean Alon Blue Square and its consolidated subsidiaries, (c) “BSRE” means Blue Square Real Estate Ltd., a corporation of which we held 53.92% of the outstanding shares as of March 31, 2016, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries, (d) “Dor Alon” means Dor Alon Energy In Israel (1988) Ltd., a corporation in which we held approximately 63.13% of the outstanding ordinary shares as of March 31, 2016, (an additional 8% is held by our controlling shareholder, Alon Israel Oil Company Ltd., or Alon) and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries, (e) “Naaman” means Naaman Group (NV) Ltd., a corporation in which we held approximately 77.51% of the outstanding ordinary shares as of March 31, 2016, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries, (f) “Bee Group” means our wholly-owned subsidiary, Bee Group Retail Ltd., and (g) “Mega Retail” a corporation currently operated through court-appointed trustees, in which we hold 100% of the outstanding shares; we undertook to transfer 33% of Mega Retail's share capital (either by way of issuing new shares of Mega Retail or by our transfer of Mega Retail's shares held by us) to an Israeli corporation to be formed by the employee union of Mega Retail. On January 17, 2016 the Lod District Court appointed trustees for the operation of Mega Retail following Mega Retail's motion for stay of proceedings.

 

We are a holding company which operates in three reportable operating segments (two as discontinued operations). In our BSRE segment, we own, lease and develop yield-generating commercial properties and projects. In our Dor Alon segment, which is held for sale we operate a chain of filling stations and convenience stores in different formats in Israel, and we are considered to be one of the four largest fuel retail companies in Israel based on number of petrol stations and is a leader in the field of convenience stores. In our Naaman segment (operated through Bee Group), which is also held for sale, we operate specialist outlets in self-operation and franchises and offer a wide range of houseware and home textile products as a retailer and wholesaler in the houseware and home textile markets. In addition, we have another operation that consists of Bee Logistics Service Center Ltd., our wholly-owned operator of a logistics center, which provides services to Naaman as well as third party activities.

 

Mega Retail is currently operated by court-appointed trustees and according to reports of its trustees owns 127 supermarkets under different formats. Mega Retail is designated for sale by its trustees.

 

The financial results of our Dor Alon and Naaman segments have been presented as discontinued operations because they consist of activities designated for sale by us, and the financial results of Mega Retail have also been deconsolidated due to our loss of control of Mega Retail.

 

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Please note that unless otherwise indicated, as used in this Annual Report, the term “Ben Moshe Proposal” shall mean the proposal made by Mr. Moti Ben Moshe from February 15, 2016 and the clarifications to the proposal requested by Alon and Alon Retail Ltd., which includes, among others, that in consideration for NIS 115 million to be paid to Alon and Alon Retail Ltd., Mr. Ben Moshe would purchase (through a company under his control) the holdings of Alon and Alon Retail Ltd. in the Company on AS IS basis, and the rights and obligations of Alon to a bridge loan of NIS 110 million extended to the Company by Alon, including the right to allocate our shares against such bridge loan, and the rights and obligations in another loan subordinated to financial debt of NIS 60 million extended to us by Alon. In addition, the Ben Moshe Proposal includes an outline for the repayment of our financial debt (NIS 924 million). The debt repayment would include the injection of up to NIS 900 million into the Company for the full repayment of the financial debt to our financial creditors, of which NIS 200 million can be designated for the acquisition of Mega Retail by the Company or a company controlled by Ben Moshe (the identity of the acquiring entity will be determined by court) free and clear of all claims, provided Mega Retail will be acquired directly by the Company. On February 28, 2016, an acceptance notice to the Ben Moshe Proposal, subject to conditions, was issued by Alon and Alon Retail Ltd. (holding, in the aggregate, approximately 72.21% of our shares). On May 8, 2016 we filed a motion with the District Court in Lod, Israel to convene meetings of our financial creditors and shareholders for approval of a debt settlement based on the Ben Moshe Proposal (the “Debt Settlement”) under Section 350 of the Companies Law (the “Motion to Convene Creditors Meeting”). The Ben Moshe Proposal is subject to a final agreement between Ben Moshe and the Company’s creditors, the trustees appointed to operate Mega Retail and the creditors of Mega Retail.

 

On May 10, 2016, the trustees of Mega Retail submitted to the court in Lod, Israel a notice in which they chose the offer of Bitan Wines Ltd. among the offers that were submitted to them for the acquisition of Mega Retail (Ben-Moshe submitted one of the offers).  The trustees requested the court to convene meetings of the creditors of Mega Retail to approve the arrangement based on such offer of Bitan Wines for the reasons detailed in the request of the trustees (“Motion 38”). Following the trustees' motion, Ben Moshe and a company under his control, filed a motion with the Court requesting the setting of a date for an urgent court hearing during which, according to Ben Moshe, the Court would hear each party's argument in a manner which would be beneficial towards Mega Retail's creditors, or alternatively, determine that Ben Moshe can respond to the trustees' motion within a time frame determined by the court. As part of the motion filed by Ben Moshe, Ben Moshe claimed, among other things, that his proposal to acquire Mega Retail is more beneficial than that of Bitan Wines, in particular given that his proposal to acquire Mega Retail may be increased by an additional NIS 40 million, as mentioned in the trustees' motion. In addition, Ben Moshe detailed in his motion such alleged inconsistencies in the motion filed by the trustees.

 

As of the date of this Annual Report, we do not know whether the court will grant the trustees' motion and/or if the offer of Bitan Wines will be included as part of a final binding Mega Retail arrangement.  In addition, we cannot estimate if a price competition between the offers of Bitan Wines and the other offers, including the offer of Ben-Moshe will be conducted (in which case the Ben Moshe Proposal, which includes that acquisition of Mega Retail, as in our proposed debt reorganization and arrangement for the Company submitted to court on May 8, 2016 may be feasible), or alternatively, that we and Ben-Moshe will work to submit an alternative debt reorganization and arrangement for the Company that doesn't include the acquisition of Mega Retail.  It is understood that there is no certainty that the court will approve the request of the Mega Retail trustees to convene meetings and/or that the offer of Bitan Wines as part of an arrangement for Mega Retail will be consummated and/or that the alternative debt reorganization and arrangement for the Company will be reached. Therefore, as of the date of this Annual Report, we cannot estimate the ramifications such notice of the trustees of Mega Retail.

 

Please note that unless otherwise indicated, as used in this Annual Report, the term “owned” or “ownership” with respect to Dor Alon filling stations, Naaman outlets, and supermarkets means the ownership of the operations of sites, outlets, and supermarkets, and not legal title to the real estate underlying sites, outlets, and supermarkets.

 

Except for the historical information contained herein, the statements contained in this Annual Report are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to our business, financial condition and operating results. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Item 3. Key Information - D. Risk Factors” and factors discussed elsewhere in this Annual Report.

 

We urge you to consider that statements which use the terms “believe,” “do not believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” “project” and similar expressions are intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Except as required by applicable law, including the securities laws of the United States, we do not undertake any obligation nor intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

All references in this Annual Report to dollars or $ are to U.S. dollars and all references in this Annual Report to NIS are to New Israeli Shekels. Unless mentioned otherwise, all figures in U.S. dollars are based on the representative exchange rate between the NIS and the dollar as published by The Bank of Israel for December 31, 2015, which was NIS 3.902 per $1.00, except figures for the first quarter of 2016, which are based on the representative exchange rate between the NIS and the dollar as published by The Bank of Israel for March 31, 2016, which was NIS 3.766 per $1.00.

 

4 

 

 

TABLE OF CONTENTS

 

    Page
     
PART I    
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 6
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 6
ITEM 3. KEY INFORMATION 6
ITEM 4. INFORMATION ON THE COMPANY 32
ITEM 4A. UNRESOLVED STAFF COMMENTS 96
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 96
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 128
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 154
ITEM 8. FINANCIAL INFORMATION 167
ITEM 9. THE OFFER AND LISTING 181
ITEM 10. ADDITIONAL INFORMATION 184
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 200
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 203
PART II    
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 205
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 205
ITEM 15. CONTROLS AND PROCEDURES 205
ITEM 16. [RESERVED] 207
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT 207
ITEM 16B. CODE OF ETHICS 207
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 207
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. 208
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS. 208
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT. 208
ITEM 16G. CORPORATE GOVERNANCE 208
Part III    
     
ITEM 17. FINANCIAL STATEMENTS 211
ITEM 18. FINANCIAL STATEMENTS 211
ITEM 19. EXHIBITS 211

 

5 

 

 

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3. KEY INFORMATION

 

Selected Financial Data.

 

We have derived the following selected consolidated financial data as of December 31, 2014 and 2015 and for each of the years ended December 31, 2013, 2014 and 2015 from our consolidated financial statements and notes included elsewhere in this Annual Report. We have derived the selected consolidated financial data as of December 31, 2011, 2012 and 2013 and for each of the years ended December 31, 2011 and 2012 from our consolidated financial statements not included in this Annual Report. We prepare our consolidated financial statements in conformity with IFRS. The results for 2015 included the effects of presenting Dor Alon and Naaman as operations designated for sale, are presented at the lower of their carrying amount and fair value less cost to sell deconsolidation of Mega Retail, and the effects of the plan of recovery and arrangement of Mega Retail in the Lod District Court. The selected financial results for the years 2011 through 2014 have been restated accordingly. You should read the selected consolidated financial data together with the section of this Annual Report titled “Item 5. Operating and Financial Review and Prospects”, our consolidated financial statements included elsewhere in this Annual Report, the related notes, and the independent registered public accounting firm’s report.

 

6 

 

 

   For the year ended December 31, 

Statement of Income Data

In accordance with IFRS:

  2011   2012   2013   2014   2015  

2015(1)

 
   NIS (in thousands, except per ordinary share or ADS data)   $ 
Revenues   89,778    67,924    1102,666    96,548    205,529    52,673 
Cost of revenues   22,973    45,664    74,388    73,553    57,634    14,769 
Gross profit   66,805    22,260    28,278    22,995    147,895    37,904 
Selling, general and administrative expenses   104,899    104,900    92,004    87,242    104,890    26,882 
Other gains   4,569    248    3,131    60,899    6,113    1,567 
Other losses   (8,451)   2,605    (3,003   (35,575)   (57,983)   (14,860)
Increases in fair value of investment property, net   41,913    7,778    45,521    49,894    57,464    14,727 
Share in gains of associates   3,321    65,335    17,253    20,034    2,646    678 
Operating profit (loss) before loss in respect of guarantees to Mega   3,258    (6,673)   (824)   31,005    51,245    13,134 
Loss in respect of guarantees to Mega   -    -    -    -    (137,553)   (35,252)
Operating profit (loss)   3,258    (6,673)   (824)   31,005    (86,308)   (22,118)
Finance income   101,687    18,263    21,021    20,626    34,648    8,880 
Finance expenses   (174,505)   (169,632)   (188,406)   (134,434)   (95,022)   (24,352)
Finance expenses, net   (72,818)   (151,368)   (167,385)   (113,808)   (60,375)   (15,472)
                               
Loss before taxes on income   (69,560)   (158,041)   (168,209)   (82,803)   (146,683)   (37,590)
Taxes on income   48,500    10,175    23,658    69,676    5,071    1,300 
Loss from continuing operations   (118,060)   (168,216)   (191,867)   (152,479)   (151,754)   (38,890)
Profit (loss) from discontinued operations   201,773    190,581    74,459    (225,482)   (1,198,173)   (307,065)
Net income (loss) for the year   83,713    22,365    (117,408)   (377,961)   (1,349,927)   (345,955)
                               
Loss from continuing operations                              
Attributable to:                              
Equity holders of the Company   (129,240)   (201,324)   (212,834)   (197,588)   (214,314)   (54,925)
Non-controlling interests   11,180    33,108    20,967    45,109    62,560    16,035 
    (118,060)   (168,216)   (191,867)   (152,479)   (151,754)   (38,890)
                               
Profit (loss) from discontinued  operations                              
Attributable to:                              
Equity holders of the Company   188,753    183,193    67,139    (234,190)   (1,055,035)   (270,382)
Non-controlling interests   13,020    7,338    7,320    8,708    (143,138)   (36,683)
    201,773    190,581    74,459    (225,482)   (1,198,173)   (307,065)
                               
Earnings (loss) per Ordinary share or ADS attributable to equity holders of the Company:                              
Basic and diluted                              
Continuing operations   (1.96)   (3.05)   (3.23)   (2.99)   (3.25)   (0.83)
Discontinued operations   2.86    2.78    1.02    (3.55)   (16.00)   (4.09)
    0.90    (0.27)   (2.21)   (6.54)   (19.25)   (4.92)
Cash dividends declared per ordinary share or ADS   1.13    -    -    -    -    - 
Number of Ordinary Shares Outstanding at the end of each year: (2)   66,043,315    65,954,427    65,954,427    65,954,427    65,954,427    65,954,427 

 

7 

 

 

(1)The translation of the NIS amounts into dollars has been made for the convenience of the reader at the representative exchange rate prevailing at December 31, 2015 (NIS 3.902 =$1.00), as published by The Bank of Israel. During 2015, the US dollar increased in value vis-à-vis the NIS by approximately 0.33%.
(2)After deduction of treasury shares.

 

   At December 31, 
   2011   2012   2013   2014   2015   2015 
   NIS (in thousands)   $(1) 
Balance Sheet Data:                              
In accordance with IFRS                              
Working capital (deficit)   (494,401)   (660,255)   (596,090)   (828,975)   (648,252)   (166,134)
Total assets*   9,094,217    9,213,254    9,162,484    8,564,160    6,744,025    1,728,351 
Short term credit from banks and others and current maturities of debentures   1,561,296    1,933,295    1,691,255    1,524,903    1,245,334    319,153 
Long term debt, net of current maturities   3,657,957    3,415,683    3,672,577    3,563,611    1,757,536    450,419 
Total equity   1,546,226    1,587,549    1,485,015    1,141,789    652,828    167,306 

 

(1)The translation of the NIS amounts into dollars has been made for the convenience of the reader at the representative exchange rate prevailing at December 31, 2015 (NIS 3.902 = $1.00), as published by The Bank of Israel.

 

*Total assets of "disposal group" classified as held for sale amounted to NIS 2,744 million (U.S. 703.3 million) and total liabilities of "disposal group" classified as held for sale amounted to NIS 2,077.9 million (U.S $532.5 million) in 2015.

 

B.Capitalization and Indebtedness.

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds.

 

Not applicable.

 

D.Risk Factors.

 

Our business, operating results and financial condition could be seriously harmed due to any of the following risks. If we do not successfully address any of the risks described below, our business, operating results and financial condition could be materially adversely affected, and the share and ADS price of Alon Blue Square may decline. We cannot assure you that we will successfully address any of these risks.

 

8 

 

 

Risks Related To Our Business as a Whole

 

There is substantial uncertainty whether we will continue operations, in which case you could lose your entire investment, and our auditors have issued a going concern opinion. If we are not able to reach a debt settlement with our material creditors, we will have liquid available sources sufficient for financing our current operations for a few months, and we may be forced to file for a stay of proceedings and cease operations.

 

There is substantial uncertainty whether we will continue operations, and our auditors have issued a going concern opinion in their report on our consolidated financial statements for the fiscal year ended December 31, 2015. We have aggregate bank debt of approximately NIS 522 million, comprised of direct debt in the sum of NIS 231 million, and the remaining amount of approximately NIS 291 million representing guaranteed debt mostly on behalf of Mega Retail. In addition we have debt of approximately NIS 380 million par value owed to holders of our Series C Debentures, and approximately NIS 96 million to holders of our gift certificates. We are currently in breach of the financial covenants covering our long-term bank debt, and we did not pay principal on our Series C Debentures in November 2015 as required. The holders of the Series C Debentures have instructed the Series C Debenture trustee to put for immediate repayment the full balance of the Company's debt to the holders of the Series C Debentures. The immediate repayment decision will enter into effect without further decision at the earlier of transfer of the control of the Company directly or indirectly (including by change in the control in the controlling shareholder) without the consent of the holders of the Series C Debentures or an application is not filed with the court to convene meetings for the approval of the debt arrangement between the Company and its financial creditors. At this stage, the entry into effect of the immediate repayment decision was extended to May 18, 2016. If the immediate repayment decision were to become effective, it could have a material adverse effect on our liquidity and operations and our ability to continue as a going concern.

 

We and our bank lenders have agreed on terms of renewal of existing on-call loans from the bank lenders to us. This agreement by the bank lenders is subject to no other creditors either accelerating their debt for immediate payment or not renewing their on-call loans to us. If any of the bank lenders accelerate their debt for immediate payment or do not renew their on-call loans, our assets may not be sufficient to satisfy our obligations to our debtors, our liquidity would be materially affected, and we may be forced to file for a stay of proceedings and cease operations. Lastly, we have outstanding guarantees to lessors of real estate properties, suppliers, supplier credit insurers, employees, and claims made by Mega Retail’s trustees, which if materialized, may require us to make substantial payments of on account of these guarantees.

 

9 

 

 

We have cash and cash equivalents of approximately NIS 59 million as of May 8, 2016 which are not sufficient to repay our outstanding indebtedness. On May 8, 2016 we filed a motion with the District Court in Lod, Israel to convene meetings of our financial creditors and shareholders for approval of a debt settlement based on the Ben Moshe Proposal. See “Item 4. Information on the Company – A. History and Development of Alon Blue Square - Offer to Acquire Holdings of Alon Oil in the Company”. Our ability to continue as a going concern is dependent on approval of the Debt Arrangement by the financial creditors followed by approval by the District Court in Lod, Israel, and satisfaction of other conditions. If we and Mr. Ben Moshe are not be able to enter into a debt settlement with our material creditors on reasonable commercial terms or at all, we will have liquid available sources sufficient at the most for financing our current operations for a few months (provided that no extraordinary events occur), and our assets may not be sufficient to satisfy our obligations to our debtors. In such event, our liquidity would be materially affected, we may have limited time to realize our assets, and we may be forced to file for a stay of proceedings and cease operations.

 

As a result, there is substantial risk that you could lose the entire amount of your investment in our company.

 

If the Debt Arrangement based on Ben Moshe's Proposal does not close, there is substantial uncertainty whether we will be able to continue operating as a going concern, in which case you could lose your entire investment. In addition to the debt arrangement, Mr. Ben Moshe will need to inject additional funds into our company in order for us to continue our operations and repay our debts.

 

Mr. Moti Ben Moshe has offered to acquire the approximately 72.71% direct and indirect interest in Alon Blue Square held by our controlling shareholder, Alon Israel Oil Company Ltd., or Alon, and the proposal has been accepted by Alon's board of directors subject to the satisfaction of various closing conditions. As part of the Debt Arrangement based on the Ben Moshe Proposal, Ben Moshe would commit to inject up to NIS 900 million into our company, including NIS 300 million upon closing, which we would use to pay our financial creditors as an initial debt repayment on account of the overall financial debt and thereafter the financial debt would be paid upon a set repayment schedule. See “Item 4. Information on the Company – A. History and Development of Alon Blue Square - Offer to Acquire Holdings of Alon Oil in the Company”. Within the framework of the initial injection of NIS 300 million upon closing, additional amounts may be injected as agreed between the Company and Ben Moshe in order to address the Company's immediate cash flow needs.

 

The Debt Arrangement based on the Ben Moshe Proposal is subject to the satisfaction of various conditions, including approval by the Company's financial creditors, shareholders, the Israeli court, and reaching a new debt arrangement for Mega Retail.

 

On May 10, 2016, the trustees of Mega Retail submitted to the court in Lod, Israel a motion in which they chose the offer of Bitan Wines Ltd. among the offers that were submitted to them for the acquisition of Mega Retail (Ben-Moshe submitted one of the offers).  It is understood that there is no certainty that the court will approve the motion of the Mega Retail trustees to convene meetings and/or that the offer of Bitan Wines as part of an arrangement for Mega Retail will be consummated.  Therefore, as of the date of this Annual Report, we cannot estimate the ramifications such notice of the trustees of Mega Retail. For more information, see “Item 4. Information on the Company – A. History and Development of Alon Blue Square - Offer to Acquire Holdings of Alon Oil in the Company”.

 

There is no guarantee that this transaction will close. If the transaction does not close, we will not have sufficient funds to repay our outstanding indebtedness, we may be forced to file for a stay of proceedings and cease operations and you may lose the entire amount of your investment in our company. Even if the Ben Moshe Proposal does close, he will need to inject additional funds into our company in order for us to continue our operations and repay our debts.

 

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If all or certain parts of the claims submitted to the courts by the trustees of Mega Retail are accepted, we may be unable to pay our outstanding debts, which would have a material adverse effect on our liquidity and operations and our ability to continue as a going concern.

 

On March 9, 2016 the court-appointed trustees of Mega Retail submitted a claim with the District Court of Lod, Israel requesting the court to order us to pay approximately NIS 117 million alleging that we did not satisfy our obligations to inject funds into Mega Retail under Mega Retail's plan of recovery. In other court filings, the trustees also made other allegations, including that we must pay approximately NIS 300 million on account of bank loans to Mega Retail that we guaranteed or are jointly-owned and that we would have no right of recovery against Mega Retail following such payment and that we owe an estimated NIS 300 million in the aggregate on account of Mega Retail's employees, suppliers, credit insurers and lessors and on account of a dividend distributed by Mega Retail in 2013. The trustees also alleged that we owe Mega Retail on account of the claim by the other shareholder in Mega Retail's subsidiary Eden Teva and other claims regarding the lease payments made by Mega Retail to Blue Square Real Estate Ltd. The trustees further allege that we should have issued options to Mega Retail's suppliers under Mega Retail's plan of recovery and arrangement and that we conducted the business of Mega Retail with insufficient capital.

 

For more information regarding the plan of recovery, see “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Mega Retail’s Plan of Recovery” and “Item 4. Information on the Company – A. History and Development of Alon Blue Square –Legal proceedings initiated by the trustees of Mega Retail against us.”

 

In the event all or part of the claims made by the trustees are accepted by the court, we will be required to obtain the consent of our financial creditors in order to satisfy our obligations. Even if we obtain such consent, we will be required to sell assets in order to satisfy these obligations and we may be unable to fully repay such obligations.

 

As a result, our liquidity and operations would be materially affected, and we may be unable to continue operating as a going concern.

 

We are exposed to third party claims for a significant amount of Mega Retail's outstanding debt and liabilities. If we are found liable to satisfy these debts and liabilities it could have a material adverse effect on our liquidity and operations and our ability to continue as a going concern.

 

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We are exposed to actual and potential third party claims for a significant amount of Mega Retail's outstanding debt and liabilities. This includes social security (bituach leumi) payments due on account of employees of Mega Retail, outstanding VAT obligations for which we have joint and several liability with Mega Retail, guarantees extended by us to lessors and credit insurers of Mega Retail, payment obligations under various Mega Retail property leases and management agreements to which we are a party, real estate taxes, water expenses, municipal fines, and other obligations for which we may be liable because we were a party to various Mega Retail leases which were not fully transferred under Mega Retail's name at the time our food retail operations were transferred to Mega Retail in 2009. In addition, we are exposed to payments on account of guarantees we extended and obligations we incurred on behalf of Mega Retail prior to its plan of recovery and as part of Mega Retail's plan of recovery. Many of the third party claims are subject to dispute, and therefore it is unclear what we would be required to pay and when we would be required to make any payments.

 

In the event we are unable to repay all or a significant part of the outstanding debt and liabilities described above, there would be substantial uncertainty whether we will be able to continue operating as a going concern.

 

Delays or inability to sell our assets at all or on commercially reasonable terms in the event the Ben Moshe Proposal is not closed could significantly harm our financial condition and our ability to satisfy our debts in a timely manner.

 

In order to repay our outstanding debts in a timely manner, and unless the Ben Moshe Proposal is closed under its current terms we are required to sell some of our assets. Since the court approval of Mega Retail's Plan of Recovery, we have sold our holdings in Diners Club Israel Ltd. to Israel Credit Cards Ltd., and our board of directors has approved the sale of our shareholdings in our subsidiary, Dor Alon. Our ability to satisfy our debt obligations is dependent upon our ability to sell our assets on commercially reasonable terms.

 

In addition, the Ben Moshe Proposal required that until the transaction closing date, we and our controlled companies will not carry out any disposition of our and their assets and/or any act to foil the purchase of control and debt arrangement, or otherwise Mr. Ben Moshe will have the right to cancel his commitments. We have therefore suspended promoting the sale of our assets, in order not foil the possibility of admitting the potential buyer.

 

Following reports in connection with the Ben Moshe Proposal, the trustee for BSRE's Series E bonds notified BSRE that, based on a legal opinion it received regarding the definition of "the current controlling shareholder" contained in the deed of trust for the Series E Bonds, in the event of a transfer of control in the Company or , a meeting of the Series E Bondholders should be convened for the purpose of obtaining Series E Bondholder approval prior to a sale by Alon of its holdings on the Company. Additionally, in the event our holdings in BSRE drop below 50%, the holders of Series E Debentures of BSRE have the right to declare all outstanding amounts due and payable. This right would restrict our ability to sell our holdings in BSRE without the consent of such holders.

 

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In the event we are unable to sell our holdings in Dor Alon (fully or partially) or any other assets in a timely manner and on commercially reasonable terms, we may be unable to repay a significant portion of our outstanding indebtedness and may have a material adverse effect on our liquidity and ability to continue operating as a going concern.

 

The proposed framework for debt repayment with our financial creditors imposes financial and operational restrictions on us which may adversely affect our ability to raise capital and/or sell our assets in the future

 

We reached a proposed framework for debt repayment with most of our financial creditors in November 2015 under which we agreed, among other things, to impose liens on our shareholding in Mega Retail, Dor Alon, and 50.1% of BSRE. In addition, any sale of such shares will require the approval of the holders of Series C Debentures and holders of 75% of our bank debt, and we are restricted from selling an amount of BSRE shares which would cause our holdings in BSRE to fall below 50.1%. The proposed framework restricts us from incurring obligations beyond the existing ones (unless such new obligations will repay existing ones), and requires us to adopt managerial cost cutting measures. For more information regarding our proposed framework, see “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Proposed Framework for Debt Repayment”.

 

These and other restrictions detailed in the proposed framework limit our ability to operate and may have a substantial effect on our ability to raise capital and/or sell our assets in the future.

 

Our agreement with the holders of our Series C Debentures places restrictions on us which constrain our ability to develop our operations and may have a material adverse effect on our liquidity.

 

Under our agreement with the holders of our Series C Debentures, until the occurrence of certain events detailed therein, we agreed, among other things, not to distribute any dividends with the prior approval of the holders of our Series C Debentures' representative, notify the Series C trustee of our intention to enter into an arrangement with any financial creditor and/or change the terms of loans or credit extended to us and/or obtain new credit in excess of NIS 5 million, notify the Series C trustee prior to an agreement to dispose of any rights in material assets, notify the Series C trustee in advance of the imposition of liens on our assets, and deliver relevant information to enable the holders of our Series C Debentures to review our financial status. For more information regarding our arrangement with the holders of our Series C Debentures, see “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Undertaking Agreement with the holders of our Series C Debentures”.

 

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These restrictions may severely constrict our ability to develop our business and adversely affects our operations.

 

If we do not satisfy the NYSE requirements for continued listing, our ADS could be delisted from NYSE.

 

The listing of our ADSs on the New York Stock Exchange Inc. is contingent on our compliance with the NYSE's conditions for continued listing. One such condition is that our average total market capitalization is not less than $50 million over a 30-day trading period and our shareholders' equity is not less than $50 million. On October 1, 2015 the NYSE notified us of our noncompliance with this continues listing standard and set a period of 90 days to submit a business plan that demonstrates compliance with this standard, and 180 days in order to regain compliance. We submitted the requisite business plan to the NYSE on January 3, 2016. On February 16, 2016 the NYSE notified us that the business plan was accepted. The NYSE will continue to review our regularly scheduled financial reporting cycle during an 18 month period from October 1, 2015 in order to examine compliance with the goals and initiatives outlined in the business plan.

 

Failure to implement or achieve the financial and operational goals outlined in our business plan or any of the minimum listing standards (such as having an average global market capitalization over a 30-day period of over $15 million) will result in us being subject to NYSE trading suspension at the point the initiative, goal, or standard is not met. Upon such an occurrence we may be delisting by the NYSE. We may also be subject to immediate suspension and delisting if the NYSE determines that we have filed or have announced an intent to file for relief under any provisions of any bankruptcy laws. In the event our ADSs are no longer listed for trading on the NYSE we will have decreased exposure in foreign markets and experience further difficulties in raising capital which could materially affect our operations and financial results.

 

We may have commitments to issue additional shares which would dilute your holdings and may lower the trading price of our securities.

 

The Mega Retail plan of recovery included a commitment to conduct a rights offering in order to raise at least NIS 150 million from our shareholders, of which Alon Israel, our largest shareholder, would commit to invest its share (approximately NIS 110 million). The plan also provides that large suppliers and service providers of Mega Retail would be able to convert the deferred debt owed to them by Mega Retail into our ordinary shares during a period of five months commencing seven days from the closing of our contemplated rights offering. During the first two months, the large suppliers would be able to convert their deferred debt into our ordinary shares at the price per share in our rights offering and during the remaining three months, the conversion price would be the higher of (i) 120% of the price per share in our rights offering and (ii) the average closing price of our shares during the 30 trading days prior to conversion.

 

It is our position that following the court appointment of trustees for the operation of Mega Retail that the obligation to conduct a rights offering and grant debt conversion rights to suppliers have been extinguished. However, the District Court of Lod, Israel may rule that these commitments are still in effect.

 

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Under our proposed framework for debt repayment with our material creditors, and under the Ben Moshe Proposal, we would be required to issue shares to our financial creditors which will constitute, in the aggregate, 10% of our share capital, following the abovementioned rights offering. Under the Ben Moshe Proposal, it is also contemplated to issue shares of our company to the trustees of Mega Retail and to Mr. Ben Moshe, See “Item 4. Information on the Company – A. History and Development of Alon Blue Square - Offer to Acquire Holdings of Alon Oil in the Company”.

 

These share issuances would cause your proportional holdings in our company to decrease and may result in an immediate decrease in the market value of our ordinary shares and ADSs. In addition, the trading price of our ordinary shares and ADSs may fluctuate substantially as a result of the share issuance described above.

 

We may be required to immediately repay an NIS 50 million loan to BSRE under our deposit of cash balances agreement with BSRE. In the event we don't pay such amounts we may lose our controlling interest in BSRE.

 

We currently owe BSRE NIS 50 million under our Deposit of Cash Balances Agreement with BSRE. Our obligations to BSRE under this agreement are secured by a pledge of shares that we hold in BSRE. We may be required to immediately repay these loans at any time to BSRE. In the event BSRE demands repayment of these amounts (and depending on the value of BSRE's shares at the time we exercise), we may be unable to fulfill these obligations and BSRE may elect to foreclose on the pledge.

 

Economic conditions in Israel affect our financial performance.

 

The financial performance of each of our operating segments is dependent to a significant extent on the economy of Israel.

 

For our BSRE segment, we value our yield-generating real estate property at fair value according to IAS 40 and changes to the fair value of our real estate are reflected in our consolidated financial statements. The fair value of our properties could be impacted by a number of factors, including the global economic and financial market crisis, as well as the retail sector in Israel because most of our assets are intended for retail businesses. Reductions in the fair value of our real estate may materially adversely affect our financial results.

 

The financial performance of our Naaman segment is also dependent to a significant extent on the economy of Israel. Global economic instability and uncertainty affected our non-food and wholesale business in the past by causing a slowdown in the growth of private consumption, which affected the growth of our houseware, home textile, toys and leisure businesses. Economic instability, uncertainty or slowdown could also affect the growth of our Naaman businesses in the future.

 

The demand for Dor Alon’s products and petroleum products in general is materially affected by the state of the Israeli economy. An economic slowdown may cause a decrease in demand for Dor Alon’s products and have an adverse effect on Dor Alon’s profit margins and exposure to customer credit risk. However, some petroleum products sold by Dor Alon are considered basic products which have a fixed demand.

 

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In addition, the global economic instability, and uncertainty has also reduced the availability of credit, increased the costs of financing and the terms under which banks agree to provide financing. These developments may reduce our sales, increase our costs of borrowing and reduce our profitability.

 

Alon is able to control the outcome of matters requiring shareholder approval.

 

As of March 31, 2016, Alon owned, directly and indirectly through Alon Retail Ltd., approximately 72.71% of our outstanding ordinary shares. So long as Alon, or any successor to its shareholdings in Alon Blue Square, continues to own beneficially more than 50% of our outstanding ordinary shares and voting power, it will be able to control the outcome of matters requiring shareholder approval that do not require a special majority, including the election of all our directors, other than our two external directors whose election, under the Israeli Companies Law, requires that a majority of the non-controlling shareholders who participate in the vote, vote for their appointment, or that the total number of shares of non-controlling shareholders that voted against their appointment does not exceed two percent of the aggregate voting rights in the Company.

 

Increase in employee minimum wage in Israel may adversely affect the value of our assets.

 

A substantial portion of the wages of the employees of Dor Alon and Naaman is adjusted upon changes to the minimum wage in Israel. Under Israeli law, the minimum wage, which is increased from time to time as a result of various economic parameters and updating of employee-union agreements, equals approximately 47.5% of the average wage for an employee in Israel, unless otherwise determined by government regulations. As of April 1, 2016, the minimum wage was NIS 4,650 or approximately $1,192, with further increases to NIS 5,000 until the beginning of 2017. In addition, collective bargaining agreements have imposed a higher minimum wage for certain industries, such as cleaning employees and security employees. A large part of the employees of Dor Alon and Naaman receive minimum wage such that corresponding increases in minimum wage in the future will increase their labor costs and thus may adversely affect the value of our assets.

 

We own a majority interest in our subsidiaries. As a majority shareholder, we owe fiduciary duties to the non-controlling shareholders of our subsidiaries and have to share dividends and distributions with these non-controlling shareholders.

 

Our main subsidiaries, as of March 31, 2016 are BSRE, in which we own a 53.92% interest, Naaman, in which we own 77.51% interest (through Bee Group), and Dor Alon, in which we own an approximately 63.13%, all three which are traded on the Tel Aviv Stock Exchange. Substantially all the ordinary shares of these companies that are not owned by us are publicly held.

 

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In order to satisfy whatever fiduciary obligations we may have under applicable law to the non-controlling shareholders of our partially owned subsidiaries, we endeavor to deal with each of these subsidiaries at “arm’s-length.” Some transactions between us and any of these subsidiaries, including any cancellation of such transactions, require the approval of the audit committee, the directors, and, under certain circumstances, approval of the shareholders of the subsidiary by special vote and are subject to the receipt of applicable permits and approvals. In addition, any dividend or distribution from a subsidiary requires the approval of the directors of that subsidiary, and may be subject to restrictions imposed by loan and other agreements to which they are parties.

 

 Rights to filling stations in the Dor Alon chain and Naaman stores are subject to agreements with third parties who may not renew the agreements or worsen their terms, which could affect our share in their market value.

 

The majority of the real estate underlying the filling stations of Dor Alon and the Naaman Group stores are leased from third parties with whom we have entered into agreements to rent such properties. Upon the expiration of such agreements, the owners of the stations and stores may not renew their agreements with Dor Alon and Naaman Group and enter into agreements with other companies, or worsen the terms of the agreements, either of which would result in a loss of profits since these companies are held for sale and presented at their market value.

 

Increases in oil, electricity, raw material and product prices may affect the value of our assets.

 

The sharp fluctuation in oil prices in recent years has led to the fluctuation in the electricity prices and the price of raw materials used in the plastic packing industry. We cannot assure you that the suppliers of our subsidiaries will not raise prices in the future. Increase in oil, raw material and product prices would impose significant expenses and costs on our subsidiaries, which could have an adverse effect on the value of our assets.

 

Fluctuations of inflation may adversely affect our financial expenses and value of our assets.

 

Our non-financial assets and equity are not adjusted for inflation in Israel, while the repayment of interest and principal of part of our loans and debentures are adjustable, linked to changes in the Israeli consumer price index, as provided in our loan and debenture agreements. As a result, an increase in inflation in Israel would have the effect of increasing our financial expenses without any corresponding offsetting increase in our assets and revenues in our consolidated financial statements, leading to lower reported earnings and equity. The extent of this effect on our consolidated financial statements would be dependent on the rate of inflation in Israel. We have an excess of CPI-linked liabilities over CPI-linked assets (mainly in respect of outstanding debentures). From time to time, we engage in transactions to hedge a portion of this inflation risk through NIS – CPI swaps in order to reduce our risk to inflation, although we do not eliminate the risk of inflation.

 

17 

 

 

In addition, some of our operating expenses are either linked to the Israeli consumer price index (such as lease payments payable by us under various real estate property leases in connection with our operations) or are indirectly affected by an increase in the Israeli consumer price index. As a result, an increase in the inflation rate in Israel would have the effect of increasing our operating expenses, thereby affecting the value of our assets. The extent of this effect on the value of our assets depends on the rate of inflation in Israel.

 

In addition, BSRE, our 53.92% subsidiary, is exposed to modifications of the construction valuation index, which may affect constructions costs.

 

An increase in the interest rate of the Bank of Israel may adversely affect our financial expenses.

 

We have issued debentures and obtained loans in NIS, some of which bear fixed interest and some of which variable interest. An increase in the interest rate published by the Bank of Israel will affect our financial expenses related to our debentures and loans which bear variable interest. Additionally, an increase rise in the interest rate published by the Bank of Israel may adversely affect our financing costs, in case we may be required to raise funds for future activities.

 

Fluctuations in the capital markets may affect our subsidiaries' ability to raise funds in order to finance their operations and to refinance their debt and effect their ability to enter into additional operational fields.

 

Our subsidiaries fund their operations from a variety of sources, including from operating activities and by raising capital from banks and the capital markets. From time to time, our subsidiaries refinance a portion of their debt and issue new debentures to fund new projects. Adverse change in capital market conditions, specifically in the demand for debentures and debentures yield, or new regulations in the capital market may adversely affect their ability to raise funds in order to finance their operations and refinance their debt, and affect their ability to enter into additional operational fields, and distribute dividends to us, any of which may materially adversely affect their financial results and their ability to operate.

 

Volatility of our share and ADS price could adversely affect our shareholders.

 

 The market price of our ordinary shares and ADSs could be volatile and could be subject to fluctuations in response to numerous factors, including the following:

 

·our ability to satisfy our obligations to our financial and other creditors;
·acceptance by the court of the claims of the trustees of Mega Retail;
·sale by Alon of its holdings in the Company;

 

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·future equity issuances under the Plan of Recovery and arrangement with our creditors;
·financial results of our subsidiaries;
·delisting from the New York Stock Exchange;
·changes in financial estimates by securities analysts;
·conditions or trends in our business;
·the political, economic, security and military conditions in Israel; and
·additions or departures of key personnel;

 

Many of these factors are beyond our control and may materially adversely affect the market price of our ordinary shares and ADSs, regardless of our performance.

 

Volatility of the price of our securities on the New York Stock Exchange or the Tel Aviv Stock Exchange is likely to be reflected in the price of our securities on the other market. In addition, fluctuations in the exchange rate between the NIS and the dollar may affect the price of our ordinary shares on the Tel Aviv Stock Exchange and, as a result, may affect the market price of our ADSs on the New York Stock Exchange.

 

Currency fluctuations might affect the value of our assets and translation of operating results.

 

Any devaluation of the NIS against various non-Israeli currencies in which we or our suppliers pay for imported goods has the effect of increasing the selling price of those products which we sell in Israel in NIS and thereby our operating results. Dor Alon is exposed to fluctuations in the US dollar - NIS exchange rate due to credit that Dor Alon obtains from its suppliers (mostly from oil refineries in Israel which is linked to the US dollar). Depreciations of the NIS - US dollar exchange rate could materially adversely affect Dor Alon’s financial results. This devaluation would have a greater effect on Naaman because a higher proportion of the goods that Naaman sells are acquired from overseas suppliers. Any devaluation of the NIS would also cause an increase in our expenses as recorded in our NIS denominated financial results even though the expenses denominated in non-Israeli currencies would remain unchanged.

 

In addition, because our financial results are denominated in NIS and are translated into US dollars for the convenience of US investors, currency fluctuations of the NIS against the US dollar may impact our US dollar translated financial results.

 

Also see “Item 3. Key Information – D. Risk Factors – Risks Related To Our Business as a Whole – Increases in oil, electricity, raw material and product prices may affect value of our assets.”

 

The failure of our use of technological information systems and computer systems may adversely affect our day-to-day operations.

 

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We use several IT systems. Our day-to-day operations are dependent on the proper function of these systems. We take various measures to ensure the integrity and reliability of the data and computer systems, including data protection and data back-up. However, a failure of our data and/or computer systems may adversely affect our day-to-day operations.

 

Additionally, we may and our subsidiaries may be subject to breaches of cyber security which may cause interruptions in our or our subsidiaries' service or allow unauthorized third parties to access our or our subsidiaries' customers' personal data. In the event of such a cyber security breach, we or our subsidiaries may need to make a significant investment to fix or replace our or our subsidiaries' IT systems, and we or our subsidiaries may face costly litigation, government investigations, government enforcement actions, fines and/or lawsuits. In addition, our and our subsidiaries' brand and reputation, as well as our and our subsidiaries' relationships with customers, may be negatively impacted.

 

We are exposed to risks of fraud and theft with regard to our gift certificates which may cause a loss of revenue and non-recoverable expenses.

 

We run programs under which we issue and sell gift certificates and electronic prepaid cards to institutions, companies and individuals, particularly during the Jewish New Year and Passover seasons. The gift certificates and prepaid cards can be used in our stores as well as other stores with which we entered into collaboration agreements. Based on our experience, we are exposed to risks connected with the issuance of gift certificates, including risks that they may be fraudulently forged or stolen, and we are exposed to risks of computer fraud or errors in connection with the issuance of prepaid cards. A substantial or large scale forgery, theft, fraud or error may cause a reduction in our revenue and increase our expenses.

 

Political conditions in Israel affect our operations and may limit our ability to sell our products.

 

We and all of our subsidiaries are incorporated under Israeli law and our principal offices and operations are located in the State of Israel. Political, economic, security and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying, from time to time, in intensity and degree, has led to security and economic problems for Israel. We could be adversely affected by hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation, or a significant downturn in the economic or financial condition of Israel.

 

The future of Israel’s relations with its Arab neighbors and the Palestinians is uncertain, and several countries, companies and organizations continue to restrict business with Israel and with Israeli companies. We could be adversely affected by adverse developments in Israel’s relationship with its Arab neighbors and the Palestinians or by restrictive laws, policies or practices directed towards Israel or Israeli businesses.

 

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Many of our officers and employees are currently obligated to perform annual reserve duty and are subject to being called to active duty at any time under emergency circumstances. We cannot assess the full impact of these requirements on our workforce or business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of these obligations.

 

It may be difficult to enforce a U.S. judgment against us and some of our officers and directors, to assert U.S. securities laws claims in Israel or serve process on our officers and directors.

 

We are incorporated in Israel. Our executive officers and directors are nonresidents of the United States, and substantially all of our assets and most of the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States based upon the civil liabilities provisions of the U.S. federal securities laws against us or any of these non-residents of the United States or to effect service of process upon these persons in the United States. Additionally, it may be difficult for you to enforce civil liabilities under U.S. federal securities laws in actions instituted in Israel.

 

We are exposed to, and currently are engaged in, a variety of legal proceedings, including class action lawsuits.

 

As a result of the scope and magnitude of our operations we and our subsidiaries are subject to the risk of a large number of lawsuits, including class action suits by consumers and consumer organizations. These actions are costly to defend and could result in significant judgments against us or our subsidiaries. Recent years have been characterized by a substantial increase in the number of requests for certification of class actions filed and approved in Israel, including against us and our subsidiaries, and this trend is expected to continue. Currently, we and our subsidiaries are engaged in various material legal proceedings, many of which are for substantial amounts. Should these requests to certify lawsuits against us or our subsidiaries as class actions be approved and succeed, this may have a material adverse effect on our financial results and value of our subsidiaries. For a summary of legal proceedings against us, see “Item 8. Financial Information – A. Consolidated Statements and Other Financial Information – Legal Proceedings.”

 

Risks Related To BSRE

 

BSRE is dependent to a significant degree on Mega Retail as a lessee of its properties. There is no guarantee that BSRE will continue to lease its properties on the same terms and there may be periods during which BSRE may not receive these payments.

 

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As of the date of this annual report, BSRE's income from lease payments made by Mega Retail constitutes a significant portion of BSRE's income. Mega Retail is currently operated by court-appointed trustees following the issuance of a stay of proceedings with respect to Mega Retail. See note 5a to our consolidated financial statements. There is uncertainty regarding the outcome of Mega Retail's stay of proceedings and the sale of Mega Retail's supermarket branches. There is no assurance that BSRE will be able to continue to lease its supermarket branches on the same terms as currently leased. In addition, there may be periods during which BSRE may not receive lease payments. Any of the above may result in a decrease in BSRE's revenues which may materially adversely affect its financial results.

 

Entrepreneurship in real estate and residential construction entails risks of not meeting the targets set forth in the original schedule and budget.

 

Entrepreneurship in real estate and residential construction entails risks of not meeting the targets set forth in the original timetable and budget, among others, due to lack of manpower in the construction industry, ongoing shortage of raw materials and/or increase in prices of raw material. Given that BSRE’s activities include the development of residential and commercial areas in the wholesale market project in Tel Aviv, this risk may materially adversely affect BSRE’s operational results. In the event BSRE is not able to meet the targets set forth in its original timetable and/or budget, BSRE may incur additional costs and/or it may be required to defer its recognition of revenues, any of which may have a material adverse effect on our financial results.

 

We are subject to risks regarding the ownership of real estate assets, including a slowdown in the Israeli yield-generating real estate market, which may adversely affect our business.

 

We own, through our subsidiaries, real-estate assets, most of which are currently used by our retail operation, and the remainder of which is leased to third parties or held for future development. These assets are subject to risks with regard to ownership of real-estate assets, including a slowdown in the Israeli yield-generating real estate market, evidenced by a decline in demand and surplus of supply of commercial properties, a reduction in the availability of credit sources, an increase in financing costs and/or stricter requirements by banks for providing such financing, which may have a material adverse effect on the real-estate markets, occupancy rates, rental fees and revenues from third parties and on the value of the assets in BSRE's financial statements. These risks include increase of operational costs, decline of the financial conditions of the lessees and additional factors which are beyond our control. Any of these risks could adversely affect our business.

 

In addition, from time to time we acquire real estate with the intention of changing the zoning of such real estate. We cannot assure that the relevant planning authorities will approve these contemplated zoning changes or, if approved, that we will be able to sell our real estate at a profit following a change of zoning.

 

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BSRE may not be able to obtain additional financing for its future capital needs on favorable terms, or at all, which could limit its growth and increase its costs and could adversely affect the price of its ordinary shares.

 

Most of BSRE’s activities, including its residential and commercial wholesale market project in Tel Aviv, are largely financed from external sources. In the event that we relinquish control of BSRE due to need for liquidity, BSRE may be in default due to the change of control provisions contained in certain of its financial agreements with such external sources. To the extent such change of control occurs without the consent of BSRE's lenders, they may declare BSRE's loans immediately due and payable, triggering cross default provisions in other loan agreements. In addition, in the event that Alon sells control of the Company, the trustee for BSRE's Series E Debentures may take the position that such change of control constitutes an event of default under the Series E Debentures without the consent of the holders of the Series E Debentures.

 

In addition, we cannot be certain that BSRE will be able to obtain financing on favorable terms for its activities, and BSRE cannot be certain that its existing credit facilities will be renewed. In addition, an adverse change can occur in the terms of the financing that it receives. Any such occurrence could increase BSRE’s financing costs and/or result in a material adverse effect on the results of the Company and its ability to develop its BSRE business. As of December 31, 2015, BSRE had long term loans including debentures in the outstanding amount of approximately NIS 1.7 billion. The amount of long term loans currently outstanding may inhibit BSRE’s ability to obtain additional financing for its future capital needs, inhibit BSRE’s long-term expansion plans, increase its costs and adversely affect the price of its ordinary shares. For more information, see “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – BSRE Series D Debentures”.

 

The value of BSRE's securities portfolio may be adversely affected by a change in the capital markets, interest rates or the status of the companies in whose securities BSRE has invested.

 

As of December 31, 2015, BSRE held approximately NIS 140 million in Israeli corporate and government bonds with fixed interest rates, a portion of which are linked to the Israeli CPI. A decrease in the market value of these bonds or interest rates or a change in the status of the companies in whose bonds BSRE have invested could lead to a material increase in our net financing expenses.

 

An earthquake of great magnitude could severely damage our business.

 

In the event of an earthquake, BSRE may incur damages, including but not limited to extensive damages to its properties and loss of revenues, which cannot be evaluated. As of the date of this report BSRE has insured its properties against earthquakes, including indemnification for loss of rent revenues for a period of 12 months, although this insurance will not cover all the damages and losses we would incur in the event of an earthquake.

 

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Risks Related to Our Naaman segment

 

Naaman's financial results may be materially affected as a result of Mega Retail's plan of recovery and/or the sale of Mega Retail to third parties.

 

In 2015, Mega Retail was deemed a significant customer of Naaman. As a result of the stay of proceedings against Mega Retail and the appointment by the court of trustees for the operation of Mega Retail, the scope of sales from Naaman to Mega Retail have decreased from NIS 22 million in 2014 to NIS 14 million in 2015. As of the date of this annual report it is unclear that Naaman will continue to sell products to Mega Retail in 2016. As a result Naaman's profitability may be materially adversely affected.

 

We have outstanding debts to Bank Hapoalim secured by a majority of our shares in Naaman. If we are unable to repay this debt, Bank Hapoalim has the right to foreclose on the shares which would cause us to lose our control of Naaman and may materially affect our financial results.

 

According to Bank Hapoalim's records, as of March 31, 2016, Bee Group's outstanding debt towards Bank Hapoalim equals approximately NIS 23.8 million (not including interest, commissions, and linkage differentials). In order to secure the outstanding debt, Bank Hapoalim placed a lien on 60% of Naaman's ordinary shares (constituting 8,593,998958 ordinary shares) held by Bee Group. In the event the ongoing debt incurred towards Bank Hapoalim until May 31, 2016 are not repaid in full and on a timely basis, or upon the occurrence of an event of default, Bank Hapoalim would have the right to foreclose on these shares in Naaman.

 

Our financial results may be materially affected in the event we lose our majority interest in Naaman.

 

We are engaged in a highly competitive business. If we are unable to compete effectively against major non-food retailers and wholesalers, low-priced non-food retailers and wholesalers, and other competitors, our business will be materially adversely affected.

 

The merchandise we sell in our Naaman and wholesale business is varied, and we therefore compete in several different markets. Our “Naaman” and “Vardinon” stores compete in the houseware, home textile and accompanying accessories markets.

 

 In recent years, competition in the Houseware and Textile and wholesale industry has increased, primarily due to the entry of retail chains and stores from outside the food industry, and Office Depot, do-it-yourself chains such as Home Center and ACE (a franchisee of Ace Hardware), household stores, home textile stores, such as Golf & Co. Ltd., Fox Home and Kitan Textile Industries Ltd., houseware stores, electricity appliances stores, and also due to the expansion of the houseware and home textile departments in supermarkets, in the houseware industry. This competition affects the selling prices of our products and the level of our sales. Increased competition may adversely affect our level of sales and our profitability.

 

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In addition, the barriers of entry are low in some of the markets in which our Naaman segment competes due to the price and availability of products from overseas suppliers, although the establishment of a network of stores throughout the country together with the required import and marketing of products requires a high level of investment. The entrance of new competitors may reduce our market share and may reduce the selling prices of our products and lead to a reduction in our profitability.

 

Tension between Israel and the Palestinian Authority may cause a delay in supply of products.

 

Some of our bed textile products are sewn in the Palestinian Authority. If there is a closure of the borders between Israel and the areas governed by the Palestinian Authority for security reasons, this could affect the transport of persons and goods and can harm the supply of products from these sewing workshops. From our past experience, there were no significant delays in the supply of products from these sewing workshops during such closures. Furthermore, sudden and unexpected interruption in supply by one of Vardinon’s suppliers can cause a shortage in products which that supplier supplied for a period of several months until the beginning of supply from an alternative supplier.

 

We are dependent to a significant extent on one supplier. If this supplier raises prices or encounters difficulties in providing its products, our operating results will be adversely affected.

 

Our Naaman segment is dependent on Offis Textile Ltd. which provides us with dyed and printed fabrics. Delay in supply of products from, or a deterioration in the terms of trade with, Offis Textile may adversely affect our Naaman segment operation.

 

Disruptions of the Israeli ports may affect our ability to import products used in our Naaman business.

 

Our Naaman segment acquires most of its products from suppliers outside of Israel, and most of its products are imported via the sea. A prolonged general strike, shutdown or a disruption of any of the Israeli ports for an extended period of time, including as a result of a military conflict, would affect our ability to import such products or increase their prices. In addition, since the peak selling season of some of our Houseware and Textile stores is before or during the holidays, disruptions in the ports before or during such holiday seasons may adversely affect our sales and financial results.

 

Political and economic conditions in China may affect the operating results of our Naaman segment.

 

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Most of our Naaman segment’s imports are from suppliers located in China. Because most of the products sold by our Naaman segment are manufactured in and imported from China, its activity may be affected by changes in the political and economic conditions in China. For instance, any material change in the NIS-US dollar or the NIS-Chinese Yuen currency exchange rates may increase our manufacturing costs and increase the price of those imported products from China.

 

Our imports from China are affected by costs and risks inherent in doing business in Chinese markets, including changes in regulatory requirements or tax laws, export restrictions, quotas, tariffs and other trade barriers, and the state of the economy.

 

Any of these risks could have a material adverse effect on our ability to deliver or receive houseware and textile products on a competitive and timely basis and on our sales and profitability.

 

Our Naaman segment profitability is significantly influenced by the cost of raw materials and cost of sales. Increase in these factors may adversely affect our operational results.

 

Our Naaman segment is exposed to fluctuations in the cost of raw materials used to manufacture our products, which affect the cost of our products. We monitor the price volatility and may speed up or delay orders in cases we identify trends of increases or decreases in the price of raw materials and products and adjust the sale price accordingly. Additionally, the cost of goods of our Naaman segment products is a fundamental component in the pricing of these products and the volume of sales and profit margins. Most of our Naaman segment products are imported (directly by us or by our suppliers). Cost of goods are affected or may be affected by changes in the rate of import tariffs, especially a change in import tariffs in the Far East, costs of raw materials, changes in shipping rates and changes in foreign currency exchange rates (mainly US dollar and Chinese currency). An increase in the price of raw materials or cost of goods may adversely affect our operational results.

 

Risks Related To Our Dor Alon Segment

 

Fluctuations in the price of petroleum products and increases in excise tax rates may have a material adverse effect on the earnings and profitability of Dor Alon and increase its need for financing.

 

The primary factors affecting the price of petroleum products in Israel are the prices of petroleum products in the Mediterranean Basin, foreign exchange rates and the excise taxes imposed on the sale of petroleum products in Israel. In the last few years, fuel prices worldwide and in Israel have fluctuated significantly. Fluctuations in fuel prices have a direct effect on Dor Alon’s working capital.

 

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Generally, an increase in fuel prices causes increases in the value of Dor Alon’s inventory and increases the volume of customer credit that Dor Alon extends to its customers and, therefore, also increases Dor Alon’s working capital requirements and increases its exposure to customer credit risk. Increased working capital requirements result in increased finance expenses.

 

The excise tax component of certain fuel prices such as diesel oil, kerosene and gasoline is significant. Excise tax is imposed directly on fuel companies at the time of sale of fuel to customers and is generally payable within 10 days after the sale, while the credit line provided by Dor Alon to its customers is significantly longer. As Dor Alon’s working capital requirements increase due to the increases in excise taxes, it will be required to procure additional credit facilities and incur additional financing expenses. Dor Alon may be unable to obtain additional financing on reasonable terms or at all. Failure to obtain additional credit facilities would have a material adverse effect on the business, financial condition and results of our operations.

 

In addition, a decrease in fuel prices under supervision (octane 95 gasoline) generally causes decreases in the value of Dor Alon’s inventory. A decrease in these fuel prices may cause a loss in the reporting period during which this price decrease occurs.

 

Competition in the energy industry is intense, and an increase in competition in the market in which Dor Alon sells its products could adversely affect the earnings and profitability of Dor Alon.

 

Competition in the Israeli energy industry is intense and has even increased in recent years. Dor Alon’s major competitors are large fuel companies in Israel and natural gas marketing companies: Paz Oil Company Ltd., or Paz, The Delek Israel Fuel Corporation Ltd., or Delek, and Sonol Israel Ltd., or Sonol, are Dor Alon’s competitors in the filling stations field of activity, and Paz, Delek, Sonol PazGas, AmisraGas, SuperGas and tens of additional small and medium size fuel marketing companies as well as small LPG companies, which are mostly local companies that operate in a limited geographic area, are Dor Alon’s competitors in the direct marketing field of activity. The principal competitive factors affecting the retail fuel and natural gas marketing business are location of filling stations, brand identity, product price, the variety of related services offered to customers, the level of service, financial strength allowing the establishment of new filling stations, procurement of petroleum products at competitive prices and the terms offered to fleet customers, real estate owners and/or owners of filling stations. In addition, Dor Alon faces competition from Oil Refineries Ltd., or ORL, following its privatization and increased competition from Paz which now owns one of the two oil refineries in Israel. Increases in competition may adversely affect our earnings and profitability.

 

If price control over diesel fuel and LPG is imposed, it may have a material adverse effect on Dor Alon’s results of operations.

 

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On July 31, 2012, an amendment to the Price Control of Goods and Services Order (Application of the Law on Diesel Fuel for Transportation and Determining the Level of Control), 2012, was published, requiring a fueling company to annually report the profitability of diesel fuel sold at filling stations. In accordance with the amendment, the Company reports such data from time to time, pursuant to chapter VII of the Price Control of Goods and Services Law, 1996. Although Dor Alon estimates that the reporting requirements of the Order will not materially adversely affect Dor Alon’s results of operations, at this stage, we cannot evaluate the influence of additional requirements which may be imposed in the future, including price control, which may materially adversely affect our results of operations.

 

The LPG price for refineries is determined by the Fuel and Gas Administration at the end of each month for the following month. In May 2013, the Fuel and Gas Administration notified its intent to impose price controls for LPG sales to the private sector. In June 2015, new ordinances became effective which require Dor Alon to publish, on its website, a list of the average prices charged to its private customers. As of the date of this Annual Report, this requirement has not had a material adverse effect on Dor Alon’s operation results.

 

Dor Alon is exposed to risks associated with the reduction of the marketing margin of petroleum products, which may influence the financial results of Dor Alon.

 

Dor Alon’s profitability is derived from the marketing margin of petroleum products, which is a fixed amount that is not affected by oil prices and is particularly low. Therefore, Dor Alon is exposed to risks arising from changes in the marketing margin of petroleum products which are under price control and petroleum products that are not under price control. A reduction of the marketing margin by the Israeli Ministry of National Infrastructure, Energy and Water Resources may adversely affect our financial results.

 

On June 12, 2015 new regulations entered into effect under which Dor Gas is required to publish, on its website, a list of the average prices collected from private customers in every local municipal council. As of the date of this report, these regulations have had no material effect on Dor Alon.

 

Dor Alon may incur costs to comply with petroleum and natural gas product and environmental regulatory controls related to its operating activities.

 

The sale and distribution of petroleum and natural gas products in Israel is subject to extensive regulation and supervision focused on preventing potential harm to the environment (principally water, air and soil contamination) and maintaining public safety. Petroleum and natural gas products are classified, under certain circumstances, as hazardous materials that are potentially contaminating. Therefore, handling and dealing with these products in Israel is subject to regulation and supervision. In recent years, enforcement of the laws in Israel concerning environmental issues has become more stringent. These developments will likely increase the costs required to construct and maintain our filling stations and private filling stations. If we do not comply with the abovementioned regulatory controls, we may be subject to litigation by regulatory authorities, third party claims, class action lawsuits and other litigation in addition to the risk of losing, conditioning or delaying the business permit of filling stations with environmental contamination. Furthermore, defending ourselves against regulatory violations alleged by regulatory authorities or consumers may in the future require substantial financial and management resources.

 

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Dor Alon is exposed to customer credit risk that may increase with future increases in the price of petroleum products.

 

Currently, accepted practice in the fuel marketing industry in Israel is to grant customers (especially fleet customers and commercial customers) a credit line for the purchase of products for extended periods without any security interest. Beginning in 2012, Dor Alon reduced the credit line for its customers. During 2015, Dor Alon had an average of NIS 464 million in outstanding customer credit (26 credit days) in the Filling Stations and Convenience Stores operation, and an average of NIS 276 million in outstanding customer credit (89 credit days) in the Direct Marketing operation. As a result of customer credit, we are exposed to the risk of delayed collections and nonpayment of debt.

 

Increases in the price of petroleum products and in excise taxes as well as economic slowdown may lead to a potential increase in the exposure to credit risks and an increase in Dor Alon’s financing expenses which may limit Dor Alon’s ability to conduct its business.

 

Political, economic and military instability in Israel may impede Dor Alon’s ability to operate and harm its financial results.

 

In addition to the risks described above in the risk factor entitled “Risks Related To Our Business As A Whole - Political conditions in Israel affect our operations and may limit our ability to sell our products”, the security situation in Israel tends to affect recreational activities of private automobile owners in Israel, and as a result, affects their consumption of petroleum products. Deterioration in the security situation causes a decrease in the consumption of petroleum products in Israel.

 

In addition, the general security situation in Israel affects the incoming and outgoing tourist industry in Israel and the airlines’ volume of activity, which in turn affects our activities in supplying jet fuel to these airlines.

 

Enacting legislation, establishment of government committees and protests against high cost of living may adversely affect our business.

 

In response to increased public awareness of the high cost of living, the Knesset has raised the priority of reducing the cost of living in Israel and has begun the process of enacting legislation, including by way of establishment of government committees, in order to address this issue. These developments could materially adversely affect our ability to open new convenience stores and the profitability of our existing convenience stores. For additional information on this matter, see “Item 4. Information on the Company – B. Business Overview – Dor Alon Segment”.

 

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Dor Alon is dependent on fuel suppliers, an event of a consistent operational failure in the sites of the fuel product suppliers may lead to a failure in Dor Alon’s ability to conduct its business and materially impact its profitability.

 

Dor Alon, like other fuel companies in Israel, is dependent on Oil Refineries Ashdod (“ORA”) and ORL for the supply of refined petroleum products. Since Dor Alon has limited fuel storage capacity, if the oil refineries fail to supply refined petroleum products or supply them at noncompetitive prices, Dor Alon may be unable to conduct its business and its profitability may be materially impacted. In addition, Dor Alon would have to increase the amount of refined petroleum products it imports. There is no certainty regarding the ability of Dor Alon to purchase these products at competitive prices.

 

A safety event in Dor Alon’s operation sites or in the customers’ sites (direct marketing) may cause severe damages and expose Dor Alon to legal claims and damage its reputation.

 

Dor Alon's results depend on its ability to identify and mitigate the risks and hazards inherent to operating in the fueling industry. Dor Alon seeks to mitigate these operational risks by designing and building its sites in accordance with industry standards, and conducting its activities in a safe and reliable environment. However, failure to manage these risks effectively could impair Dor Alon's ability to operate and result in unexpected incidents, including fires, explosion, mechanical failures or other safety event, which may be expose Dor Alon to severe damage to or destruction of property, natural resources and equipment, which could lead to significant legal claims and damage to its reputation. These events may materially adversely affect Dor Alon's profitability and financial condition.

 

Significant natural or other disasters in Dor Alon’s sites or its costumers’ sites (in respect of the gas operations) might damage Dor Alon’s operations continuity and damages its profitability.

 

Dor Alon's operations could be disrupted by natural or human causes beyond its control, including physical risks from severe storms, floods, and other forms of severe weather, war accidents, civil unrest, political events, earthquakes, system failures, and terrorist acts. If any of these occur, it could result in the suspension of operations of Dor Alon or harm people or the natural environment, which could damage Dor Alon's profitability.

 

The absence of a comprehensive process or set of procedures to recover or protect its operational sites and data may cause Dor Alon damages in its operational and business continuity and damage its brand and profitability.

 

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Dor Alon does not currently have a comprehensive process or set of procedures to recover or protect its operational sites or data in the event of a major incident which would materially limit its ability to continue operating its business. In the event of a major incident that limits the ability of Dor Alon to operate its business, there may be significant disruptions in the continuity of Dor Alon's business which may adversely affect its brand and profitability.

 

Risks Related To Mega Retail

 

If the trustees of Mega Retail are unsuccessful in selling Mega Retail at all or on reasonable commercial terms, it would increase our exposure to Mega Retail's debts and obligations which would materially affect our ability to continue operating as a going concern.

 

Following the filing of a stay of legal proceedings by Mega Retail with the District Court of Lod, Israel on January 17, 2016, the court appointed trustees for the operation of Mega Retail. The trustees commenced and later terminated a tender process for the sale of Mega Retail.

 

The trustees of Mega Retail may not be successful in selling Mega Retail at all, or on reasonable commercial terms. If the trustees do not successfully operate the business of Mega Retail, the market value of Mega Retail may decrease. The operation of Mega Retail may be adversely affected by the highly competitive Israeli food retail business, which is characterized by high turnover, narrow operating margins, low barriers to entry such as low establishment costs. Competitors to Mega Retail include Shufersal, Rami Levy Chain Stores Hashikma Marketing 2006 Ltd., Bitan Wines Ltd., Victory Supermarket Chain Ltd., and Osher Ad - Food Warehouses, as well as independent grocers, open-air markets, and other retailers selling supermarket goods. These market factors can render Mega Retail unattractive to a potential third party buyer.

 

Additionally, perceived unattractive property lease obligations and demands of the labor union of Mega Retail may further hinder the trustees' ability to sell Mega Retail to third parties.

 

In the event Mega Retail is not sold to third parties at all, or on reasonable commercial terms, the liabilities we incurred on account of Mega Retail may become payable in full or in part. See “Item 3. Key Information D. Risk Factors Risks Related to our Business as a Whole We are exposed to third party claims for a significant amount of Mega Retail's outstanding debt and liabilities. If we are found liable to satisfy these debts and liabilities it could have a material adverse effect on our liquidity and operations and our ability to continue as a going concern” for more information. We may be unable to pay these outstanding liabilities which may materially affect our ability to continue operating as a going concern.

 

Regulatory restrictions on sale of Mega Retail may hinder the sale of Mega Retail to third parties at all, or on reasonable commercial terms.

 

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As of the date of this report, the District Court in Lod, Israel has indicated to the trustees of Mega Retail its preference that Mega Retail be sold as one business unit rather than individual stores. Regulatory restrictions imposed by the Israel Anti-Trust Authority may materially impact the ability of the trustees of Mega Retail to sell Mega Retail as one business unit. These regulatory restrictions limit the number of potential third party buyers who are capable and willing to purchase Mega Retail. As a consequence, the reduced competition for the purchase of Mega Retail can further negatively affect the sale price of Mega Retail.

 

In the event Mega Retail is not sold to third parties at all, or on reasonable commercial terms, the liabilities we incurred on account of Mega Retail may become payable in full or in part. See “Item 3. Key Information – D. Risk Factors – Risks Related to our Business as a Whole – We are exposed to third party claims for a significant amount of Mega Retail's outstanding debt and liabilities. If we are found liable to satisfy these debts and liabilities it could have a material adverse effect on our liquidity and operations and our ability to continue as a going concern” for more information. We may be unable to pay these outstanding liabilities which may materially affect our ability to continue operating as a going concern.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A.History and Development of Alon Blue Square.

 

Alon Blue Square Israel - Ltd. was incorporated in June 1988 as a company under the laws of the State of Israel. Our principal executive offices are located at Europark Yakum, France Building, Yakum 6097200, Israel, and our telephone number is +972-9-961-8504.

 

In 1996, we completed our initial public offering and our ADSs were listed for trading on the New York Stock Exchange. In November 2000, our ordinary shares were listed for trading on the Tel Aviv Stock Exchange.

 

On July 17, 2010, our name was changed to “Alon Holdings Blue Square – Israel Ltd.”, and on April 24, 2013, our name was changed to “Alon Blue Square Israel Ltd.”

 

During the third quarter, our board of directors decided to put up for sale our entire holding in Dor Alon at that time (71.17%). Following this decision, Dor Alon is presented starting from the third quarter of this year as part of activities designated for sale according to its market value; as a result, we recorded a loss of NIS 714 million.

 

During the fourth quarter, the board of directors of Bee Group decided to put up for sale the Company's entire holding in Naaman at that time (77.51%). Following this decision, Naaman is presented at the end of this year as part of activities designated for sale.

 

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Following the continued deterioration in the financial strength of Mega Retail, on January 17, 2016, Mega Retail applied to the District Court in Lod, Israel for a temporary stay of proceedings, following which trustees were appointed for the operation of Mega Retail. As a result, we have no impact on the management of Mega Retail.

 

Agreement with the employees and plan of recovery from July 2015

 

On June 21, 2015, a collective bargaining agreement and understanding letter were signed between Mega Retail's management, us, Mega Retail's employee committee and the Histadrut, effective April 1, 2015. The following are the principles of the collective bargaining agreement:

 

Closure of 32 losing branches of Mega Retail, discontinuing the employment of employees in the branches to be closed, and reduction of personnel at corporate headquarters.

 

The employees waived part of their wage costs and certain terms of retirement of the employees for whose employment were scheduled to be terminated. 

 

The allocation of 33% of Mega Retail's share capital (to be carried out by way of allocating new shares or by transferring Mega Retail shares held by us) to a newly formed legal entity to be established by the employees' committee for active and permanent employees. The newly formed entity is entitled to appoint one-third of the members of Mega Retail's Board of Directors who are not external directors, and in any event not less than two members, where one would be the chairman of the employees' committee and the other a professional party. As of the date of this annual report, the shares were not yet allocated to the newly formed entity.

 

We committed under the employees' collective bargaining agreement to provide certain credit lines during the first five years of the agreement. This commitment was replaced by a commitment to extend higher credit lines to which we agreed under Mega Retail's plan of recovery (see below).

 

Mega Retail's plan of recovery

 

On June 29, 2015, Mega Retail filed with the District Court in Lod, Israel a plan of recovery for Mega Retail under which a petition was filed under section 350 of the Israeli Companies Law-1999 to convene meetings of certain of Mega Retail's creditors, namely, its employees, suppliers, property owners and certain the banks in order to reach an arrangement with each of these creditor groups as part of the plan of recovery. On July 1, 2015, the District Court approved the convening of creditor meetings and granted Mega Retail an interim period of two weeks during which it will be able to formulate a plan of recovery with its creditors.

 

On July 12, 2015, the creditors' meetings of Mega Retail convened for the purpose of voting on the recovery plan being presented.

 

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On July 14 and 15, 2015, the District Court approved the plan of recovery. Under the plan of recovery, we assumed various liabilities as follows:

 

·Supporting Mega Retail - We committed to extend to Mega Retail, effective June 1, 2015, an amount of NIS 320 million as follows:

 

-NIS 240 million by way of loans or guarantees, of which NIS 160 million would be converted into Mega Retail's share capital (prior to the allocation of 33% of Mega Retail's share capital to employees by virtue of the collective bargaining agreement signed on June 21, 2015). The balance of NIS 80 million beyond the converted amount to share capital would be repaid only after the full repayment of the effective debt to banks and suppliers (as defined in the plan of recovery).

 

-NIS 80 million as a framework for working capital based on the current needs of Mega Retail and at its request if necessary.

 

·Liabilities regarding guaranteed and shared bank debts - the debts of Mega Retail and Eden Briut Teva Market Ltd. to banks that were secured by our guarantee or debts that are shared by us and Mega Retail (the guaranteed debt) would be paid by us without derogating from our right to assume the rights of the creditors in respect of the paid debt under the conditions set forth in the plan of recovery. The total guaranteed debt as of March 31, 2016 is approximately NIS 300 million on account of Mega Retail and NIS 29 million as on account of Eden Teva.

 

·Arrangement with suppliers - under the arrangement with Mega Retail's suppliers it was agreed that 30% of past debts to Mega Retail's large suppliers (namely, those to whom Mega Retail had debt as of the effective date of greater than NIS 800 thousand) shall be deferred for a grace period of two years (the deferred debt) and shall be repaid effective July 15, 2017 in 36 equal monthly installments (the repayment period). The deferred debt shall bear during the grace period, interest (unlinked) at a rate of 2% per annum (grace interest) and shall bear in the repayment period, interest (unlinked) at a rate of 3% per annum (repayment interest). The deferred debt shall not be linked. Each large supplier shall be granted a non-marketable option for five months from the issuance date of such option to convert the deferred debt (in whole or in part) into our shares by allocating shares in lieu of the deferred debt to the supplier (the suppliers' option). During the first two months from the allocation date of the suppliers' option, the exercise price shall be the price of our shares in the proposed rights issuance date (base price). 

 

·Upon the elapse of two months from the allocation of the suppliers' option, the exercise price of the option shall be the higher of: (i) the closing price of our shares during the 30 trading days that preceded the conversion, or (ii) 120% of the base price. In accordance with the plan of recovery, the deadline for issuing the options was January 15, 2016. Due to regulatory limitations, such options were not issued by such deadline. We applied to the District Court seeking a decision stating that the commitment to issue the suppliers' options is not valid following Mega Retail's entry into a stay of proceedings and the as a result we are not committed to issue the supplier's option. A decision has not yet been rendered in the above motion.

 

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·Waiver of control in Mega Retail's Board – under the above plan of recovery, we agreed that Mega Retail's Board will be composed of seven members, three of whom are to be appointed by us, two members are to be appointed by the employees' committee, one director to be appointed by Mega Retail from a list of five candidates to be recommended by the President of the Manufacturers Association of Israel and one director to be appointed by the District Court based on the bank's recommendations. As a result of this provision, we lost our majority in Mega Retail's Board and consequently lost the control of Mega Retail. Following this loss of control, the investment in Mega Retail is presented on an equity basis.

 

On July 20, 2015, we approved the provisions of the plan of recovery that relate to us, subject to the approval of the plan of recovery with Discount Bank regarding a deferral until September 30, 2015 of the repayment of on call loans made by Discount Bank to us.

 

On July 27, 2015, we reached an agreement with Discount Bank under which the bank will not require an immediate repayment of on call loans until September 30, 2015. Following this agreement, all our conditions precedent for approving the plan of recovery were satisfied.

 

Mega Retail's plan of recovery did not settle two material issues, the first, the continued supply of products by suppliers to Mega Retail on credit terms that preceded the plan of recovery; and the second, the return of Mega Retail's customers to making their supermarket purchases in its branches.

 

Following approval of the plan of recovery, Mega Retail closed 32 supermarket branches and two other losing branches were closed (in addition to the initial bargaining agreement), and 1,200 employees were dismissed. Additionally, Mega Retail negotiated a discount of 9% in rental fees commencing on November 1, 2015 for a period of 24 months with its main lessor, BSRE. See “Item 4. Information on the Company – B. Business Overview – Mega Retail”.

 

The terms of supply of Mega Retail's suppliers continued to worsen, resulting in substantial deterioration of sales, especially in the discount stores operated under the "YOU" brand. After further deterioration in relations with its suppliers, Mega Retail sold all 22 "YOU" brand supermarket branches which constituted Mega Retail's discount chain which employed more than one thousand employees. The sale of the "YOU" chain was made quickly for a total of NIS 130 million and including agreements with Mega Retail's employees' committee and the Histadrut regarding the termination of employment of more than an additional one thousand employees.

 

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Stay of Proceedings and Appointment of Trustees for Mega Retail

 

We announced on January 18, 2016 that in furtherance of the filing by Mega Retail of a voluntary request with the District Court in Lod for a stay of proceedings, the court approved the temporary stay of proceedings with respect to Mega Retail and the appointment of Gabi Trabelsi, CPA, Adv. Ehud Gindes, and Adv. Amir Bartov as trustees for the operation of Mega Retail. Their role is to manage Mega Retail in an attempt to restore and sell Mega Retail, either as one unit or as groups of supermarket branches, with a view towards retaining places of work for Mega Retail employees, as well as examining the matter of completing the execution and fulfillment, to the extent possible, of the Mega Retail plan of recovery and arrangement. The stay of proceedings was extended until May 17, 2016.

 

For information regarding the claims and counter-claims of the trustees, the Company and the Company subsidiaries, please see “Item 4. Information on the Company – B. Business Overview – Mega Retail – Legal proceedings initiated by the trustees of Mega Retail against us.”

 

Financing from Alon Israel Oil Company Ltd.

 

On June 4, 2015 we announced that we entered into a potential credit line transaction with a bank for an aggregate amount of NIS 75 million. The credit line was to be for a period of up to 3 months, bearing interest rate similar to other credit lines received by us from that bank. As a security for repayment, our controlling shareholder, Alon Israel Oil Company Ltd., or Alon, charged in favor of the bank a deposit of NIS 75 million which was used as collateral for the credit line. As of December 31, 2015, the credit line was paid out of the deposit of Alon.

 

On July 19, 2015, the board of directors of Alon approved to inject a total of NIS 95 million as a bridge loan to us which is to be repaid from the proceeds we would receive from a rights issuance of NIS 150 million, under which Alon committed to participate according to its percentage of holdings in the Company (NIS 110 million) such that the charged deposit amount described above which was used by us along with the injection amount would constitute NIS 170 million. The total amount of NIS 170 million is composed of NIS 110 million representing a bridge loan to be repaid from the proceeds we would receive on account of Alon's share in the rights issuance and a total of NIS 60 million representing a long term loan to be repaid after the full repayment of our debt to financial creditors and the holders of our Series C Debentures. As of December 31, 2015, we had received the NIS 170 million from Alon.

 

In addition, Alon committed to extend to us a short-term loan of NIS 50 million to be used by us to support Mega Retail's plan of recovery. The short-term loan was to be repaid from proceeds to be received by us from the sale of our holdings in our subsidiaries. It was determined that all of these loans do not bear interest but are linked to the CPI (Including the base index).

 

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In lieu of the short-term loan of NIS 50 million described above, on November 8, 2015, Alon acquired our shares in Dor Alon in an amount of NIS 50 million (8.04% of our shares in Dor Alon). As part of the transaction, in the event of the sale of the sold shares by Alon to third parties, we may receive additional consideration. As a security for the additional consideration, 20% of the sold shares were charged in our favor for a period of up to 2 years.

 

Undertaking Agreement with the holders of our Series C Debentures

 

On September 11, 2015, we entered into an undertaking agreement with the holders of our Series C Debentures. We undertook, among other things, to (i) make only ongoing payments on account of principal, interest, and linkage to our financial creditors, subject to the understandings with bank lenders as part of Mega Retail's plan of recovery; (ii) notify the holders of our Series C Debentures' trustee of our intention to enter into an arrangement with any financial creditor and/or change the terms of loans or credit extended to us and/or obtain new credit in excess of NIS 5 million and/or intention to amend or grant guarantees or security to secure the debt owed by us to financial creditors, and notify the holders of our Series C Debentures' trustee prior to an agreement to dispose of rights in material assets, subject to limited exceptions; (iii) notify the holders of our Series C Debentures' trustee in advance of the imposition of liens on our assets to secure existing debt to financial creditors, the acceleration of payments of principal to financial creditors, any exceptional preference granted to a financial creditor, investments in Mega Retail and/or grant of guarantees to creditors of Mega Retail not contemplated in the Mega Retail plan of recovery, grant of guaranty in favor of financials creditor of any of our subsidiaries, and any new extraordinary transaction between us (or private company under its control) and our controlling shareholder or a transaction in which our controlling shareholders has a personal interest; and (iv) not distribute dividends without prior approval of the holders of our Series C Debentures' representative.

 

 Starting from October 27, 2015, meetings of the holders of the Series C Debentures were convened, and the holders decided on the deferral of the payment dates on account of the principal amounts from November 4, 2015 to May 29, 2016.

 

The above undertakings are applicable until the earliest of (i) notification by the holders of our Series C Debentures' trustee of termination of negotiations; (ii) seven days after such notification by us to the trustee (with certain undertaking continuing for a longer period), (iii) decision to demand full or partial repayment of the debt owed by us to the holders of our Series C Debentures, and (iv) initiation of legal actions by the holders of our Series C Debentures' trustee against us.

 

Proposed Framework for Debt Repayment

 

On November 2, 2015, within the framework of the negotiations conducted by us with the representatives of the holders of the Series C Debentures and our creditor banks, guidelines were formulated for an outline of rescheduling and reorganizing the financial debt, including debt which we guaranteed in favor of Mega Retail. As part of the framework, it was agreed that effective November 1, 2015, (i) all debts would bear interest at the rate of 4% per annum linked to the CPI to be paid in regular semi-annual installments, (ii) interest at a rate of 1% interest would accrue and be payable on the final payment date of the principal amounts, and (iii) an additional interest amount of up to 1% would be payable in accordance with the terms of a definitive agreement between the parties. In addition, principal payments (pro-rated among banks and the holders of our Series C Debentures) would be paid at a rate of 2% per annum from November 2017 until November 2019. The outstanding principal amount (94%) would be repaid in one payment in November 2020.

 

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Additionally, it was agreed that debt repayment would be accelerated in the event Dor Alon or BSRE were sold, in which case, the debt holders would receive up to 10% of our shares.

 

However, on February 28, 2016, an acceptance notice was given by Alon for the Ben Moshe Proposal. The offer includes various conditions for debt rescheduling and reorganization. See “Item 4. Information on the Company – A. History and Development of Alon Blue Square - Offer to Acquire Holdings of Alon Oil in the Company. ”

 

Offer to Acquire Holdings of Alon Oil in the Company

 

In the first quarter of 2016, Alon and its subsidiary, Alon Retail Ltd. received two proposals to purchase control of the Company which were brought for approval by the holders of our Series C Debentures. On February 16, 2016, the holders of our Series C Debentures approved to hold negotiations with one of the potential acquirers, Mr. Ben Moshe, regarding his proposal which includes, among others, an outline for the repayment our financial debt (NIS 924 million). On February 28, 2016, an acceptance notice to the Ben Moshe Proposal, subject to conditions, was issued by Alon and Alon Retail Ltd. (holding, in the aggregate, approximately 72.21% of our shares).

 

On May 8, 2016 we filed a motion with the District Court of Lod, Israel to convene meetings of our financial creditors (consisting of holders of our bank debt and guaranteed bank debt and holders of our Series C Debentures) and shareholders for the approval of a proposed debt reorganization and arrangement under Section 350 of the Companies Law. Although it is contemplated that we would convene a meeting of shareholders, we retained our right, in accordance with applicable Israeli law, to apply to court at a later date to determine that shareholder approval is not required for the Ben Moshe Proposal.

 

Concurrently with the debt reorganization and arrangement, a company under control of Mr. Moti Ben Moshe would acquire (i) all of the outstanding shares of the Company held directly and indirectly by Alon and Alon Retail, (ii) the rights and the obligations of Alon to a bridge loan of NIS 110 million extended to the Company by Alon, including the right to allocate our shares against such bridge loan, and (iii) the rights and the obligations in another loan subordinated to financial debt of NIS 60 million extended to the Company by Alon, in consideration for the payment of NIS 115 million.

 

The Ben Moshe Proposal is subject to a final agreement between Ben Moshe and the Company’s creditors, the trustees appointed to operate Mega Retail and the creditors of Mega Retail.

 

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The Ben Moshe Proposal contemplates the complete waiver of all claims against the Company and against its subsidiaries and against all parties entitled to receive indemnification from the Company and its subsidiaries by Mega Retail, the trustees of Mega Retail and creditors of Mega Retail as well as the purchase by the Company or a company controlled by Ben Moshe of the operations of Mega Retail free and clear of all claims.

 

As part of the Ben Moshe Proposal, Ben Moshe would commit to make cash infusions of up to NIS 900 million (approximately $238.1 million) into the Company, of which up to NIS 200 million can be designated for the acquisition of Mega Retail, provided Mega Retail will be acquired directly by the Company.

 

The Closing of the Ben Moshe Proposal is contingent upon, among others, the following: (i) approval of the financial creditors, (ii) approval of the Company's shareholders (or alternatively, determination by the court that no such approval is required), (iii) approval of the Israeli court following convening of meetings described above, (iv) receipt of agreed upon third party approvals for effectuating a change of control in the Company, (v) the transfer of the acquired assets free and clear of any liens, and (vi) approval by the court of the acquisition of, or investment in, Mega Retail by the Company or a company controlled by Ben Moshe and the waiver of all claims against the Company and its subsidiaries by the trustees and creditors of Mega Retail. The deadline for satisfying the closing conditions is July 31, 2016. More information on closing conditions is set forth below.

 

There is no guarantee that Ben Moshe will reach a final agreement with the Company’s creditors, the trustees appointed to operate Mega Retail and the creditors of Mega Retail, or that all the closing conditions for the Ben Moshe Proposal will be satisfied.

 

Below is a description of the contemplated Ben Moshe Proposal:

 

Cash Infusions by Ben Moshe

 

In general, Ben Moshe would commit to make the following cash infusions into the Company:

 

-on the closing date, Ben Moshe would inject NIS 300 million (approximately $79.3 million) into the Company which are designated for partial payment of the debt to Company financial creditors and such additional amount agreed for the Company's immediate cash flow needs (collectively, the “First Injection”); the First Injection would include approximately NIS 240 million paid in equity by Ben Moshe and the remainder in convertible debt;

 

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-subject to various conditions but in any event if the Company has cash flow needs and/or insomuch as required for an early repayment, Ben Moshe would inject into the Company an additional amount, that together with the First Injection, would reach NIS 600 million (the “Second Injection”);

 

-Ben Moshe would inject an additional (third) NIS 300 million into the Company during the third year following the closing (the “Third Injection”);

 

-Ben Moshe may make the cash injections into the Company (cash in excess of the approximately NIS 240 million paid as equity on the closing date) in the form of subordinated convertible debt, capital notes or equity or as part of a private investment or as part of a rights offering or on account of participation in future rights offerings and/or exercise of rights or options exercisable into Company shares. To the extent paid by Ben Moshe (i) as part of a rights offering, the amounts will be paid on the terms in the rights offering and (ii) as part of a private offering, the amounts will be paid at a 10% discount to the market price at that time. Conversion of Ben-Moshe's subordinated debt into Company shares would be made at a Company valuation of NIS 50 million (approximately $13.2 million). The Company valuation (NIS 50 million) at which the financial creditors, the trustees of Mega Retail and Ben Moshe would be issued shares (including shares to be issued in the future to Ben Moshe in a private offering or upon conversion of subordinated debt) has not been finally agreed to by the Company;

 

-The balance of the financial debt following repayment at closing would be repaid as described below and unpaid financial debt would bear interest and linkage differentials as described in the Ben Moshe Proposal. The Ben Moshe Proposal contemplates the full repayment of the financial debt of the Company and does not apply to jointly-held debt, such as creditors who, at the time of closing, have a claim of debt against the Company together with Mega Retail, or which is guaranteed by the Company, or is based on facts or matters relating to Mega Retail, other than bank lenders (collectively, the “Joint Debt”). Under the Debt Arrangement based on the Ben Moshe Proposal, the Joint Debt will be addressed within the framework of a new debt arrangement for Mega Retail, the closing of which is a condition to closing the Debt Arrangement based on the Ben Moshe Proposal ; and

 

-Upon the closing date, NIS 300 million would be deposited into an account to guarantee Ben-Moshe's obligations for carrying out the fund injections after the closing. Inasmuch as the outstanding obligations decrease from the above amount, the deposit amount will decrease accordingly (in lieu of such deposit, Ben-Moshe may, under certain circumstances, increase Second Injection by NIS 100 million and decrease Third Injection by the same amount. An additional NIS 100 million would be paid to the financial creditors at the end of six months from the closing date).

 

Additional Principal Terms

 

The Ben Moshe Proposal would contain the following additional principal terms:

 

-at closing, Company shares would be issued to the Company's financial creditors, to the trustees of Mega Retail and to Ben-Moshe, as described below;

 

-annual interest rate of 6% would accrue beginning from 30 days prior to the closing and be paid semi-annually beginning on the sixth month following closing (until full repayment of the debt);

 

-each of the Company's financial creditors will have the right to demand early repayment of its debt, which will be effectuated after the elapse of 12 months from the closing date (an amount of 2.5% of the paid amount will be added to the repayment amount). After the First Injection, the remaining financial debt will be repaid in four annual payments, each equal to 15% of the principal debt amount, upon completion of 12 months, 24 months and 36 months, and the balance of the debt within 48 months after closing;

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-until full repayment of the outstanding debt, the Company will be entitled to effectuate early repayment of the debt accrued until such time (in whole or in part). If an early debt repayment is effectuated in the first three years from the closing date beyond the payment designated for that year, 2.5% of the paid amount will be added to the repayment amount (not applicable to the amount paid upon the closing or amounts paid according to new repayment schedule);

 

-all other outstanding debts or liabilities of the Company (other than the Joint Debt) will be paid by the Company in the ordinary course of business as determined by the Company at its sole discretion. The Ben Moshe Proposal does not apply to debts or liabilities incurred towards creditors not determined to be financial creditors under the Ben Moshe Proposal;

 

-to secure full repayment under the Ben Moshe Proposal, at closing the Company would create a lien principally on the Company's unsecured shares in its subsidiaries Dor Alon Energy In Israel (1988) Ltd. and Blue Square Real Estate Ltd. for the benefit of the financial creditors;

 

-the financial creditors will be entitled to immediate repayment of their debt and to foreclose on the lien upon the occurrence of certain events, including among others: (i) delay in payment to them, (ii) a fundamental breach by the Company or Ben Moshe of their respective obligations, or (iii) dissolution proceedings;

 

-

upon the elapse of 12 months following full repayment of the debt of the financial creditors, the Company would be obligated to repay Ben Moshe the full amount of cash infusions paid to the Company in the form of debt that had not previously been converted to equity (subject to extension at the election of Ben-Moshe); after repayment of the Company's financial debt, the debt to Ben-Moshe will be linked and bear interest at 5%;

 

-Ben-Moshe's obligation to make the cash infusions will end when the Company's obligations under the Ben Moshe Proposal terminate (including repayment of all financial debt); and

 

-the Company has requested that the court grant it a grace period so that it is not required to make any payments until closing other than ongoing payments such as to employees, service providers, and consumers of gift certificates at stores, and payments that are essential to the Company maintaining its operations as a going concern.

 

Closing Conditions and Requested Orders from the Court

 

The Ben Moshe Proposal is subject to the satisfaction of the following closing conditions:

 

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-until May 29, the court would order the convening of creditor meetings to approve the Ben Moshe Proposal;

 

-until June 19, 2016, the creditor meetings would approve the Ben Moshe Proposal;

 

-until July 3, 2016, the court will approve the Ben Moshe Proposal (without conditions, unless approved explicitly in writing by the Company and Ben-Moshe), and will grant the orders providing for the following:

 

-prior to closing changes will be made to the Company's shareholders equity to enable implementation and execution of the Ben Moshe Proposal, including issuance of shares thereunder , including through cancellation of par value of the Company's shares and/or increase in registered share capital of the Company and/or combination of the Company's shares;

 

-on the date of closing directors will be added to the board of directors of the Company in the scope and identity provided by Ben-Moshe to the Company, and that Company directors serving prior to closing will be terminated, other than Company directors that had been appointed by Ben Moshe prior to closing (if so appointed) and excluding external directors;

 

-on the date of closing the Company's articles of association will be amended to a form approved by the Company and Ben Moshe and attached as Schedule 22 to the Ben Moshe Proposal prior to convening meetings of creditors to approve the Ben Moshe Proposal;

 

-until the date of closing, that no third party will have grounds for any demand or claim against the Company or any company under its control (including Blue Square Real Estate) or against any third party whatsoever based on the fact that control of the Company or any under company under its control has changed;

 

-all requests for class actions against the Company will be dismissed, and commencing from closing date, no requests for class actions will be submitted against the Company with respect to the period prior to closing;

 

-approval of the Ben Moshe Proposal will constitute also an approval of all share issuances to be made under the Ben Moshe Proposal, including approval pursuant to Securities Regulations (private placement of securities in registered company), 2000, such that no additional approval or action under such regulations will be required in connection with such issuances, including approval of the shareholders of the Company for any such issuance. This order will also approve the offers and issuances of securities under the Ben Moshe Proposal without the need for a prospectus;

 

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-the securities to be issued under the Ben Moshe Proposal and/or relating thereto, whether to financial creditors and trustees of Mega Retail and whether to Ben-Moshe, including results from a conversion of the debt of the Company to shares to Ben-Moshe in accordance with the Ben Moshe Proposal, will be free and clear of any resale limitations (including under the Israel Securities Law and regulations thereunder or under the articles of The Tel Aviv Stock Exchange (“TASE”));

 

-approval by the court and satisfaction of the conditions to effectiveness of the offer by Ben Moshe for an investment in, or acquisition of, Mega Retail or its activities submitted to the trustees of Mega Retail by a company under the control of Ben Moshe on May 5, 2016 (or based on any change to such offer or replacement offer from a company under the control of Ben Moshe) (“Offer to Acquire Mega”) and of the creditors arrangement based on the Offer to Acquire Mega Retail (“Creditors Arrangement in Mega”) which includes the mandatory provisions attached as a schedule to court application relating to, among others, (i) waiver by trustees and creditors of Mega Retail exempted the Company and any company under its control from any claim or demand and (ii) that the funds of the Mega Retail trustees solely will be used to pay all obligations to the creditors of Mega Retail who have claims against the Company relating to Mega Retail (including those to whom the Company granted guarantees) (other than bank lenders);

 

-approval of TASE and The New York Stock Exchange (“NYSE”) for the issuance and listing for trading of the Company shares to be issued under the Ben Moshe Proposal, including approval for issuance and listing of the shares issuable upon exercise or use of the debts of the Company to Ben Moshe under the Ben Moshe Proposal (including on account of all the cash injections, and the loans acquired by Ben Moshe from Alon in the total amount of NIS 170 million); to the extent the Company shares will stop trading on the NSYE, the condition to receive approval of the NYSE for such issuance and listing will be cancelled;

 

-approval of the TASE to the change in the terms of the Company's Series C Debentures;

 

-the Company and Ben Moshe will agree to the list of agreements and approvals needed in connection with the transfer of control in the Company and any company under its control to Ben Moshe and consummation of the Ben Moshe Proposal, including under commitments and agreements to which the Company and companies under its control (including Blue Square Real Estate) are parties, and for which their receipt will be a closing condition for the Arrangement (“Required Approvals”). In addition, receipt of the Required Approvals; without derogating from the foregoing, it is agreed that if the Company or any company under its control (directly or indirectly) is party to an agreement with the banks that includes a “change of control” provision, the agreement of a bank to the Ben Moshe Proposal shall be seen as an agreement by such bank to the change of control of the Company and of any company under its control on account of an agreement for acquisition of control (for the removal of doubt – in a manner that the bank will not have any right by virtue of the change of control);

 

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-approval of the shareholders of the Company of the Ben Moshe Proposal, or alternatively, approval by the court that there is no need for a shareholders meeting; and

 

-transfer of the acquired assets (as defined in the control acquisition agreement) to Ben Moshe free and clear of any third party rights.

 

The last day for satisfaction of all conditions is July 31, 2016.

 

Alon, the current controlling shareholder of the Company, notified the Company that the terms of the Ben Moshe Proposal don't match the agreement signed between it and Ben Moshe, with respect to the mechanism of closing and the closing conditions. To the Company's knowledge, Alon and Ben Moshe are acting to work out these issues, subject to required approvals.

 

Terminating Conditions

 

So long as the closing date has not occurred, Ben Moshe will have the right to cancel the Ben Moshe Proposal if any one of the following conditions occurs, and in such event the Ben Moshe Proposal will have not effectiveness:

 

-the Offer to Acquire Mega Retail is cancelled or nullified according to its terms (in which event, the Company and Ben-Moshe will act to submit a different arrangement);

 

-the court rejects the request to convene meetings;

 

-the creditors meetings (or any of them in the event of more than one meeting) decide not to approve the Ben Moshe Proposal; or

 

-the court rejects the request to approve the Ben Moshe Proposal.

 

Events Occurring Upon Closing

 

The following events would occur upon closing of the Ben Moshe Proposal:

 

-Ben Moshe would acquire from Alon the shares and rights and obligations regarding the loans and inject the First Injection into the Company;

 

-the Company would pay NIS 300 million to its financial creditors as debt repayment;

 

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-7,328,270 shares, representing 10% of the outstanding shares on a post-issuance basis (prior to share issuances to Mega Retail Trustees, creditors of Mega Retail, and to Ben Moshe described below), would be issued to the Company's financial creditors;

 

-294,117,647 shares would be issued to the trustees of Mega Retail and creditors of Mega Retail, as described above, in connection with the waiver of claims; and

 

-1,762,220,188 shares would be issued to Ben Moshe for its equity investment of NIS 240 million, based on a Company valuation of NIS 50 million which has yet to be determined by the Company's audit committee and board of directors. Therefore the precise number of shares is subject to change based on the final valuation of the Company. Since the receipt of the Ben Moshe Proposal, Mr. Ben Moshe, the Company and its creditors have been negotiating the terms of final arrangement, and the terms of the offer above are subject to change based on the results of these negotiations.

 

In addition, the Ben Moshe Proposal from February 2016 includes the following additional terms:

 

·The proposed debt arrangement will include limitations on using the injected funds for new investments and/or for the purchase of Mega Retail;

 

·Restrictions on distribution of dividends by the Company, unless the creditors' consent is obtained;

 

·Until the transaction closing date, the Company and its controlled companies will not carry out any disposition of their assets and/or any action that may foil the acquisition of control, including not entering into an agreement with Mega Retail's trustees, or otherwise Mr. Ben Moshe will have the right to cancel his commitments;

 

·Mr. Ben Moshe committed to deposit NIS 250,000,000 to demonstrate seriousness. Documents that were presented to the Company show that such amount was deposited in two banks accounts where the authorized signatories are the attorneys of Mr. Ben Moshe;

 

·If Mr. Ben Moshe revokes his offer under circumstances under his control and in default of his obligations , his attorney will be directed to transfer NIS 20 million to the Company as an agreed compensation by Mr. Ben Moshe as an exclusive remedy for breach;

 

·Effective upon acceptance of the Ben Moshe Proposal and until the conditions precedent are satisfied and/or the expiration of the Ben Moshe Proposal, Alon and Alon Retail Ltd. will not negotiate an alternative transaction; and

 

·ExtraHolding Ltd. will guarantee any commitment Mr. Ben Moshe is required to effectuate on the closing date.

 

On May 10, 2016, the trustees of Mega Retail submitted to the court in Lod, Israel a notice in which they chose the offer of Bitan Wines Ltd. among the offers that were submitted to them for the acquisition of Mega Retail (Ben-Moshe submitted one of the offers).  The trustees requested the court to convene meetings of the creditors of Mega Retail to approve the arrangement based on such offer of Bitan Wines for the reasons detailed in the request of the trustees (“Motion 38”). Following the trustees' motion, Ben Moshe and a company under his control, filed a motion with the Court requesting the setting of a date for an urgent court hearing during which, according to Ben Moshe, the Court would hear each party's argument in a manner which would be beneficial towards Mega Retail's creditors, or alternatively, determine that Ben Moshe can respond to the trustees' motion within a time frame determined by the court. As part of the motion filed by Ben Moshe, Ben Moshe claimed, among other things, that his proposal to acquire Mega Retail is more beneficial than that of Bitan Wines, in particular given that his proposal to acquire Mega Retail may be increased by an additional NIS 40 million, as mentioned in the trustees' motion. In addition, Ben Moshe detailed in his motion such alleged inconsistencies in the motion filed by the trustees.

 

As of the date of this Annual Report, we do not know whether the court will grant the trustees' motion and/or if the offer of Bitan Wines will be included as part of a final binding Mega Retail arrangement.  In addition, we cannot estimate if a price competition between the offers of Bitan Wines and the other offers, including the offer of Ben-Moshe will be conducted (in which case the Ben Moshe Proposal, which includes that acquisition of Mega Retail, as in our proposed debt reorganization and arrangement for the Company submitted to court on May 8, 2016 may be feasible), or alternatively, that we and Ben-Moshe will work to submit an alternative debt reorganization and arrangement for the Company that doesn't include the acquisition of Mega Retail.  It is understood that there is no certainty that the court will approve the request of the Mega Retail trustees to convene meetings and/or that the offer of Bitan Wines as part of an arrangement for Mega Retail will be consummated and/or that the alternative debt reorganization and arrangement for the Company will be reached. Therefore, as of the date of this Annual Report, we cannot estimate the ramifications such notice of the trustees of Mega Retail.

 

Events Relating to Blue Square Real Estate

 

On December 24, 2015, the board of directors of BSRE approved the transfer of rights in 10 "YOU" brand supermarket branches which are leased by Mega Retail to third parties following Mega Retail's decision from December 2015 to immediately sell of all of its "YOU" brand supermarkets. BSRE entered into lease agreements with third parties under which the rental fees paid by Mega Retail (subject to commercially reasonable adjustments, grace periods and various discounts) were granted to these third parties. The rental periods under the new lease agreements range from 10 to 20 years and include renewal options to extend the period. The new lease agreements include mechanisms for the provision of collateral.

 

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·Following reports in connection with proposals for the sale of Company shares held by Alon, the trustee for BSRE's Series E bonds notified BSRE that, based on a legal opinion it received regarding the definition of "the current controlling shareholder" contained in the deed of trust for the Series E Bonds, in the event of a transfer of control in the Company, a meeting of the Series E Bondholders should be convened for the purpose of obtaining Series E Bondholder approval prior to a sale by Alon of its holdings on the Company.

 

·On February 16, 2016, BSRE filed a creditor's claim with Mega Retail's trustees, claiming that an amount of NIS 9.2 million (excluding VAT) is owed to BSRE on account of rental fee debt and other expenses and debts in respect of the lease of properties from BSRE to Mega Retail, and an additional amount of NIS 123.5 million (excluding VAT) is owed to BSRE on account of (i) damages caused to BSRE by Mega Retail (ii) Mega Retail's liabilities in accordance with agreements and indemnification letters between the parties and (iii) potential exposure due to legal proceedings where BSRE and Mega Retail are parties to such proceedings.

 

·On February 23, 2016 (Application 37), Mega Retail's trustees filed an application for instruction in which the court was requested to sign a summary judgment instructing the land registry offices and/or the Israel Lands Authority to register in the books caveats regarding the appointment of Mega Retail's trustees, on all of the real estate assets in which Mega Retail has rights. BSRE filed an appeal, but the Supreme Court ruled that under the circumstances it saw no reason to delay the registration.

 

We received several proposals to purchase our holdings in BSRE (53.92%), and these proposals were reviewed by our board. As of the report date, the proposals the Company received for the purchase of BSRE are invalid.

 

Permanent Liquidation of Eden Briut Teva Market

 

On July 9, 2015, Eden Briut Teva Market Ltd. ("Eden") filed an application with the court for leave of a stay of proceedings order, to which was attached the creditors' arrangement proposal for the creditors of Eden Teva Market creditors. Eden's debts are estimated at NIS 81 million, excluding the banks' creditors which amount to NIS 74.6 million. Mega Retail guarantees the debts of Eden to Bank Leumi in the amount of approximately NIS 35.7 million and NIS 9.7 million to the First International Bank. The Company guarantees the debts of Eden to Bank Hapoalim in the amount of approximately NIS 29.2 million.

 

On July 9, 2015, the court granted the stay of proceedings application and rendered a stay of proceedings order to Eden and appointed a trustee for the stay of proceeding period. Under the application for stay of proceedings, Mega Retail filed a proposal for creditors' arrangement however, on July 22, 2015 Mega Retail notified the court that it withdraws the proposed arrangement submitted to Eden's creditors.

 

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On December 3, 2015, a settlement agreement between Mega Retail and Eden was approved by the district court according to which NIS 3.8 million was paid to Eden Teva. An appeal against the settlement agreement was filed in January 2016 by a supplier of Eden Teva and a court hearing has been scheduled for July 14, 2016. On December 6, 2015, a permanent liquidation order was rendered against Eden Teva. 

 

Other Recent Developments

 

The following is a description of certain events that have occurred during the last number of years:

 

In our BSRE segment:

 

·In connection with the Wholesale Market Project in Tel Aviv, as of March 15, 2016, commitments for 717 sale agreements with apartment purchases for NIS 1,894 million (including VAT) had been entered into and advances of NIS 1,328 million (including VAT) had been received. For more information on the transaction with the Wholesale Market Company, see “Item 4. Information on the Company – B. Business Overview – BSRE – Description of Real Estate Properties” below and “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreements between Alon and Alon Blue Square's Subsidiaries – Agreement with the Wholesale Market Company.”

 

·Givon Parking project, Tel Aviv- in the first quarter of 2015, Tel Aviv Parking Lots Ltd., a Company controlled by BSRE and a third party (the “Parking Company”), completed the parking lot, in accordance with the engagement with the Tel-Aviv municipality in an agreement to Build, Operate, and Transfer the Givon Parking Tel Aviv Project in an aggregated 31,000 square meters which includes approximately 1,000 parking spaces and development of the public square on its roof. In April 2015, the parking lot was open to the public. The development of the public square and its delivery to the Tel-Aviv municipality was completed.

 

In our Dor Alon segment:

 

The approval by the Israel Land Authority in February 2014 of the allocation of land in the southern industrial region of Herzliya to a company owned equally by Dor Alon and a third party. The allocation is subject to several conditions, including the payment of capitalized lease fees. The jointly owned company submitted an objection with regard to the amount of the capitalization lease fees and is working to complete the transaction with the Israel Land Authority. The zoning plan permits the jointly owned company to establish a project containing 70,000 square meters designated for commercial and industrial purposes. Dor Alon intends to continue to operate (through the joint company) the promotion and implementation of this project, including the allocation of land to the project by the Israel Land Authority.

 

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Other operations:

 

·In December 2015, we decided to cease our gift certificate operations. We will continue to honor outstanding obligations to issue gift certificate.

 

·On July 6, 2015, we signed an agreement with Pelephone Communications Ltd. for the sale of our Alon Cellular activity, our 100% subsidiary through which we operated an MVNO network in Israel. Upon the completion of the agreement, Alon Cellular would be entitled to half the income from the transferred customers for 36 months. In addition, under the agreement, the purchaser would be entitled to market and sell SIM cards in Mega Retail stores in exchange for fees determined in the agreement between the parties. The agreement was subject to the approvals of the relevant parties, the Ministry of Communications and the Antitrust Authority. In September and October 2015, the required regulatory approvals were received, and in November 2015 the transaction closed. Contingent on the number of transferred customers, Alon Cellular is entitled to a minimum consideration of NIS 10 million if its share in income from transferred customers over three years is lower than this amount. In December 2015, Alon Cellular's board of directors resolved to voluntarily dissolve Alon Cellular following our debt forgiveness to Alon Cellular and the forgiveness of the debt balance upon the completion of the dissolution process.

 

·On November 29, 2015, we entered into an agreement with Dor Alon for the sale of all of their holdings in Diners Club Israel Ltd., an associate company held 49% by us (36.75% directly by us and 12.25% by Dor Alon), in which we operated in the sector of issuance and clearance of credit cards in Israel and the issuance of YOU credit cards to the customer club membership of the group, to Israel Credit Cards Ltd. ("ICC"). On December 15, 2015, the transaction was completed in a consideration for NIS 130 million of which NIS 120.25 million was received in cash and the balance was received in January 2016. The agreement states that ICC will pay us and Dor Alon further consideration of four additional equal installments amounting to NIS 5 million on March 31, 2016, September 30, 2016, March 31, 2017 and September 30, 2017, subject to fulfillment of the following conditions (for each of the dates above): (1) the agreement between Diners Customer Club, us, and Dor Alon (a registered partnership) ("You Partnership") (in which the holders of rights are the Company and Mega Retail, which settles the relationship between You Partnership and You Customer Club ("The club's agreement" and "club", respectively), remains in effect; (2) Mega Retail and the chain of fueling stations of Dor Alon (including the convenience stores attached to them, operating under the brands "Dor Alon" and "Alonit") are part of the companies that provide benefits under the club; (3) on the payment date March 31, 2016, the number of Mega Retail stores will not be less than 115 stores and regarding the payments between the dates April 1, 2016 to September 30, 2017, the number of Mega Retail stores will not be less than 100 stores; (4) Mega Retail and Dor Alon will continue to offer to their customers and the customers of corporations controlled by them (as applicable), the issuance of the Club credit card and all as set forth in the club agreement and pursuant to its terms; (5) the club will offer value proposition to the Club credit card holders, as set out in the club agreement; and (6) an application for a liquidation order and/or appointment of a receiver and/or stay of proceedings and/or the appointment of a temporary or permanent liquidator against Mega Retail was not filed, which was not canceled within 60 days of filing the application and/or granting the order, respectively.

 

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·On June 22, 2015, an agreement was signed between Bee Group Ltd., our wholly owned subsidiary, Retail 3000 Ltd., and Kfar Hashaashuim for sale of all of the holdings of Bee Group in Kfar Hashaashuim. According to the agreement the share transfer would take place with the full repayment of the debt, for which we granted guarantees of NIS 45 million and with the cancellation of the guarantee granted by us in favor of Bank Hapoalim. In return for the transfer of the shares, Retail 3000 undertook to pay Bee Group five annual installments from the date of signing the agreement of NIS 1 million each (the first payment was fully paid), or 35% of our net income in the same year, whichever is higher. Under the agreement, Retail 3000 committed to repay the entire debt to Bank Hapoalim, which is guaranteed by us, until December 30, 2015. As part of the agreement, in 2015 we injected into Kfar Hashaashuim a total of NIS 19 million and our guarantees to Bank Hapoalim were canceled. As of December 30, 2015, the shares of Kfar Hashaashuim were transferred and shareholders' loans granted to Kfar Hashaashuim were assigned in favor of Retail 3000.

 

·On July 28, 2015 an application for the liquidation of Dr. Baby (a company held by Mega Retail) was filed and a liquidator was appointed by the court.

 

·On December 27, 2015, a merger agreement was signed between us and Bee Retail Group, under which in view of broad economic considerations, we agreed to merge for the purposes of streamlining the activities carried out by us and Bee Group while utilizing the organizational and economic advantages deriving from the merger. Under the merger, Bee Group would transfer to us, upon the effective date that which was set for December 29, 2015, the ownership and the basic right to use the assets of Bee Group and we would absorb all of the rights and liabilities of Bee Group which are to be transferred to us on an as is basis, for no consideration. The merger is contingent upon the satisfaction of several conditions precedent including the approval of the relevant corporate organs of each of the companies, and approvals of various governmental authorities. As of the date of this annual report, the approvals have not yet been received.

 

·According to Bank Hapoalim's records, as of March 31, 2016, Bee Group's outstanding debt towards Bank Hapoalim equals approximately NIS 23.8 million (not including interest, commissions, and linkage differentials). In order to secure the outstanding debt, Bank Hapoalim placed a lien on 60% of Naaman's ordinary shares (constituting 11,166,998 ordinary shares) held by Bee Group. In the event the ongoing debt incurred towards Bank Hapoalim until May 31, 2016 are not repaid in full and on a timely basis, or upon the occurrence of an event of default, Bank Hapoalim will be entitled to immediate repayment of the outstanding debt and exercise of the secured Naaman shares held by Bee Group.

 

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Capital Expenditures

 

In 2015, we invested approximately NIS 218.1 million, or $55.9 million, in property and equipment, intangible assets and investment property, a 48% decrease from our 2014 investment of NIS 413 million. Of our investment in property, and equipment and investment property in 2015, we invested NIS 21.0 million, or $5.4 million, in land and buildings, including land that we lease and investment property, as compared with NIS 79.6 million in 2014.

 

For additional information pertaining to our principal capital expenditures and divestitures for the last three financial years and those of which are currently in progress, and the method of financing, see “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources.”

 

B. Business Overview.

 

General

 

We are a holding company which operates in three reportable operating segments (two as discontinued operations). In our BSRE segment, we own, lease and develop yield-generating commercial properties and projects. In our Dor Alon segment, which is held for sale, we operate a chain of filling stations and convenience stores in different formats in Israel, and we are considered to be one of the four largest fuel retail companies in Israel based on number of petrol stations and is a leader in the field of convenience stores. In our Naaman segment (operated through Bee Group), which is also held for sale, we operate specialist outlets in self-operation and franchises and offer a wide range of houseware and home textile products as a retailer and wholesaler in the houseware and home textile markets. In addition, we have another operation that consists of Bee Logistics Service Center Ltd., our wholly-owned operator of a logistics center, which provides services to Naaman as well as third party activities. .

 

Mega Retail is currently operated by court-appointed trustees and owns, according to reports by its trustees, 127 supermarkets under different formats. Mega Retail is designated for sale by its trustees.

 

The financial results of our Dor Alon and Naaman segments have been presented as discontinued operations because they consist of activities designated for sale by us, and the financial results of Mega Retail have been deconsolidated due to our loss of control of Mega Retail. As of March 31, 2016, Alon Blue Square owned 53.92% of the outstanding shares of BSRE, 63.13% of the outstanding shares of Dor Alon, 100% of the outstanding shares of Bee Group, 77.51% of the outstanding shares of Naaman and 100% of the outstanding shares of Mega Retail (we undertook to transfer 33% of Mega Retail's share capital to a private Israeli company to be formed by the employee union of Mega Retail). The balance of BSRE shares, Dor Alon shares and Naaman shares is publicly held and traded on the Tel Aviv Stock Exchange.

 

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BSRE is the owner of most of our real estate properties, and it leases approximately 84 properties to Mega Retail. Following the deconsolidation of Mega Retail's financial results from our consolidated financial results commencing in the third quarter of 2015, these assets are presented at fair value in our consolidated financial statements. As of December 31, 2015, the consolidated assets of BSRE aggregated approximately NIS 3.1 billion, or $ 784 million. BSRE’s assets constituted approximately 45.4% of our total consolidated assets at that date.

 

As of December 31, 2015, we were the owners, through Naaman, of 107 Houseware and textile stores, while the remaining 13 of our Houseware and textile stores were owned and operated by franchisees. As of December 31, 2015, the consolidated assets of our Naaman segment (excluding the stores owned and operated by franchisees) aggregated approximately NIS 162.3 million, or $41.6 million. Our Naaman’s assets constituted approximately 2.4% of our total consolidated assets at that date. Mega Retail is a material client of Naaman, and following the deterioration of Mega Retail's financial results, the sales to Mega Retail and the investment in Naaman were reduced.

 

As of December 31, 2015, Dor Alon operated 211 filling stations, 218 convenience stores, which are comprised of 144 convenience stores in filling station and commercial sites and 74 independent convenience stores (30 of which are under the “Alonit” brands and 44 under the AM:PM brand). As of December 31, 2015, the total consolidated assets of Dor Alon and its subsidiaries aggregated approximately NIS 1.8 billion, or $466.7 million. Dor Alon’s assets constitute approximately 27% of our total consolidated assets at that date. In July 2015, our board of directors decided to sell our holdings in Dor Alon in order to reduce our financial debt. Following that decision, Dor Alon is presented as "an activity designated for sale".

 

Following the continued deterioration in the financial strength of Mega Retail, on January 17, 2016 Mega Retail applied to the District Court in Lod, Israel for a temporary stay of proceedings following which trustees were appointed for the operation of Mega Retail. As a result, the investment in Mega Retail is presented in our consolidated financial statements on an equity basis, and we deconsolidated Mega Retail's financial results from our results. According to report No. 4 of the trustees of Mega Retail dated March 18, 2016, Mega Retail was the owner of 127 supermarkets and maintains the Mega@Internet website. Most of the supermarkets are local neighborhood store brand "Mega in Town". According to the report, from January 17, 2016 until February 16th, 2016 sales of Mega Retail equaled NIS188 million, and losses for that period equaled NIS 8.6 million. As of June 30, 2015, the unaudited consolidated assets of Mega Retail aggregated approximately NIS 576 million, or $148 million.

 

During 2015, we decided to sell those businesses that are not profitable and/or not core to our overall business strategy.

 

Our Strategies

 

Our strategy is to pursue a number of strategies, which include:

 

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·entering into a reorganization plan with our financial and other creditors, which would include locating a strategic investor to inject equity or debt financing into the Company or disposing of our assets;

 

·developing and expanding of the BSRE segment by developing and improving the existing real estate properties, maximizing of leases, increasing building rights, and purchasing additional commercial real estate in Israel;

 

in our discontinued operations, growing our filling stations and convenience store operations, both within our filing stations and as stand-alone stores, including expanding the variety of products and services offered within the stores, and

 

·expanding the marketing of natural gas for industry and maintaining operation in the private electricity sector while examining the development of additional projects and expanding the marketing of Dor Alon’s private brand in the lubricant oil sector, “Dor Oil”.

 

BSRE

 

As of December 31, 2015, through our 53.92% subsidiary, BSRE1, we were the legal owner (including through long-term leases from the Israel Land Authority and the Municipality of Tel Aviv) of 115 yield generating real estate properties (including properties owned in connection with our Mega Retail and Naaman segments, which includes offices), totaling approximately 280,000 square meters, and approximately 104,000 square meters of unutilized building rights. In addition, BSRE operated in the area of residential real estate promotion and planning.

 

Most of our real estate is currently used in connection with the retail operation of our stores. A significant portion of BSRE's investment properties (providing approximately 60% of its rental income in 2015), are leased to Mega Retail. During 2015, Mega Retail exited 22 supermarket branches, and as of March 31, 2016 leased from BSRE 61 supermarket branches, offices located in Rosh Ha'ayin, and the logistics center in Kibbutz Eyal. The trustees for Mega Retail have submitted applications to the court requesting that Mega Retail withdraw from a supermarket branch, the offices located in Rosh Ha'ayin and the logistics center in Kibbutz Eyal. For a discussion regarding the effects of Mega Retail's stay of proceedings on BSRE, see “Item 4. Information on the Company – A. History and Development of Alon Blue Square - Events Relating to Blue Square Real Estate.”

 

 

 

1 The following data is presented in the aggregate with respect to all of the investment property of BSRE, investment property of BSRE’s subsidiaries and the proportionate share of BSRE in jointly controlled parties.

 

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Description of Real Estate Properties

 

Most of our real estate is owned by BSRE and includes commercial areas, distribution centers and offices which are mainly designated for the use of our Mega Retail segment and our Naaman segment, a 50% holding in Hadar Mall and Kiryat Hasharon, small commercial sites, office buildings, logistics sites, our holdings in the Wholesale Market Companies and additional undeveloped properties for use as commercial areas, office buildings, and logistics centers.

 

As of December 31, 2015, the total square meters of developed property that we (including jointly controlled entities) owned was approximately 280,000 square meters, the total square meters of property in development that we owned was approximately 16,230 and the total square meters of unutilized building rights that we owned was approximately 104,000 square meters. In addition, BSRE has the building rights for 3,000 apartments in Point Wells and 722 apartments in the Wholesale Market Project.

 

The following table provides certain details regarding our real estate properties held for use or rent of which we are the legal owner (including through long-term leases from the Israel Land Authority), as of December 31, 2015:

 

   Number of
properties for
use or rent
   Area in square
meter for leasing
(property space)
   Occupancy rate 
Commercial areas, including supermarket stores   107    191,000    97.8%
               
Warehouses and Logistics Centers   6    58,000    97.6%
                
Offices(1)   6    31,000    88.3%
               
Total Developed property(2)   119    280,000    N/A 
                
Total property in development-commercial areas, logistics centers and the Wholesale Market Project   1    16,230      
                
Total unutilized building rights        104,000      

 

(1) Not including an area of 14,000 square meters of an office building in Petah Tikva.

(2) Not including an area of 42,000 square meters of parking lots adjacent to commercial and office areas and 17,000 square meters of parking lots adjacent to BSRE's yield generating assets.

 

Below is a short description of a number of these properties:

 

Commercial areas, including supermarket stores

 

The properties designated for supermarkets are individual units or integrated units in buildings in industrial, residential or commercial areas. Some of the properties have parking lots and operational areas that are not included in the square meters calculated for lease. The majority of the yield-generating properties are leased for supermarket use, principally to Mega Retail. For more information, see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreements between Alon Blue Square and its Subsidiaries.” Below are additional commercial areas not designated for supermarkets that BSRE owns:

 

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·Hadar Shopping Mall - BSRE owns 50% of the property, which is located in the Talpiot industrial area in Jerusalem, and the other 50% is held by a third party. The lease from the Israel Land Authority ends in 2021 with an option to extend the lease for an additional 49 years, subject to a fee. The mall includes 26,744 square meters of commercial space in addition to 1,064 parking spaces. The space is leased to third parties. As of March 31, 2016, the occupancy rate of the mall is 98.8%. The property is managed by a joint management company.

 

On June 5, 2012, BSRE entered into a loan agreement with a group of institutional companies to finance the building of an addition to the Hadar Mall, which has since been completed. The lenders extended an amount of NIS 125 million over a period of 10 years during which an aggregate of NIS 42.5 million will be repaid in 17 bi-annual payments commencing on the 18th month subsequent to the date of the loan, and the remaining sum will be repaid in a one-time payment at the end of the loan term. BSRE has the option to obtain an additional loan of NIS 40 million upon the completion of the construction. The loan is linked to the CPI and bears annual interest of 4.1%. As collateral for the repayment of the loan, BSRE placed a lien on its rights in the Hadar Mall.

 

On June 3, 2015 BSRE entered into an amendment to the loan agreement pursuant to which the option to obtain an additional loan increased from NIS 40 million to NIS 70 million. On August 5, 2015, due to disagreements regarding the option and considering Mega Retail’s financial condition, BSRE decided not to accept and the lenders decided not to extend an additional loan. Nonetheless, the remaining provisions contained in the amendment to the loan agreement remained in effect, such as: (i) the original NIS 125 million loan will be repaid until June 30, 2023 (ii) the principal and interest will be repaid in 17 semi-annual payments beginning from June 10, 2015 (32% of the principal will be repaid in 16 payments and the additional 38% will be fully payed on June 30, 2023) (iii) triggers for immediate repayment were revised and are currently as follows: (A) in the event the Net Operating Income (NOI) from the mall is below NIS 20 million (linked to the CPI); (B) in the event BSRE ceases being rated by a rating agency approved by the Supervisor of Capital Markets; (C) in the event there is a change in the holdings of BSRE such that we will no longer have control of BSRE; (D) in the event BSRE enters into a merger and the ration between its financial debt and its CAP (total financial debt plus shareholders' equity) following the merger is not greater than 70%; (E) in the event the guarantee ration (ration between outstanding loan amount and guaranteed assets) is greater than 70% of the loan amount and BSRE has not provided additional guarantees; (F) in the event of immediate payment demand of a debenture or other material financial debt valued at over 7.5% of BSRE' shareholders' equity; (G) upon the ratio between the NOI from the mall in respect of the pledged real-estate and the annual principal and interest payments being under 105%; (H) in the event that the coverage ratio is higher than 105% but lower than 110% and BSRE hasn’t extended additional securities to the lenders within six months; and (H) in the event the coverage ratio is higher than 110% but lower than 120% and BSRE hasn’t extended additional securities to the lenders within nine months.

 

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Offices

 

BSRE is the owner of the following major office building and properties designated for office building construction:

 

Comverse Building, Ra’anana BSRE has completed construction of a 23,000 square-meter office building on real property it owns in Ra’anana and a 3,500 square-meter basement and 900 parking spaces (the “structure”), most of which has been leased to Comverse for a period of 10 years with projected monthly lease payments in the first period of NIS 1.8 million, with a renewal option for an additional 5 years, during which the rental fees would increase by 7.5% (the “Comverse Building Project”). In addition, BSRE has undertaken to erect a surrounding structure at an estimated cost of NIS 200 million and to perform all of the finishing work, if requested by the third party leasing the structure (the "Lessee"), which is estimated at a cost of NIS 75 million, and BSRE will be entitled to receive 7.5% of the cost in addition to the rental fees. BSRE completed construction of the shell and transferred usage rights to the Lessee during the fourth quarter of 2014. Following a request by the Lessee to minimize the leased property, the initial monthly lease payments are approximately NIS 1.8 million (BSRE is entitled to NIS 0.9 million). On March 31, 2014 BSRE entered into a credit line agreement with several financial entities, held by Harel Investments in Insurance and Financial Services Ltd., in an aggregate amount of NIS 105 million in order to finance its part of the construction and operation of the project. On May 31, 2015 BSRE withdrew NIS 95 million from the credit line, and on August 2, 2015 withdrew an additional NIS 7 million. According to the agreement those funds will bear a variable interest rate linked to the prime rate, and will be repaid over a 15 year period.

 

Warehouses and Logistics Areas

 

Below is a short description of the logistics areas owned by BSRE:

 

Kibbutz Eyal - BSRE and Eyal Microgal Ltd. (“Eyal Microgal”) signed an agreement for the development of a 57 dunam property for storage and logistics usage. Pursuant to the agreement, BSRE and Eyal Microgal jointly hold in equal parts a new company, Eyal Baribua Ltd. (“Eyal Baribua”), to which Kibbutz Eyal transferred the property in February 2011. In addition, pursuant to this agreement in February 2011, BSRE transferred to Eyal Baribua an amount based on the purchasing costs, development costs and an additional cost. Upon these transfers, the parties entered into a statement of work for the development project, pursuant to which, among other things, BSRE was issued 200 shares in the new company, which as of March 31, 2015 represented 50% of the issued and outstanding shares of Eyal Baribua. The Israel Land Authority has approved the allocation of only 41.5 dunam for Eyal Baribua. A building permit has been obtained, and the joint company is in the process of constructing the logistics center in an area of 28,000 square meters. In June 2014, the construction of the logistics was completed, with Mega Retail commencing operations of the logistics center in July of 2014 according to the lease agreements between BSRE and Mega Retail.

 

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BSRE and Mega Retail are party to a lease agreement, pursuant to which BSRE is constructing the logistics center in Kibbutz Eyal to be leased by Mega Retail. The lease is for a period of 15 years from the beginning of use of the property with an option to renew for additional three year periods (but not to exceed a total renewal period of 24 years) for an annual payment equal to 8.7% to 9% of the total investment made by Eyal Baribua in acquiring and building the logistic center, according to the calculation mechanism and orders provided for in the lease agreement.

 

Eyal Baribua has a credit facility from a bank in the amount of approximately 97.5 million. Eyal Baribua created liens in favor of the bank, including a lien on all of its rights in the land, a floating charge on the project, a pledge and assignment by way of pledge of BSRE’s rights under the lease agreement with Mega Retail.

 

Property in development

 

·Wholesale Market Company - On May 31, 2012, BSRE, Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi completed the purchase of long term lease rights to a property in the wholesale market site in Tel Aviv (the “Wholesale Market Project”) for the purpose of building and marketing on the property an apartment building complex and a shopping mall from the municipality of Tel Aviv and the Wholesale Market for Agricultural Produce in Tel Aviv Company Ltd. (the “Wholesale Market Company”). As of December 31, 2015, BSRE owned 49.5% of the company that owns the residential building rights and 50% of the company that owns the commercial building rights. The property consists of building rights of approximately 97,460 square meters, of which approximately 65,840 square meters are designated for residential use, approximately 3,700 square meters are designated for residential leases, and approximately 27,920 square meters are designated for commercial use, part of which would be located on the ground floor of the residential buildings. Within the framework of the approved plan, the Wholesale Market Project will include 11 buildings, each consisting of 14 floors. The Wholesale Market Project includes 722 residential units for sale and 54 units which will be leased in accordance with certain criteria determined by the Municipality of Tel Aviv and the Purchasers. It is contemplated that the Wholesale Market Project will contain approximately 32,460 square meters leased space for commercial use. Building permits for all the residential units had been granted as well as permits for the commercial space. In August 2015, construction for the Tel-Aviv Light Railway System began. Part of the construction required the demolition of the Maariv Gate which was in proximity to the Wholesale Market Project, and a new route was opened leading to the adjacent Givon Parking lot. According to the urban plans relating to the construction of the Light Railway system, all routes towards the adjacent Givon Parking should remain unaffected.

 

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On June 26, 2013, the Residence Company and the Mall Company entered into a financing agreement with banks pursuant to which the banks would extend financing and credit facilities to the Residence Company in the amount of NIS 2 billion for granting guarantees and financing and credit lines of up to NIS 450 million to the Mall Company for completing the construction of the mall basements and foundation. The Mall Company and the banks entered into subsequent amendments to the financing agreement, most recently, in June 2015 (the “Amendment”). Under the Amendment the banks will extend the credit line to up to NIS 1 billion. As of December 31, 2015, the Mall Company had utilized NIS 700 million from the total credit line. The credit line will be repaid at any time following the third anniversary of the mall’s opening date, subject to certain conditions, but not later than September 30, 2019. The credit line will bear variable interest linked to the prime rate with an additional gap of 2% per year. The Amendment also includes provisions pursuant to which in certain circumstances of failure to comply with the financial requirements, schedules, minimal renting rate and payments, additional interest will apply. To secure the liability of the Residence Company, in addition to securities imposed on the assets of the Residence Company, BSRE provided a constant guarantee of approximately NIS 25 million, and to secure the liability of the Mall Company, in addition to securities imposed on assets of the Mall Company and certain assets of the Residence Company, BSRE provided a constant guarantee of NIS 100 million. The Amendment also includes a cross-default mechanism pursuant to which a default event under the financing agreement with the Mall Company which allows the banks to demand immediate repayment of the loan, would also be deemed a breach of the financing agreement between the Residence Company and the banks.

 

On August 31, 2014 City Core entered into an agreement with a construction contractor for the construction of four residential buildings, comprising a total of 276 housing units for consideration of NIS 150 million. The construction period under the agreement is 19 months commencing on the date the construction site is received by the contractor. The agreement includes provisions for provision of bank guarantees to City Core, bonus payment and late penalty payment mechanisms.

 

On November 10, 2014 City Core entered into an agreement with an additional construction contractor for the construction of three residential buildings, comprising a total of 223 housing units for consideration of NIS 127.2 million. The construction period under the agreement is 20 months (with a three month grace period) on the date the construction site is received by the contractor. The agreement requires the contractor to undertake to provide bank guarantees to City Core and includes mechanisms for bonus payments and late penalty payments.

 

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On November 11, 2014 City Core entered into an additional agreement with a construction contractor for the construction of three residential buildings, comprising a total of 223 housing units for consideration of NIS 127.2 million.

 

·As of March 16, 2016, City Core entered into commitments for 717 sale agreements with apartment purchases for NIS 1,894 million (including VAT) and received advances of NIS 1,328 million (including VAT). Down payments for such apartments reached approximately 70% of the aggregate consideration amount for the purchased apartments.

 

Properties with development potential

 

As of December 31, 2015, BSRE had rights to build a total of 104,000 square meters (72,000 square meters mainly for commercial purposes and 32,000 square meters for residential purposes). Because the utilization of building rights is dependent on economic feasibility, satisfaction of various conditions, payment of costs and other factors, it is not clear if and when BSRE will utilize these building rights.

 

Point Wells, Washington

 

On June 1, 2010, BSRE completed the acquisition of an approximately 240-dunam parcel (approximately 59 acres) of property in Point Wells, near Seattle, Washington, which serves primarily as a plant for storage and distribution of fuel and oils. BSRE purchased the property through a special purpose entity established in the United States, BSRE Point Wells, LP, which entered into a purchase agreement, dated May 7, 2010, with Paramount of Washington LLC (“POW”) for the property and into a development agreement, dated June 1, 2010, with POW and Paramount Petroleum Corporation (“PPC”). PPC leases the property from POW and operates and maintains it. POW and PPC are wholly owned subsidiaries of Alon USA Energy Inc., a public company whose shares are traded on the NYSE (“Alon USA”) and, until May 14, 2015 was controlled by our indirect controlling shareholder, Alon. Alon's holdings in Alon USA Energy Inc. were acquired by Delek USA, a U.S. publicly traded company, in which Alon holds 9.65%.

 

Upon the closing of the transaction, BSRE Point Wells, LP granted to POW and PPC a right of use of the property, for a consideration of approximately $440 thousand per quarter commencing July 1, 2010, for a period commencing on June 2, 2010 and terminating upon the earlier of: (i) June 2, 2020 or (ii) the time of sale of the property, after the enhancement thereof, to a third party in accordance with the development agreement (the “License Period”). In the event BSRE sells the land, POW will have the right to participate in the consideration net of costs as defined in the agreement.

 

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The present land use designation of the property was changed to urban center zoning from its original land use designation, which was heavy industrial. On May 12, 2010, the local Snomish County Council (the “Local Council”) adopted (a) an ordinance approving the new Urban Center Code and (b) and ordinance to change the zoning designation of Point Wells to Urban Center, both of which became effective on May 29, 2010. In March 2011, BSRE, through BSRE Point Wells, LP, submitted a detailed plan to the Local Council, which included plans for the building of three residential areas, including approximately 3,000 residential units, and public areas as well as development plans (the “Plan”), and in November 2011, the court determined that a building permit will be provided only after completion of all the required adjustments pursuant to the local law and the aforementioned ordinances. BSRE is working to give legal effect to the detailed plan. Based on a report submitted by BSRE Point Wells, the Local Council approved new regulations pursuant to which the land use designation was defined as urban village and approved the plans for 2,700 residential units. On January 7, 2013, the court of appeals determined that BSRE Point Wells is permitted to continue with the development of the property despite the new regulations. Opponents to the detailed plan appealed to the Supreme Court of the State Washington to allow a further hearing regarding the court of appeals decision. Such hearing occurred on October 24, 2013, in the Washington State Supreme Court.

 

On April 10, 2014, the State of Washington Supreme Court upheld that BSRE has a vested right to the development of the land under the designation of "urban center", which shall include the construction of 3,000 housing units, public areas and development programs. As of the date of this report, the Company is unable to estimate the exact duration of time it will take to receive the approval of the competent authorities for exercising the construction rights under the plan which determined the designation of land as an “urban center”.

 

According to the development agreement signed between the parties, BSRE Point Wells, LP will take action to initiate a detailed plan for approving the construction of at least 2,000 residential units on the property. All of the expenses connected with the approval of the change of zoning, including the initiation and preparation of a detailed plan, will be borne by BSRE Point Wells, LP. BSRE assesses that these expenses will amount to approximately $8.5 million (which is $6.9 million capitalized). If the detailed plan is not approved and/or if it does not contain at least 2,000 residential units, BSRE Point Wells, LP will bear no responsibility to POW and/or PPC. In consideration for PPC’s right to participate in the development of the property and in the proceeds that will be received from the sale of the property to a third party after the enhancement thereof, PPC will pay BSRE Point Wells, LP quarterly participation fees in a sum of $440,000, which will be paid commencing from July 1, 2010 and throughout the entire License Period.

 

The development agreement further stipulates provisions regarding a division of the consideration that will be received from the sale of the property to a third party after the change of zoning and enhancement of the property.

 

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Givon Parking

 

In July 2010, Gindi was awarded a tender to Build Operate and Transfer (“BOT”) a parking lot in Tel Aviv (“Givon Parking”) for approximately 1,000 parking spaces adjacent to the Wholesale Market Project. In August 2010, BSRE joined Gindi in this project as a 50% joint venture partner. On October 11, 2011, BSRE received a notice from Tel Aviv municipality that all of the conditions to approve the BOT agreement of “Givon Parking” in Tel Aviv had been satisfied. In consideration for constructing the parking lot, BSRE and its partners will be entitled to operate and collect rental fees for parking for a period of 23 years from delivering the authority for use of property. On November 13, 2011 BSRE received the right to use the property for constructions work. Construction of the parking lot was completed in September of 2014. Development of the public area on the roof of the parking lot was completed. The parking lot obtained a Form 4 prior to operation and BSRE obtained final approval to operate the parking lot. The total cost for establishing the parking lot, including related costs, is estimated at NIS 144 million ($37 million), and the share of BSRE is approximately NIS 72 million ($18.5 million). On December 12, 2011, BSRE and its partners signed an agreement with the bank for the funding of approximately 82% of the parking lot construction’s costs, and the credit lines provided for financing the project were in the aggregate amount of NIS 115 million (approximately US $33 million). In December 2015 the credit line was replaced with a long-term loan in an amount of approximately NIS 119 million, which bears interest at prime plus 1% and is to be repaid in installments until the final repayment date of December 31, 2030 (includes options for repayment). BSRE and its partners determined material issues regarding the construction and the management of the parking lot in which an unanimously decision is required, and principles regarding dilution of each of the parties’ rights in the event that one of the parties will not invest the amounts that such party obligated to invest. The parking lot was opened for use in April of 2015.

 

During 2015, BSRE invested a total amount of NIS 20 million, including investments in rental offices and areas used for commercial and industrial development. Additionally, BSRE jointly controlled entities which invested NIS 84 million during 2015.

 

Industry Overview

 

The yield-generating real estate market in Israel includes the development, promotion, planning, construction, marketing and operating of real estate properties intended for leasing primarily for the purpose of commercial, industrial, office space, parking and warehouse use. The yield-generating real estate market is affected by the growth or slowdown in the Israeli economy, and by changes in the demand and the available supply of commercial areas, as well as the construction of additional commercial areas. The real estate market is also affected by governmental, municipal and tax authority policies regarding planning, building, marketing and taxation of land.

 

A slowdown in the Israeli yield-generating real estate market as occurred in Israel beginning in the fourth quarter of 2008 and until 2010, could adversely affect our real estate business. If the economic conditions in Israel were to deteriorate, there may be a decline in demand for commercial real estate, a reduction in rental fees, a decline in the fair value of our real estate assets and an increase in the cost and availability of financing from Israeli banks, which could adversely affect our real estate business. In addition, we can identify greater caution on behalf of companies and potential investors to new projects which has resulted, among others, from directives of The Bank of Israel with respect to the amount of leverage permitted in the real estate market and requirements from banks to a higher occupancy rate prior to construction. As a result, we estimate that the availability of yield generating properties will be reduced or remain stable due to lack of new projects or their delay.

 

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In addition, it is expected that there will be a greater gap between the high supply of office space in Israel and the relatively low supply of existing places of work, which may result in higher rates for existing projects, but greater competition and lower rates for future projects. An additional market factor is the increased strength of "acquisition groups" which lead to greater competition for property prices. In leading shopping centers, occupancy rates remained high in 2015, and retail store sales turnover rose. In areas where competition increased, such as Beer Sheva and the suburbs of Haifa, occupancy rates decreased which caused downward pressure on rental fees.

 

With respect to the residential building sector in Israel, a recession may cause a decrease in the scope of marketing and sales and a decrease in the prices of apartments. In addition, government policies may affect the availability and value of real estate designated for building and may also affect the prices of apartments. Moreover, since 2010, we entered the field of promotion and planning of residential real estate. There are different risks in this sector including: exposure to changes in the demand for residential properties as a result of changes in the economy, especially as a result of a recession or a significant deterioration in the economy; the speed at which local planning authorities and cities approve the building projects; changes in and increases to the stringency of building and planning laws and regulations, which may require BSRE to incur additional expenses; lack of human resources in the building sector as a result of the government’s policy for employing foreign workers, or ‘closures’ for security reasons as well as delays or continuing lack of raw materials, for example as a result of the closure of Israel’s ports, that may affect the Company’s ability to meet the original timetables as well as its originally contemplated costs; and changes in the government’s policies for the granting of mortgages, which affect the level of demand for residential properties.

 

Competition

 

The yield-generating real estate market in Israel is highly competitive and is characterized by a large number of competitors. The main factor affecting competition in this market is geographic location of property. There are properties in close proximity to some of our properties that are similar in purpose and use, which has the effect of increasing competition for the leasing of those properties as well as reducing the rental rates for those properties. Other factors affecting competition are the leasing price, the physical condition of the properties, the finishing of the properties and the level of the management services provided to tenants. Furthermore, economic and financial conditions may further increase competition, leading to a reduction of rental fees and a decline in demand for properties. BSRE’s portion in the office space rental market is small, and we are therefore only slightly affected by the trends and changes in the competition of this specific field. In the commercial centers sector, there was a consistent increase in rental fees during the last three years. In addition, many mergers and acquisitions occurred in the sector of shopping malls sector in recent years, creating centralization and control by a limited number of companies, redacting the competition in the yield-generating real estate market, and affecting rental and management fees.

 

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Government Regulation

 

Environmental Laws Related to Real Estate

 

As the owner or long-term lessee of real estate property, we may be held liable for any violation of law, including of environmental laws, which takes place on real estate property that we either own or lease pursuant to a long term lease, and we may be required to bear the costs associated with compliance with such laws.

 

Due to the fact that most of our real estate properties are leased to commercial businesses, which are not polluting factories, and in light of the division of liabilities between us and the lessees, we do not anticipate material exposure in the area of environmental law with respect to our real estate properties.

 

In addition, pursuant to authorization agreements with cellular companies, we allow cellular companies to place and operate cellular communication devices in certain locations on our properties. Under such agreements, the cellular companies have agreed to operate and use the devices in accordance with the standards of the Ministry of Environmental Protection and the commissioner of radiation, and in accordance with the provisions of any other law.

 

Planning and Construction Law, 1965

 

The Planning and Construction Law and the regulations promulgated thereunder determine the regulatory and supervisory scheme, among other things, in matters relating to construction permits, licensing, and rights, changes in the designated uses of real estate property and betterment taxes levied on improved properties. In addition, under the Planning and Construction Law, the owner of real estate may be held criminally liable for an offense committed by a lessee on such property.

 

In addition, the field of residential construction and selling of residential units is subject to the Sale (Apartments) Law, 5733-1973 and to the Sale (Apartments) (Assurance of Investments of Persons Acquiring Apartments) Law, 5735-1974, and the regulations promulgated thereunder. In June 2008, these laws were respectively amended to obligate a seller, among other things, to keep a dedicated project bank account for each project, as well as providing a guarantee to the buyer for payments already received by the seller for the residential unit (without which a buyer will not be obligated to pay any amount above 7% of the price for the unit). In March 2011, these laws were additionally amended to broaden the sellers’ responsibilities toward the buyers, among others, regarding the examination period and its terms, compensation in the event of late delivering of the occupancy on the apartment, and obligations to register a house as condominium.

 

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Regulations for Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an existing building)

 

On November 3, 2011, the Regulations for Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an existing building), 2011 was approved and published. For additional information, see “Item 4. Information on the Company – B. Business Overview – General Government Regulation.”

 

BSRE’s Strategies

 

Our strategy for our real estate activities is to become a substantial owner of yield-generating properties and developer of commercial real estate through our subsidiary, BSRE. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include:

 

·management and lease of rental properties, development and improvement of existing properties and building rights. Approximately 60% of BSRE’s rental properties are leased to Mega Retail;

 

·locating and initiating real estate investments in Israel and abroad while expanding and diversifying BSRE’s asset portfolio;

 

·cautiously examining the expansion of activities abroad;

 

·focusing on rental property designated as trading, logistics and offices; and

 

·submitting requests for approvals from municipalities in order to add usage rights, re-categorize land rights, and add building rights to its properties.

 

Naaman

 

General

 

Through our wholly owned subsidiary, Bee Group Retail Ltd. (“Bee Group”), we operate in the Naaman segment, concentrated in our Naaman and Vardinon stores and wholesale sales. The chain operates under two different brand names: (i) “Naaman”, which sells houseware products; and (ii) “Vardinon”, which sells home textile products and accompanying accessories. The stores of our “Naaman” and “Vardinon” chains are primarily owned and operated by us. In addition to these stores, we have established houseware departments within most of our large supermarket stores. As of December 31, 2015, we operated, through our subsidiaries and franchisees, a total of 120 houseware and textile stores under the Naaman and Vardinon chains, of which 13 stores were owned and operated by franchisees.

 

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As of December 31, 2015, Bee Group owned approximately 77.51% of the outstanding shares of Naaman Group (N.V.) Ltd., a company traded on the Tel Aviv Stock Exchange. Naaman is one of Israel’s major branded houseware retailers which imports and markets various houseware products, such as kitchen utensils, cutlery and dinner sets. As of December 31, 2015, Naaman had its own chain of 68 houseware stores and supplied its products to Mega Retail for sale in Mega Retail's supermarkets. Naaman also sells its products to wholesale customers, including privately owned stores, retail chains, institutional customers, employee committees and sales promotion companies.

 

Vardinon products are distributed by its chain of retail stores (52 stores as of December 31, 2015) and by wholesale to customers that include other wholesalers, retail chains, employee committees and catalogues.

 

Industry Overview

 

The Houseware and Textile retail sales of houseware in Israel include houseware departments in large retail chains, do-it-yourself retail chains, and private specialty stores and boutiques. The sale of these products through catalogs and internet sales sites has increased in recent years. We do not have enough information to assess our market share in this market, as most of our competitors are privately owned companies.

 

There are also many companies and distributors that market and sell home textile products to wholesale customers. We do not have any formal information about the size of the home textile market and the market share of the various competitors in this market; however, we estimate that our “Vardinon” chain is one of the leading retailers in the mid to premium home textile market.

 

Competition

 

In addition, due to our controlling interests of “Non-Food” chains, Vardinon and Naaman, we face increased competition in the Houseware and Textile market. In recent years, this competition has increased primarily due to the entry of retail chains and stores outside the food industry, such as Office Depot, do-it-yourself chains such as Home Center and ACE (a franchisee of Ace Hardware), household stores, home textile stores, such as Golf & Co. Ltd. (competes with both Vardinon and Naaman), Ahim Fried Feathers Industry (1977) Ltd. (competes with Vardinon), Fox Home and Kitan Textile Industries Ltd., houseware stores, electricity appliances stores, and also due to the expansion of the houseware and home textile departments in supermarkets. This increased competition affects the sales prices of our products and our sales. Increased competition may adversely affect our sales and our profitability.

 

In addition, the barriers of entry are low in some of the markets in which our Naaman segment competes due to the price and availability of products from overseas suppliers, although the establishment of a network of stores throughout the country together with the required import and marketing of products requires a high level of investment. The entrance of new competitors may reduce our market share and may reduce the sale prices of our products and lead to a reduction in our profitability.

 

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The merchandise we sell in our Naaman business is varied, and we therefore compete in several different markets.

 

In the houseware market, in which our “Naaman” stores compete, there has been a consistent increase in competition, both due to the entry of the do-it-yourself chains, such as Home Center and ACE, and due to the expansion of houseware departments within the supermarket chains, such as Shufersal, and the entry of other new competitors, such as Fox Home, and specialized stores. The sale of these products through catalogs and internet sales sites has also increased in recent years. We do not have enough information to assess our market share in this market, as most of our competitors are privately owned companies.

 

The home textile and accompanying accessories market in Israel in which our “Vardinon” stores compete is highly competitive. Vardinon’s competitors in this market include home textile departments in large chains, department stores and privately owned stores and new competitors, such as Ahim Fried Feathers Industry (1977) Ltd., Fox Home and Kitan Textile. In addition, there are also many companies and distributors that market and sell home textile products to wholesale customers.

 

This market can be divided into two main categories: (i) brand name companies such as Kitan Textile Industries Ltd., Golf & Co. Ltd., Fox Home which operate in the home textile market and Ahim Fried Feathers Industry (1977) Ltd. which operates primarily in the bedding market. Brand name companies generally manufacture high quality products which are on average more expensive than non- brand name products; (ii) non – brand name companies which sell lower quality and less expensive products. We do not have any formal information about the size of the home textile market and the market share of the various competitors in this market, however, we estimate that our “Vardinon” chain is one of the leading retailers in the mid to premium home textile market.

 

Naaman Operations

 

The following table provides certain information regarding our Naaman stores as of December 31, 2015:

 

Non-Food Properties     Number   Square
meters
 
Stores  Leased   102    12,030 
   Leased from BSRE   2    214 
   Franchise operated   3    - 
   Franchises   13    - 
Offices  Leased   1    2,538 
Total      121    14,782 

 

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Purchasing and Distribution

 

Naaman acquires its products and accompanying accessories which it markets from numerous suppliers in Israel and abroad, mainly from the Far East. The overseas suppliers are generally manufacturers. Vardinon purchases its home textile products either as finished products or through subcontractors, each of which is generally responsible for a certain part of the manufacturing process. Vardinon has many suppliers and subcontractors in Israel and abroad, mainly the Far East, India and Turkey, and they may vary from season to season based on various factors.

 

Marketing

 

Our main marketing channels for our Houseware and Textile products are (i) the Houseware and Textile stores operating under various brand name chains, (ii) Houseware and Textile departments in our supermarkets and (iii) direct sales to wholesalers and institutional customers.

 

Our Naaman chain markets its products to privately owned stores, retail chains, institutional customers, employee committees and sales promotion companies. Our Vardinon chain markets its products through stores that are owned and operated by Vardinon that are located primarily in shopping centers, as well as to other customers, including wholesalers, retail chains, employee committees and catalogues. Our marketing activities include advertisements for the media, such as television and newspaper.

 

Government Regulation

 

Naaman

 

Our Naaman business is subject to Israeli laws relating to imports, customs, labeling of products and consumer protection laws, as well as to labor laws and license and permit laws as they apply to the operation of our network of stores.

 

Our sales activities are subject to general laws such as the Liability for Defective Products Law, 1980, pursuant to which, under certain circumstances, we may be liable for personal injuries resulting from defects in products that we market. We are also subject to the Consumer Protection Law, 1981, which is described below under “– General Government Regulation”. We are also subject to the Supervision of Products and Services Law, 1957, and orders promulgated pursuant to such law.

 

Houseware Products

 

We are subject to safety tests, quality control and certification by the Standards Institution of Israel. These are primarily related to the release of metals from ceramic appliances/wares, marking of wares/dishes, pressure cookers, lighters and plastic ware used for food and drink.

 

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Business Permits

 

As of March 31, 2016, the aggregate floor space for all Naaman and Vardinan retail stores is less than 800 square meters, most of which are located in malls operated by management companies. As such, the Naaman is not required to obtain a business permit for such retail stores under the Business Permits Law, 1968. Naaman does not estimate that it will be liable under such law, but cannot ascertain such statement due to unforeseeable regulatory changes.

 

For additional information regarding government regulations relating to our Naaman segment, please see “General Government Regulation” below.

 

Seasonality

 

Our business is subject to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our “Naaman” and “Vardinon” chains increased sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in either the third or the fourth quarter. In our filling stations, there is an increase in activity during vacations and holidays.

 

Many of our expenses are unrelated to the level of sales, and therefore a relatively modest increase or decrease in sales, whether or not related to the timing of holidays, tends to have a disproportionately large impact on our profitability.

 

Naaman Strategies

 

Please see “Item 4. Information on the Company – B. Business Overview – Our Strategies” above for a description of our strategies in our Naaman segment.

 

Dor Alon Segment

 

General

 

We operate filling stations and convenience stores and market petroleum products in Israel through Dor Alon, our direct subsidiary in which we held 63.13% as of March 31, 2016. In July 2015 we decided to sell our holdings in Dor Alon in order to reduce our financial debt. Dor Alon’s activity includes four primary fields of activity:

 

·Filling Stations and Convenience Stores - Dor Alon develops, constructs and operates a network of public filings stations operating under the "Dor Alon" and "Alonit" brand, most of which include convenience stores, and markets and supplies gasoline and other products through travel centers (commercial centers that include a gasoline service station operating under the "Alonit" and "Super Alonit" brands), internal filling stations and leasing of commercial space to third parties.

 

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·Direct Marketing - Dor Alon supplies fuel oil and other petroleum products, including Liquefied Petroleum Gas (“LPG”), Natural Gas, and steam, directly to residential and commercial customers as well as governmental entities.

 

·Marketing of Jet Fuel - Dor Alon supplies jet fuel to commercial airlines.

 

·Others – in addition to the three primary fields of activity described above, Dor Alon is active in the development, and operation of independent convenient stores under the "AM:PM", "Super Alonit", "Alonit Ba'Moshav", and "Alonit Ba'Kibbutz" brands.

 

In addition, Dor Alon is in the process of establishing through a subsidiary, a power plant in Sugat’s industrial area in Kiryat Gat, Israel and advancement of the development of real estate in which Dor Alon has rights to increase their value and increase the number of yield-producing assets of Dor Alon. Furthermore, Dor Alon holds 5% of Dor Gas Searches LP, a limited partnership which holds 4% of the rights in the Tamar natural gas field.

 

Filling Stations, Convenience Stores, and Others

 

As of December 31, 2015, Dor Alon supplied motor fuels, motor oil and other petroleum products to a network of 211 filling stations operating under the “Dor Alon” brand. Integrated into most of Dor Alon’s public filling stations are Diesel Fueling Centers (“DFC”) that sell diesel fuel for large vehicles such as trucks and buses at preferential terms. Dor Alon also supplies ARAL lubricants and Texaco lubricants in Israel.

 

As of December 31, 2015, Dor Alon operated 218 convenience stores, including 144 convenience stores adjacent to our filling stations and 74 standalone convenience stores (30 under the “Super Alonit “Alonit in the Kibbutz”, and “Alonit in Moshavim” brands, and 44 standalone convenience stores operated under the AM:PM brand). 213 convenience stores are operated by the Alon Group, and five convenience stores are operated by third parties. All the stand alone convenience stores are leased for different periods.

 

The Dor Alon filling stations and convenience stores network is divided into complexes owned by Dor Alon, complexes in which Dor Alon has a long term lease (most of which are jointly owned or leased in equal shares with third parties) and complexes owned by third parties. As of December 31, 2015, Dor Alon (either solely or through joint companies or partnerships) owned or held under lease and operating agreements 182 commercial and filling sites. The other 29 filling stations and convenience stores are operated by third parties, under the Dor Alon brand, who have entered into supply agreements with Dor Alon for petroleum products. The filling stations and convenience stores include four travel centers along the Cross-Israel Highway (Israel’s first toll road); Dor Alon has the exclusive rights to operate these travel centers for a 30-year period beginning in June 1999.

 

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The filling stations and convenience stores sector demands substantial capital investment (the cost of establishing a refueling and commercial complex is estimated at NIS 4-6 million, not including the cost of land) and competition is fierce. Most of the competition relates to the acquisition of rights to establish new commercial refueling complexes and around obtaining commitments from existing filling stations. In the last few years, there have been a number of developments in this sector, including:

 

·intensified competition in marketing products to end users, such as price competition, reduction of credit terms to customers, improvement of the quality of service and the diversity of the products and services;

 

·an increase in the investments necessary to build a new filling station due to higher building standards of filling stations and due to planning and regulatory strict requirements regarding environmental protection and safety imposed by the Israel Ministry of Environmental Protection;

 

·an expansion of retail activity in convenience stores apart from the filling stations; and

 

·imposition of price control on LPG and diesel oil.

 

Increase in the minimum wage (see “Item 3. Key Information – D. Risk Factors – Risks Related to Our Business as a Whole – Increase in employee minimum wage in Israel may adversely affect the value of our assets”).

 

Legislation in favor of Promoting Competition in the Food Industry

 

In March 2014, the Knesset adopted new legislation in favor of “Promoting Competition in the Food Industry” (the "Food Law"). The Food Law is divided into three (3) main topics: (i) regulation of operations of suppliers and retailers; (ii) geographic competition of retailers; and (iii) transparency of prices. The Food Law is already in effect.

 

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·Regulation of operations of suppliers and retailers. The Food Law states a list of required actions and prohibited actions regarding the relationship between suppliers and retailers, such as: (a) a retailer may not dictate or recommend to a supplier or interfere in any way with regard to the consumer price charged by other retailers for a product or the terms under which other retailers sell products to consumers; (b) a supplier may not dictate or recommend to a retailer or interfere in any way with regard to the consumer price charged by the retailer for a product provided by another supplier or the terms under which the retailer sells the product of another supplier; (c) a Large Supplier (a supplier with total sales exceeding NIS 300 million per year or a monopoly) may not arrange products at a Large Retailer (a retailer with at least three stores and total sales exceeding NIS 250 million per year) and may not dictate, recommend, or interfere in any way with the arrangements of its products (excluding guidance required to keep the quality and safety of its products); (d) a Large Supplier may not be a party to an arrangement with a Large Retailer under which products are sold to retailer in a lower price than the marginal cost of supplying the product to retailer; (e) a sale of a certain product to the retailer by a Large Supplier may not be a condition for the sale of another product by such supplier; (f) a supplier may not grant bonuses to a Large Retailer; (g) the Commissioner may instruct a Large Retailer, which sells a product of a Large Supplier, with regard to the steps that should be taken in relation with same product or a substitute product in order to prevent reduction of competition or to increase competition. In addition, the Commissioner may issue instructions with respect to the shelf space assigned to a specific product and substitute products and the payments for such shelf spaces; (h) a Large Retailer may not assign shelf space to a Very Large Supplier (a supplier with total sales exceeding NIS 1 billion per year) exceeding 50% of the shelf space in each of the retailer’s big stores. The remaining shelf space must be assigned to suppliers which are not Very Large Suppliers; and (i) the Commissioner was granted the authority to issue instructions to a Large Retailer in case its actions with respect to its private label may reduce competition or harm the public.

 

·Geographic competition of retailers. The following issues will apply to Large Retailers and retailers with at least one store with sales exceeding NIS 100 million per year with regard to Big Stores (stores with sale space exceeding 250 square meters): (a) the Commissioner will define for each Big Store its geographical area based on statistical information, such as distance from consumers, store size and store area, whether it is in an urban area or other; (b) with respect to each Big Store, the Commissioner will define its competition group which will include all the stores which compete for the same consumers; (c) the Commissioner will calculate for each Big Store its share of the competition group according to the ratio between its total sales compared to the total sales of the competition group; (d) once every two years, the Commissioner will notify each Large Retailer with regards to the demand areas in which its Big Stores’ share in the competition group exceed 30% and 50%. Opening a new store in such demand areas will require the Commissioner’s prior approval. Such request will not be approved unless the Commissioner determines that there is no reasonable doubt that opening a new store will adversely affect the competition in the relevant demand area. A request to open a new store in a demand area of which the retailer’s share compared to the competition group exceeds 50% will not be approved, unless the Commissioner determines there is near certainty that opening a new store will not adversely affect the competition in the relevant demand area. The Commissioner’s decision will be granted within 90 days and may be appealed; (e) the Commissioner must publish the demand areas within six months from publication of the Food Law; (f) the court, upon the Commissioner’s request, may order that a Large Retailer that owns a store, which its share compared to the competition group exceeds 50% in a certain demand area, cease the store’s operation, transfer its right in such store to another party, sell its rights in the store or take any other appropriate measure in order to increase the competition in the demand area; (g) a Large Retailer that received a notification from the Commissioner as described in section (d) above may not enter into an agreement which will limit other retailers from entering into similar agreements in the demand area; and (h) once a year, each Large Retailer is required to report to the Commissioner with respect to each of its Big Stores: the store location, the date of opening and the total sales of each store.

 

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·Transparency of Prices. The Food Law provides for the following, among others, with regard to the transparency of prices: (a) a Large Retailer which owns stores with an average selling space exceeding 120 square meters will publicize via the internet, with respect to each of its stores, the updated price of each product sold in each store, such that a comparison between Large Retailers may be conducted; (b) the publication will include the list of all products sold in each store, their prices, including prices for different consumers, special sales, deals and discounts, terms and date of expiration; (c) the price of each product must be updated within an hour from the moment it is updated in the store; and (d) failure to comply with sections (a) to (c) above may lead to criminal and monetary penalties.

 

Enactment of The Law to Promote Competition and Reduce Concentration

 

The "Law to Promote Competition and Reduce Concentration" – 2013, or (the "Competition Law") established, among other matters, that when granting any national rights, permits and licenses to use national resources ("Rights"), the applicable regulating agency must take into account, in addition to all other matters, the advancement of competition in that specific sector and anti - concentration in the economy as a whole. Under the Competition Law, certain companies, such as Dor Alon, are considered "concentration groups" as they relate to the petroleum industry, LPG, or industries where a natural gas marketing permit is required. As of December 10, 2014, any applicable regulating agency must take into account, in addition to all other matters, the advancement of competition in that specific sector, while granting any right, permit or licensing to a sector which is not an essential infrastructure section.

 

Dor Alon adds filling stations to its network by either developing new commercial and/or filling stations or, less frequently, entering into an agreement with the owners of existing filling stations and convenience stores whose supply contract with another fuel company has expired. Developing new commercial and filling stations often takes several years and requires compliance with numerous laws and regulations.

 

Dor Alon anticipates opening and operating an additional 7-9 filling stations during 2016 and 2017. Dor Alon has plans and agreements to plan, establish, and operate additional filling stations, and these stations are currently in different stages of authorization and establishment.

 

Dor Alon has a cooperation agreement with a third party to establish through a joint company a nationwide chain of Si “espresso-bars” to be located in Dor Alon’s filling stations. As of December 31, 2015, Dor Alon’s filling stations included 12 Si cafes that were operated by a joint company, three of which are located outside of Dor Alon’s filling stations. The cafes sell products under the “Si” brand as well as other products. In addition, most of the Alonit convenience stores include a small coffee bar.

 

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Customers of Dor Alon’s filling stations and convenience stores consist of the public at-large and, to a lesser degree, drivers of fleet vehicles (referred to as fleet customers). Fleet customers use electronic fueling cards or vehicle mounted devices to refuel their vehicles, with payment for the fuel products to be made at a later date, on a consolidated basis. The electronic fueling cards are also offered to private customers. Customers utilizing electronic fueling cards enjoy preferential fuel prices and terms of payment, which Dor Alon believes leads to concentrated buying by fleet customers from Dor Alon.

 

Internal Filling Stations (fleet stations)

 

As of December 31, 2015, Dor Alon supplied motor fuels to 160 internal filling stations operating under the Dor Alon brand, including 94 fleet stations operated by a joint company described below. Internal filling stations are stations in Israel located on the premises of kibbutzim and moshavim, as well as some DFCs that are not integrated with filling stations. Fuel products sold in internal filling stations are designated for a defined group of customers, such as inhabitants of the kibbutzim and moshavim, who receive preferential fuel prices and payment terms.

 

Dor Alon also holds 50% of a joint company together with a certain third party (50%) which operates internal stations located in moshavim. Dor Alon supplies this jointly held company with motor fuels and other petroleum products. As of December 31, 2015, this joint company operated and supplied motor fuels and other petroleum products to 94 internal filling stations operating in moshavim.

 

Direct Marketing

 

Dor Alon and Dorgas (a wholly owned subsidiary of Dor Alon) distribute petroleum products, including fuel oil, diesel, LPG, kerosene, naphtha and bitumen as well as natural gas directly to commercial, industrial, institutional and residential customers as well as governmental entities. They also supply, install and maintain customer end-user equipment, such as fuel tanks and LPG balloons, related to the petroleum products they supply. The direct marketing of LPG is coordinated solely by Dorgas.

 

Most engagements with industrial and commercial customers include installation of end equipment at the customer’s site, including the conversion of the customers plants into natural gas generated plants. The engagement period is affected, inter alia, by the volume of investment in equipment provided to the customer. Commercial customers include customers in the fields of industry, transportation, earthwork, agriculture, infrastructure and marine works, among others. Institutional customers include municipalities and cooperatives for public transportation. The majority of Dor Alon’s communications with institutional clients are commenced following a public bidding process, are for a defined period and are based on terms of exclusivity.

 

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Private sector clients are mostly domestic customers and small businesses that use refined oil for heating and cooking, private homes, apartment buildings and small businesses. As of December 31, 2015, Dor Alon had approximately 110,000 LPG customers. Agreements with domestic customers are for fixed periods, with the agreement renewing automatically at the end of each period, with no need for any further notice.

 

Dorgas also coordinates the marketing of the Company's natural gas operations. Dorgas manages a marketing and engineering network which offers its customers services related to the conversion of customer plants into natural gas generated plants and the supply of natural gas to such plants. During the course of the reporting period, Dorgas entered into several agreements for the conversion of customer plants into natural gas generated plants and the subsequent supply of natural gas. Dorgas hires and trains professional engineering personnel to manage and handle this highly regulated sector. In order to enable the plant conversions described above, Dorgas enters into agreements with engineering and project development companies.

 

During the years 2014-2015, an increasing number of industrial customers switched from purchasing petroleum-based products to natural gas. As a result of the reduction in prices of petroleum-based products in 2015, there was a decrease in the gap between prices of petroleum-based products and prices of natural gas which resulted in a reduction in the number of industrial and institutional customers switching from purchasing petroleum based products to purchasing natural gas.

 

Marketing of Jet Fuel

 

Dor Alon’s jet fuel marketing operations include marketing and sale of jet fuel to Israelis civilian airlines and foreign airlines which land at Ben Gurion airport. In connection with this operation, Dor Alon has an agreement with Chevron. For additional information, see “Item 4. Information on the Company – B. Business Overview – Dor Alon Segment – Industry Overview – Marketing – Marketing of Jet Fuel.”

 

Industry Overview

 

Recent Developments in the Israeli Fuel Market

 

Competition

 

Competition in the Israeli energy industry is intense. Dor Alon’s major competitors are large fuel companies in Israel and natural gas marketing companies: Paz, Delek and Sonol in the filling stations field of activity. Dor Alon is the fourth largest fuel company in Israel based on the number of filling stations. The principal competitive factors affecting the retail fuel and natural gas marketing business are location of filling stations, brand identity, product price, the variety of related services offered to customers, the level of service, financial strength allowing the establishment of new filling stations, procurement of petroleum products at competitive prices and the terms of agreement offered to fleet customers, real estate owners and/or owners of filling stations. With respect to its direct marketing operations, Dor Alon expects to face competition from Paz, Delek and Sonol Pazgas, Amisragas, Supergas, Oil Refineries Ltd., or ORL, and tens of additional small and medium size fuel marketing companies as well as small LPG companies, which are mostly local companies that operate in a limited geographic area. The principal competitive factors in the direct marketing business are product price, credit terms and levels of service. Moreover, a portion of the customers in the direct marketing sector require professional support in installation of equipment and continuous maintenance. These direct marketing customers view the significance in the quality of the petroleum distillate. Increases in competition may adversely affect the earnings and profitability of Dor Alon.

 

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Purchasing and Distribution

 

Motor Fuel and Other Petroleum Products

 

Dor Alon, like other fuel companies in Israel, is dependent on Oil Refineries Ashdod (“ORA”) and ORL for the supply of refined petroleum products. If the oil refineries fail to supply refined petroleum products or supply them at noncompetitive prices, Dor Alon would have to increase the amount of refined petroleum products it imports. There is no certainty regarding the ability of Dor Alon to purchase these products at competitive prices.

 

Dor Alon purchases motor oils marketed by it from various suppliers, such as ARAL Lubricants GmbH and SA Texaco N.V. In addition, Dor Alon purchases motor oils from local manufacturers and markets them under the private label brand name “Dor Oil.” Dorgas purchases natural gas directly from the Tamar Partnership. See “Item 4. Information on the Company – B. Business Overview – Dor Alon Segment – Industry Overview – Marketing – Natural Gas Purchase Agreements.” Additionally, Dor Alon manufactures products independently at its oil mixing facility in Haifa bay. Dor Alon purchases raw materials, especially base oils from local manufacturers, and manufactures a variety of oils, which are marketed under the “Dor Oil” brand.

 

Convenience Store Products

 

Until June 2015 Dor Alon purchased most of the food and non-food products sold in its convenience stores from our subsidiaries. Pursuant to an agreement with Mega Retail, a subsidiary of Dor Alon paid Mega Retail the price of the products plus a 2% margin for the direct supply of products by the suppliers to the convenience stores, and a 2.75% margin plus distribution costs for the supply of products from that subsidiary’s central warehouse. For further information on this agreement, see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreements between Alon Blue Square and its Subsidiaries – Procurement Agreement with Dor Alon Management.” In July 2015, following Mega Retail's Plan of Recovery, Dor Alon and Mega Retail agreed to terminate the agreement between them. Consequently, Dor Alon purchases food and non-food products sold in its convenience stores directly from food suppliers. As of the date of this report, Dor Alon has engaged with all necessary suppliers and the termination of the agreement with Mega Retail is not expected to change its commercial expenses.

 

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Marketing

 

Direct Marketing

 

Dor Alon and Dorgas’ marketing and sales personnel or its distributors are responsible for entering into agreements with customers in this field of operations. Products are transported directly to the customer’s facilities. Dor Alon has a marketing, service and support apparatus for customers in this field of operations.

 

LPG marketing (for use of homes and small businesses) is done partly by independent distributors. The agreements with the independent distributors include a mutual exclusivity provision for a defined geographical area and are for an unlimited period. The distributors are responsible for the marketing, payment collection and equipment maintenance as required by applicable law. For this purpose, Dorgas established engineering and marketing system offering services, which include conversion to gas infrastructure in enterprises and supply of natural gas.

 

Marketing of Jet Fuel

 

Dor Alon’s jet fuel marketing operations include the marketing of jet fuel to civilian airlines, which are conducted through a joint venture with Chevron to market and supply jet fuel to commercial airlines at Ben Gurion International Airport. Each party refers customers to the joint venture, with Chevron referring its customers, foreign airlines, with whom it operates abroad. The term of the joint venture expires in mid-2019. All fuel companies marketing jet fuel are obligated to purchase refueling services for aircrafts at Ben Gurion International Airport from two companies - Paz Aviation Services Ltd. and Mercury Aviation (Israel) Ltd., a company in which Dor Alon holds a 31.25% interest. Mercury Aviation (Israel) Ltd. provides the customer refueling services to the joint venture of Dor Alon and Chevron. As of the date of this Annual Report, Paz Aviation Assets Ltd. is the only company that provides jet fuel storage services, though this company’s activities are regulated and it is obligated to provide storage services at regulated prices. Dor Alon is dependent on this joint venture as a material customer in the marketing of jet fuel.

 

Marketing and Distribution

 

In the filling stations and convenience stores sector, Dor Alon markets and promotes its products using the following methods:

 

·increasing the attractiveness of the refueling and commercial compounds by diversifying its products and services;

 

·conducting sales and promotions in the filling stations and convenience stores;

 

·improving Dor Alon’s brand name recognition and image through public relations;

 

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·marketing of fuel products to fleet customers along with discounts on fuel prices and preferential payment terms via electronic fueling cards or vehicle mounted devices; and

 

·Improving Dor Alon’s relationship with its customers and increasing the costumers loyalty to the filling stations chain and the services provided by Dor Alon within the benefits granted under You club activities.

 

In the direct marketing sector, Dor Alon markets its oil distillates using Dor Alon sales personnel and independent distributors. The marketing of some of the LPG (for use in private residences and small businesses) is performed by independent distributors. The distribution agreements with distributors are on a mutually exclusive basis for marketing LPG to private residences and retail customers and are for an unlimited time. The distributors are responsible for marketing the LPG, collecting payments and maintaining the LPG equipment as required by law. Consumers who purchase LPG from the distributors are customers of Dorgas.

 

Marketing and distribution in the jet fuel sector is done through the joint venture with Chevron (as mentioned above).

 

Other Activities

 

Establishment of a Power Plant

 

In February 2012, Dor Alon Energy Centers, a limited partnership under the control of a subsidiary of Dor Alon (55%) and a third party (45%) (the “Partnership”), entered into an agreement with Sugat Sugar Refineries Ltd. (“Sugat”), according to which the Partnership will plan, finance, establish, maintain, and operate a power plant in Sugat’s industrial area in Kiryat Gat, Israel, consisting of an energy output of up to 124 megawatts. In the first stage, the energy output of the plant is to be 64 megawatts.

 

The Partnership is to provide Sugat’s energy requirements for a period of 24 years and 11 months. Sugat has the option to extend the term of the agreement following the first stage of the agreement. The Partnership began supplying steam to Sugat in the second half of 2014.

 

The Partnership will be authorized to sell electricity and steam manufactured at the facility also to third parties.

 

According to the agreement with Sugat, prior to commencement of the first stage, the Partnership will connect to the Israel Natural Gas Lines and will convert the current Sugat power plant into a dual usage plant, providing both natural gas and mazut. On March 1, 2012, the Partnership entered into an agreement with Israel Natural Gas Lines Ltd., or Natgaz, in order to connect the Sugat power plant to the Israel Natural Gas Lines, and to provide natural gas conduit services. The Partnership completed conversion of the Sugat power plant on June 22, 2014. The agreement is in effect until July 31, 2029 with an option to extend for an additional five years.

 

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Under the agreement with Natgaz, the Partnership is responsible for payment on account of the connection to the natural gas lines, of approximately NIS 13 million, as well as immaterial ongoing annual payments for conduit services, regardless of whether the Partnership uses such services or not.

 

On September 8, 2015 the parties signed an additional amendment to the agreement which primarily includes a provision whereby Sugat replaces the Partnership as operator of the facility. In addition, under certain circumstances, the period of time prior to the commencement of the first stage will be extended by one year.

 

Natural Gas Purchase Agreements

 

On December 9, 2012, the Partnership signed a natural gas purchase agreement with the partners of Tamar Partnership for the operation of existing facilities and the power plant, if established, aimed to provide Sugat’s energy requirements. Pursuant to the agreement, Tamar Partnership is to supply the Partnership with natural gas in the amount of up to 1.68 BCM (billion cubic meters) (the “Total Agreed Quantity”). In addition, the Partnership has the right to reduce the quantities purchased in the event that it does not establish the abovementioned power plant.

 

The agreement was effective from June 2014 until the earlier of approximately 15 years or upon the Partnership’s consummation of the Total Agreed Quantity, with an option of both parties to extend for an additional two years or upon the consummation of the Total Agreed Quantity, whichever is earlier.

 

The Partnership has committed to acquire or pay (Take or Pay) a minimum annual quantity of gas in accordance with the mechanism set in the Supply Agreement.

 

In November 2013, New Dorgas Ltd., a subsidiary of Dor Alon (“Dorgas”), signed a natural gas purchase agreement with the partners of Tamar Partnership in the amount of US$ 85 million. According to the agreement, Tamar Partnership is to supply Dorgas with natural gas in the amount of up to 0.36 BCM (billion cubic meters) (the “Total Agreed Quantity”). Dorgas began supplying under the agreement in the fourth quarter of 2013 and the agreement is effective until the earlier of seven years or upon the consummation by the purchaser of the Total Agreed Quantity. The purchaser has committed to acquire or pay (Take or Pay) a minimum annual quantity of gas in accordance with the mechanism set in the agreement. It was further agreed that during an interim period until the enlargement of the supply capacity abilities of Tamar, if applicable, the natural gas supply will be subject to the availability of the natural gas quantities, after supply to other third parties, to whom there are prior commitments.

 

The agreement is subject to obtaining an approval from the Antitrust Authority. An exemption request was filed with the Antitrust Authority which notified Dor Alon that as of December 31, 2015, it will not initiate antitrust enforcement procedures regarding the agreement until a decision regarding the exemption request is given.

 

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Establishment of a Joint Loyalty Plan

 

On November 29, 2005, we entered into the following agreements with Dor-Alon (i) an agreement establishing a joint loyalty plan for the benefit of Alon Blue Square’ and Dor Alon’s customers, formed as a partnership to be held 75% by Alon Blue Square (now held by Mega Retail) and 25% by Dor Alon (the “Loyalty Plan”) and (ii) an agreement under which Alon Blue Square and Dor Alon purchased 49% (36.75% Alon Blue Square and 12.25% Dor Alon) of the shares of capital stock of Diners Israel from CAL for a total consideration of NIS 21.3 million (of which NIS 15.6 million was paid by Alon Blue Square). The consideration was funded through a non-recourse loan granted by CAL to Alon Blue Square and Dor Alon.

 

For more information regarding the Loyalty Plan, see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreements between Alon Blue Square and its Subsidiaries – Transactions with Dor Alon in Connection with Establishment of a Joint Loyalty Plan.”

 

Government Regulation

 

Environmental regulation

 

In its filling stations and convenience stores business, Dor Alon is subject to various laws and regulations aimed at preventing damage to the environment (mainly air, water and soil contamination), including the following laws and regulations:

 

·The Water Law, 5719-1959, or the Water Law, provides for the protection of all water resources in Israel and imposes liability on those who, by action or lack thereof have caused and/or may cause contamination of water sources. The law gives the authorities broad powers, including the authority to require whoever caused the damage to do everything necessary to stop the contamination, restore the status quo ante and fined for violating the order.

 

·The Water Regulations (Prevention of Contamination) (Filling Stations), 5757-1997, promulgated under the Water Law, or the Water Regulations, which provides regulations for the construction of filling stations, and directives issued by the Commissioner (as defined under the Water Regulations) concerning the planning, construction and operation of filling stations, including the insulation and protection of fuel tanks. Failure to comply with the provisions of the Water Law and regulations promulgated thereunder may be considered a criminal offense.

 

·Public Health Regulations (Wastewater Quality Standards and Rules for Sewage Treatment), 5770-2010, and the Water and Sewage Rules (Factories Wastewaters Discharged into the Sewage System), 5771-2011, published during 2010-2011 aim to protect the public health, prevent water pollution from wastewater and sewage, protect the environment including the ecosystems, land and crops, by regulating discharge of wastewater from factories (including filling stations) to prevent damage to the sewage system by imposing penalties and by sampling. As of the date of this Report, some of the water corporations have begun sampling pursuant to the rules and regulations. Dor Alon estimates that the costs for the sampling are insignificant.

 

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·The Environmental Protection Regulation, 5768-2008, which increases the penalties determined in other environmental laws.

 

·The Dangerous Goods Law, 5753-1993, which imposes an obligation to obtain a permit to handle dangerous substances.

 

·Business Permits. In order to obtain business permits to operate filling stations, Dor Alon must install devices at some of its stations. In addition, the regulations state the manner in which storage fuel and how to obtain the associated licenses.

 

·The Combined Environmental Licensing law memorandum was published on October 9, 2015. The memorandum classifies factories into three levels according to their influence on the environment. Factories classified as A or B will be obligated to obtain a combined environmental license, while factories classified as C level will be obtain licensing under its business permits. It is expected that operating fuel filling stations will be classified as level B. The law memorandum is not final and is subject to further change.

 

·As of March 31, 2016 the Israel government published the Liquefied Petroleum Gas Bill. The bill would apply to LPG while the previous Gas Law (Safety and Licensing) would apply to natural gas. The bill includes provisions which do not affect the current legal status along with provisions designated to enhance the authorities of the Gas Safety Administration and the enforcement system. As of March 31, 2016 Dor Alon cannot evaluate the effects of the proposed bill.

 

·Our natural gas operations are subject to the Natural Gas Industry Law, 5762-2002, which regulates the natural gas sector in Israel. The law determines, among others, that one must not engage in the construction and operation of a transmission system or part of it, the establishment and operation of a distribution network or part of it, the construction and operation of a LNG facility and the construction and operation of the storage facility, without a license issued by the Minister of National Infrastructure (hereinafter in this section “Minister”) and in accordance with its terms. In addition, the Natural Gas Industry Law states that the following shall not engage in the sale and marketing of natural gas: (a) a transmission system licensee, (b) an electric power provider, and anyone who is involved with oil refining at a rate exceeding ten percent (10%) of the oil refined in Israel. According to the Natural Gas Industry Law, the sale and marketing of natural gas does not require a license, provided however, that the Minister, in his sole discretion, under the conditions stipulated by law and the consent of the Minister of Finance and the approval of the Knesset Finance Committee, may determine that for a period to be determined, the marketing of natural gas will require a license.

 

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·The Planning and Building Regulations (Licensing of Natural Gas Facilities) Law, 2003-5763, lists the requirements of the permit application to be submitted for the construction of a gas facility by an applicant requesting to construct a gas facility.

 

·Dor Alon is aware of environmental law proposals including, inter alia the Bill for Preventing Land Contamination and Treatment of Contaminated Lands, 5772-2011 which, among others, defines the term “Contaminated Land”, prohibits contamination of lands and disposal of contaminate materials, establishes a fund for rehabilitation of contaminate lands, authorizes a commissioner and defines its governance enforcement authority, including monetary sanctions, and establishes a criminal offense for breaching the law. These law proposals may influence Dor Alon’s financial results if the laws are approved.

 

Dor Alon expects to invest approximately NIS 8 million in 2016, approximately NIS 6 million in 2017, and approximately NIS 3.5 million in 2018 in order to satisfy the environmental laws and regulations. These amounts may vary depending on the actual costs of the required restoration work and the planning and construction of new facilities and whether new laws, regulations and other requirements will be imposed for which additional expenses will be incurred.

 

Dor Alon reached an arrangement with the Israeli Ministry of Environmental Protection regarding the execution of an eight year plan for identifying and treating contaminations at 54 filling stations operated by Dor Alon built before 1997. In addition, Dor Alon reached an understanding with the Ministry of Environmental Protection concerning a vapor recovery system (referred to as Stage 2) in fuel stations located in residential areas. Pursuant to the understanding, Dor Alon has installed Stage 2 in fuel stations located within 40 meters of residential areas.

 

Additionally, and without derogating from Dor Alon’s obligations above, in September 2011 and in January 2012, the Ministry of Environmental Protection issued directives pursuant to which Dor Alon would be required to install vapor recovery systems in each of its fuel stations located within 80 meters of residential areas by the end of 2013; and in all other fuel stations by the end of 2017. Pursuant to the aforementioned directives, by the end of 2015 Dor Alon installed the vapor recovery system in 149 filling stations and is expected to install vapor recovery systems in an additional 45 filling stations in the course of 2016-2017.

 

In its direct marketing business, Dor Alon is also subject to various laws and regulations, including laws and regulations that:

 

·Impose duties of licensing and of obtaining various permits, such as permits to operate as a gas supplier and licenses to operate and deal with LPG and LPG’s storage;

 

·Impose provisions related to safety in connection with the marketing and supplying of gas; and

 

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·Impose provisions related to the marketing of LPG, such as standards for gas containers, gas systems and installation of central gas systems.

 

In its jet fuel business, Dor Alon is subject also to other laws and regulations. Dor Alon’s activity as a provider of infrastructure services for jet fueling and jet fueling services for jets at Ben Gurion International Airport are subject to regulation.

 

Other Government Regulation

 

Dor Alon, as a fuel company, is subject to various other laws and regulations, including laws and regulations that:

 

·provide that any use of property must be done in accordance with the designated purpose of the property as per The Planning and Building Law, 5725-1965, or the Planning and Building Law. Often, the permit for establishing filling stations involves changing the designated purpose of the property;

 

·impose duties of licensing and obligations to obtain various permits from various governmental authorities, including the police, the Ministry of Environmental Protection, the Ministry of Industry, Trade and Labor, the fire department and the relevant zoning committees. As of the date of this Annual Report, there are a few indictments or sentences pending against Dor Alon and its subsidiaries regarding the operation of filling stations and/or convenience stores without permits. A number of indictments are pending against Dor Alon and its subsidiaries with respect to filling stations and convenience stores concerning the operation of filling station and convenience stores without permits. Dor Alon estimates that even if one or more of the filling stations and/or convenience stores will be closed, it would not have a material effect on Dor Alon’s financial results.

 

·establish the duty of fuel companies to maintain an inventory of fuels for emergency purposes, the expenses of which are paid by the Israeli Fuel and Gas Administration, and to maintain, at their own expense, a supply of diesel fuel that is not an emergency supply;

 

·impose an excise tax on the supply of fuel from ORL and on the release of fuel from customs;

 

·prescribe a maximum consumer price for 95 octane gasoline;

 

·impose anti-trust prohibitions under the Antitrust Law, including with respect to price setting and exclusive long term (over three years) supply agreements between gas supply companies, such as Dor Alon, and filling stations (which are not owned by such companies);

 

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·impose restrictions on the operation of filling stations and convenience stores on the Jewish Sabbath (Saturday) and requiring a permit to be obtained in order to employ Jewish workers on Saturday. Dor Alon does not possess such a permit. Most of Dor Alon’s filling stations and convenience stores are open during the Jewish Sabbath. Under Israeli law, employment of workers in violation of the law is subject to a fine or imprisonment of up to a month, or both. The convenience stores in the AM:PM chain of stores also operate during the night and on Saturdays. On the basis of information obtained from Dor Alon, in the cities in which AM:PM operates there are municipal regulations restricting their activity during the night and on Saturdays. Most of the AM:PM stores have obtained permits to operate at night.

 

·Following legal proceedings between the Tel Aviv Municipality and the Ministry of Interior, the government received the authority to regulate municipal regulations restricting the operation of businesses on Saturday. A private bill, supported by the government, which prohibits the operation of businesses on Saturday would have to receive the approval of a special committee of executives prior to implementation. Furthermore, legal proceedings regarding the private bill were conducted in the Supreme Court in March 2016 which provided the parties involved until July 2016 to submit their comments regarding the private bill.

 

·set provisions pertaining to safety in the marketing and supply of fuel and LPG.

 

·The "Fuel Industry Advancement of Competition Law (Installation of Automatic Fueling Device) – 2010" requires fueling companies to install automatic and universally compatible fueling devices (the "Devices") which allow filling from all fueling companies with whom customers entered into a services agreement. Using the Devices, customers can purchase gasoline without the need for an alternative method of payment at the filling station. Rather, the filling pump automatically detects the Device and provides fuel automatically. In the past, automatic fueling device were not universal, and as such, could only be used by customers of the fueling companies who installed the fueling devices and entered into services agreements with such customers. Under this legislation, fueling companies are only permitted to sell gasoline through universally compatible devices, regardless of which fueling company the device belongs to or who installed the device, and are restricted from selling not universally compatible devices. In addition, fueling companies are restricted from refusing, without reason, to enter into a services agreement with a customer for the installation of a universally compatible fueling device, or from selling gasoline through such devices.

 

This legislation will become effective after the Fuel Administration at the Ministry of National Infrastructure approves product specifications for the Devices. On October 20, 2014, the Fuel Administration published relevant specifications and deadlines for compliance. In September 2015 an amendment to the regulations was published detailing the timeline for the application of the regulations.

 

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As of December 31, 2015, two fueling companies had received lab approval for their Devices. However one of the components of the device can be easily hacked and therefore not recommended for monetary transactions. The Supreme Court postponed the date of effectiveness of the regulations. Dor Alon is making the necessary preparations to apply the regulation and estimates that it will be able to apply the on a timely basis. Dor Alon cannot currently estimate the effect of the Devices on its business operations.

 

In July 2012, a draft proposed law entitled the “Fuel Industry Law - 2012” was circulated. The proposed law stipulates, among other things, the following: requirement of a license from the Fuel and Gas Administration for a period of three years which must be extended at the end of each term; prohibition on the possession of more than one refinement license by one company or its controlling shareholders; restriction on the possession of refinement licenses together with marketing licenses under the same license; imposition of fees and additional payments as a condition for granting a license; limitations on transferring or pledging the license and the rights thereunder without prior consent of the Fuel and Gas Administration; obligation to hold operational and emergency inventory; prohibition on running a public filling station without registering with the filling station registrar and the requirement for both a valid business license and building permit for the filling station; broad criminal liability, including personal liability of officers and a monetary sanctions; and prohibition on unreasonable refusal to provide

 

Dor Alon Sites Strategies

 

Our strategies in our Dor Alon segment are to continuously expand our filling station coverage in Israel and expand our convenience stores, both as part of our filling stations and on a standalone basis. To achieve this goal, we intend to pursue a number of operation and growth strategies, which include:

 

·expanding our national presence of filling stations and commercial retail centers, while giving preference to developing filling complexes and public filling stations in urban areas (including small stations);

 

·strengthening and expanding the various services and products offered to customers in the filling and commerce complexes, as well as improve the quality of those services and observing environmental regulations;

 

·increasing sales in the convenience store sector in order to increase its relative market share in this sector by expanding convenience store chain in the existing filling and commerce complexes, in new complexes, and through independent convenience stores (under the brands AM:PM, Alonit in kibbutzim, and Alonit in moshavim);

 

·initially operating a few of our convenience stores and "Si" coffee shops by franchises, and if such action will succeed, to operate additional convenience stores by franchises;

 

·expanding our national presence in our stand alone convenience stores mainly in city centers;

 

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·combining parallel activity of building and operating convenience stores in turban, village, and roadside complexes in order to provide Dor Alon the basis for a national chain in the Dor Alon segment;

 

·expanding the fleet customers base;

 

·preserving and nurturing the Dor Alon and Alonit brands as a leading brands;

 

·preserving Dor Alon’s status as a leader in the computerized fueling sector for drivers of heavy vehicles, by various road services which are given to these customers in the filling stations and commercial sites, such as resting areas, showers, and more;

 

·in the direct marketing sector, maintaining Dor Alon’s growth in the scope of sales, subject to maintaining profitability and proper diversification of its types of customers;

 

·diversifying Dor Alon’s fuel supply sources, including the importation of fuels;

 

·expanding the marketing of Dor Alon’s private brand in the lubricant oil sector – “Doroil”, while at the same time leveraging its international brands (“Texaco”, “Chevron” and “Aral”) in order to increase its market share in the oils marketing sector;

 

·continuing to take part in tenders for the supply of petroleum distillates, which are mostly published by institutional bodies, subject to specific economic examination of each tender;

 

·expanding Dor Alon’s fuel distribution suppliers in additional terminals;

 

·expanding the marketing of natural gas for industry sector, which is subject to establishment of distribution systems by local franchises; In addition, the company will monitor the possibility of using natural gas for transportation and will prepare accordingly;

 

·maintaining the joint operation with the international company Chevron in the jet fuel sector along with its continuing operations with Ben Gurion International Airport;

 

·in the power plants sector, maintaining operation in the private electricity sector and examining development of additional projects;

 

·evaluating options to expand operations in the chemistry field together with partners in Israel and worldwide; and

 

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·continuing to invest in human resources while encouraging innovation, devotion, teamwork and improvement of administrative abilities.

 

The following table provides certain information regarding our filling stations and convenience stores in the Dor Alon segment as of December 31, 2015:

 

Filling stations  Owned (including leases exceeding 25 years)   34 
   Leased (leases of up to 25 years)   148 
   Supply agreements   29 
       211 
         
   Internal stations (1)   160 
         
Convenience Stores (2)  Operated   213 
   Franchised   5 
       218 
         
   Sites In Development   37 

 

(1)Typically, our stations are in Kibbutzim and Moshavim used by defined populations

 

Convenience Stores: 144 Alonit stores are adjacent to filling stations and 30 Alonit stand alone stores, including 44 stores under the AM:PM brand.

 

Mega Retail

 

Plan of Recovery; Stay of Proceedings and Appointment of Trustees

 

On July 15, 2015, the District Court of Lod, Israel approved Mega Retail's plan of recovery. After the approval of the plan of recovery, Mega Retail closed 32 supermarket branches and two other losing branches were closed (in addition to the initial bargaining agreement), and 1,200 employees were dismissed. Additionally, Mega Retail negotiated a discount of 9% in rental fees commencing on November 1, 2015 for a period of 24 months with its main lessor.

 

Mega Retail's plan of recovery did not settle two material issues, the first, the continued supply of products by suppliers to Mega Retail on credit terms that preceded the plan of recovery; and the second, the return of Mega Retail's customers to making their supermarket purchases in its branches.

 

A significant part of the suppliers did not return to supply Mega Retail under the credit terms prior to the arrangement. As reported by Mega Retail to the Company, the suppliers continued to stiffen and toughen the supply conditions to Mega Retail, resulting in substantial deterioration of sales, especially in the discount stores operated under the brand YOU. After further deteriorated relations with the suppliers, Mega Retail reached a decision to sell all 22 branches in the sub chain, YOU. The sub chain, YOU, constituted Mega Retail's discount chain which employed more than 1,000 employees. The sale of the sub chain, YOU, was made quickly for a total of NIS 130 million and reaching agreements with the employees' committee and the Histadrut on the employment termination of more than an additional 1,000 employees.

 

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Following the continued deterioration in the financial strength of Mega Retail, on January 17, 2016 Mega Retail applied to the District Court in Lod, Israel for a temporary stay of proceedings following which trustees were appointed for the operation of Mega Retail.

 

General

 

According to report No. 4 of the trustees of Mega Retail dated March 28, 2016, Mega Retail was the owner of 127 supermarkets and maintains the Mega@Internet website which allows customers to place orders via the internet. Most of the supermarkets are local neighborhood store brand "Mega in Town". According to the report, from January 17, 2016 until February 16th, 2016 sales of Mega Retail equaled NIS 188 million, and losses for that period equaled NIS 8.6 million. As of September 30, 2015, the unaudited consolidated assets of Mega Retail aggregated approximately NIS 937 million, or $241 million.

 

Mega Retail's supermarkets offer a range of food and beverage products and “Non-Food” items, such as houseware, small electrical appliances, and entertainment products and textile products (called “Non-Food” in this Annual Report), and “Near-Food” products, such as health and beauty aids, baby and young children products, cosmetics and hygiene products (called “Near-Food” in this Annual Report). Many of Mega Retail's supermarkets offer specialty departments such as full service bakeries, delicatessens, fresh meat and prepared food departments; certain supermarkets also contain franchise operations. Mega Retail supermarkets also sell and market the “Mega” line of private label goods.

 

The following table sets forth the change in the number of Mega Retail supermarket stores (net of store closures) and supermarket store space as of the dates indicated:

 

   No. of Stores  

Store Space

(square meters)

 
         
As of December 31, 2011   211    377,650 
As of December 31, 2012   212    369,000 
As of December 31, 2013   213    360,000 
As of December 31, 2014   197    303,000 
As of March 28, 2016   127    Not Available 

 

The following table sets forth the selected operating data of our supermarket stores as of the date indicated:

 

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   For the year ended
December 31,
   For the period ended September 30,
2015
 
   2013   2014   2015 (3)   2015 
Selected Operating Data:  NIS (in thousands)   U.S. Dollars (in
thousands) (4)
 
Number of supermarket stores (at year end)   213    197    150    - 
                     
Increase (decrease) in same store sales(1)   (1)%   (3.6)%   (6.8)%   - 
                     
Total square meters (at year end)(2)   360,000    303,000    208,000    - 
                     
Supermarket sales per square meter (in NIS)   18,171    19,017    15,143    3,860 
                     
Supermarket sales per employee (in thousands)   812    864    924    236 

 

(1)          The percentage change in same store sales is the percentage change in sales of those stores that operated continuously during the entire reporting period of both the current period and the year preceding it. Stores are not deemed to have operated continuously (and therefore not included as “same stores”) if such stores were permanently closed during the reporting period or the preceding period, were resized significantly during the period or were significantly renovated or expanded during the period. Store resizing is considered significant if it exceeds 5% or more of the store’s original size. The comparative figures include the results of branches whose operations we resolved to cease.

(2)          Based on an average total square meters at month end during the relevant period.

(3)          The information as of and for the nine month period ended September 30, 2015 is unaudited and does not take into account the subsequent sale by Mega Retail of 23 supermarket branches.

(4)          Based on the representative exchange rate between the NIS and the dollar as published by The Bank of Israel for September 30, 2015, which was NIS 3.923 per $1.00.

 

To the Company's knowledge, in addition to its ownership of supermarkets, Mega Retail also leases a distribution center in Kibbutz Eyal and leases a building in Rosh Ha'ayin covering approximately 8,000 square meters.

 

During 2015 and until March 28, 2016, and based on Report No. 4 of the trustees of Mega Retail, Mega Retail closed or sold 70 branches Mega Retail leases the real estate underlying the stores that it operates from BSRE and third parties.

 

Eden Teva

 

We also previously held 51% of the outstanding shares of Eden Briut Teva Market Ltd. (“Eden Teva”).

 

On July 9, 2015, Eden Teva filed an application with the court for leave of a stay of proceedings order. We guaranteed the debts of Eden Teva to Bank Hapoalim in the amount of approximately NIS 29.2 million. On July 9, 2015, the court granted the stay of proceedings order to Eden Teva and appointed a trustee for the stay of proceeding period.

 

On December 3, 2015, a settlement agreement between Mega Retail and Eden Teva was approved by the District Court according to which NIS 3.8 million was paid to Eden Teva. An appeal against the settlement agreement was filed in January 2016 by a supplier of Eden Teva and a court hearing has been scheduled for July 14, 2016. On December 6, 2015, a permanent liquidation order was rendered against Eden Teva.

 

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In July 2015, a claim was filed against us, directors and officers of Eden Teva who serve in such capacity at our request, and Mega Retail with the Tel Aviv District Court, in connection with Eden Teva, by the minority shareholders (49%) in Eden Teva. In the claim, the plaintiffs sought, among others, an injunction under which the defendants will be required to purchase the shares of the plaintiffs in Eden Teva for NIS 40 million. On November 25, 2015, an amended claim was filed under which the plaintiffs allege that damages were caused to them in the amount of loss of their share value (according to the value claimed in the original claim); however the amount of the claim was reduced for purposes of court fees and was set at NIS 40 million. For more information see “Legal Proceedings”.

 

Competition

 

The Israeli food retailing industry is highly competitive and is characterized by high turnover and narrow operating margins. Mega Retail competes with the largest supermarket chain, Shufersal, growing low-priced supermarket chains, such as Rami Levy, Bitan, Victory, and Osher Ad, independent grocers, open-air markets, and other retailers selling supermarket goods. Because there are few barriers to entry, new companies continue to enter the market throughout the country, increasing available store space in an already saturated market.

 

Other supermarket chains in recent years have continued to aggressively increase their market share and expanded their presence in locations throughout Israel, often geographically beyond their original locations. The low barriers of entry, including the relatively low cost of establishing new smaller supermarket chains, have contributed to the increase in number and expansion of smaller supermarket chains in recent years and the corresponding decrease in the number of branches held by Mega Retail, particularly in the hard discount format. Mega Retail was not successful in developing its hard discount format branches and its organic health food format, Eden Teva.

 

Shufersal, the largest supermarket chain, has taken numerous initiatives in the last few years to improve its competitive position. The competitive position of Shufersal, together with the expansion of smaller supermarket chains in recent years, has contributed to the intensified competition experienced in recent years.

 

Marketing

 

Mega Retail maintains a Loyalty Plan, which it established together with Dor Alon and which offers to its customers credit cards (Diners and Mastercard) bearing the name “You”, or a membership card, is to promote customer loyalty to the Company and Dor Alon. For more information, see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreements between Alon Blue Square and its Subsidiaries – Transactions with Dor Alon in Connection with Establishment of a Joint Loyalty Plan”.

 

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In June 2014, Diners Israel and YOU club entered into an agreement with El Al Israel Airlines Ltd. (El Al) to issue a credit card of the "FLY CARD" brand. In November 2015, we entered into an agreement with Dor Alon for the sale of all of its holdings in Diners (36.75% and 12.25%, respectively, for a total of 49%) to Israel Credit Cards Ltd. (ICC) for NIS 130 million. For more information see “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Other Recent Developments”.

 

Seasonality

 

Mega Retail's business is subject to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in its supermarkets, increased sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in either the third or the fourth quarter. Generally, purchases for a particular holiday occur during the two-week period prior to the commencement of that holiday. However, the timing of the holidays does not affect its semiannual results.

 

For information regarding legal proceedings initiated by the trustees of Mega Retail, see “Item 8. Financial Information – Legal Proceedings – Legal Proceedings Initiated by the Trustees of Mega Retail Against Us.”

 

Additional Business Information

 

Diners Israel

 

On November 29, 2015, we entered into an agreement with Dor Alon for the sale of all of their holdings in Diners Club Israel Ltd., an associate company held 49% by us (36.75% directly by us and 12.25% by Dor Alon), in which we operated in the sector of issuance and clearance of credit cards in Israel and the issuance of YOU credit cards to the customer club membership of the group, to Israel Credit Cards Ltd. ("ICC"). On December 15, 2015, the transaction was completed in a consideration for NIS 130 million of which NIS 120.25 million was received in cash and the balance was received in January 2016. For more information see, “Item 4.Information on the Company –A. History and Development of Alon Blue Square – Other Recent Developments”.

 

Alon Cellular

 

Other Recent Developments

On July 6, 2015, we signed an agreement with Pelephone Communications Ltd. for the sale of our Alon Cellular activity, our 100% subsidiary through which we operated an MVNO network in Israel. Upon the completion of the agreement, Alon Cellular would be entitled to half the income from the transferred customers for 36 months. In December 2015, Alon Cellular's board of directors resolved to voluntarily dissolve Alon Cellular following our debt forgiveness to Alon Cellular and the forgiveness of the debt balance upon the completion of the dissolution process. For more information see, “Item 4. Information on the Company –A. History and Development of Alon Blue Square – Other Recent Developments”.

 

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Dr. Baby – which sold baby and young children accessories operated 13 stores and through other wholesale channels. The Company is evaluating its continued operation in this industry with its main competitors being store chains "Motzezim" and "Shilav". In July 2015 Dr. Baby entered into temporary receivership.

 

Distribution and Logistics Center - Through Bee Logistics Services Ltd., the Company holds 100% of the operator of a logistics center, which services a portion the Company’s Non-Food activities as well as third party activities. The distribution center is operated on an approximately 24,000 square meter site and is currently leased to Bee Group by BSRE.

 

General Government Regulation

 

The Law for Increasing the Enforcement of Labor Law, 5771-2011

 

The law establishes a mechanism of enforcement and warning, both in the criminal and civil levels, imposes direct liability to execute legal requirements even on the chief executive officer, and provides the Israel Industry, Trade and Employment Office the authority to impose sanctions towards companies which receive services from contractors in three different industries: (i) security services; (ii) cleaning services; and (iii) food catering. The law became effective on June 19, 2012. The law may affect the manner of hiring employees and also may impose on the Company great liability towards independent contractors providing these services.

 

Consumer Protection Laws

 

We are obligated to label prices on our products on the basis of The Consumer Protection Law, 1981. Contravention of the law constitutes a criminal offense. In 2009, new regulations under the Consumer Protection Law became effective under which we are obligated to indicate on the shelf the price per measurement unit with respect to most of our products. Said regulations impose additional costs and could increase the risk for discrepancies between the prices that appear on the products, the prices that appear on the shelf and the prices charged by the cash register. Claims regarding violation of the Consumer Protection Law are filed against the Company from time to time. These claims are usually settled in plea bargain proceedings. In addition, the Company may be subject to criminal liability in connection with future claims under the Consumer Protection Law. These discrepancies are the result of human error by personnel responsible for labeling our products and circumstances beyond the Company’s control. We are making efforts to minimize these errors, including directing store management to charge the lower price in situations where a discrepancy is found between the price on a product and the price appearing at the cash register.

 

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We are also obligated under these laws to advertise and conduct our business in a manner that is not misleading to our customers. Our obligations include, among other things, ensuring that our advertised prices are the prices that are actually charged by the cash registers in our stores, and ensuring that our coupons may be used in our stores as advertised. In December 2005, the applicability of the Consumer Protection Law with respect to the prohibition of misleading conduct was expanded to apply also to conduct following the completion of the transaction between the consumer and the supplier.

 

In addition, under the Consumer Protection Law, we are obligated to post our merchandise return policy in our stores. The law and regulations promulgated thereunder impose various requirements regarding the location, details, size and shape of the notice of such policy.

 

In addition, under the Consumer Protection Law, a remedy of exemplary (punitive) damages may be provided to plaintiffs for specific violations of the law under certain circumstances.

 

Regulations under the Consumer Protection Law also regulate the warranty and post-sale services of certain electrical appliances. Under the regulations, sellers of new electrical appliances (priced in excess of NIS 400) to the end user consumer are required to assume the responsibilities of the manufacturer(s) of the appliances in the event such manufacturer cannot be located. In addition, sellers must deliver to consumers a manufacturer warranty certificate with the delivery of the products.

 

On December 14, 2010, the Regulations of Consumer Protection (Abolition of Transaction), came into effect pursuant to which a consumer is allowed to cancel purchase agreements of certain goods and receive a full refund on condition that the consumer returns the goods unused and undamaged. These regulations apply to certain goods over the price of NIS 50.

 

The Class Actions Law (the “Law”) codified prior existing class actions arrangements, including under the Consumer Protection Law, by among other things, substantially extending the causes of action under which one can bring a class action, alleviating the prerequisites for certifying and maintaining a class action and lowering the eligibility requirements for a class action representative. The Law is not unique to the line of business in which we engage; however, the expansion of the availability of the Law to potential claimants increases our exposure to potential lawsuits.

 

In addition, A Bill for the Consumer Protection Law (Amendment no. 35) (Redeeming Gift Cards), 5772-2012 was adopted on January 2014, and will become effective July 1, 2014. The new law establishes a minimum mandatory validity period of a gift card of five years, and that the amount stated in the gift card must be uniform to all businesses subscribing to the gift card. In addition, the new law grants the Minister of Economy the right to enact additional regulations prohibiting the limit of use of the gift certificates. This legislation may adversely affect our profitability from gift certificates, by increasing their cost and increasing competition in the market.

 

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Product Liability

 

We market various products, including foods and cleaning and hygiene products, which may affect consumer health, and, as such, we are subject to legislation and supervision (for example, Liability for Defective Products Law, 1980) relating to these areas, including orders of the Ministry of Health relating to the import and sale of food and cleaning and hygiene products, as well as veterinary supervision of the marketing of meats. In addition, many laws and regulations govern the rights of persons that may have been injured by products that we manufacture, assemble, store, market or sell. Under certain circumstances, the Company may be responsible for damages as a result of defects in the products marketed and sold by the Company.

 

Regulations for Equal Rights for Persons with Disabilities

 

On November 3, 2011, the Regulations for Equal Rights for Persons with Disabilities (accommodations for accessibility in a public place which is an existing building), 2011, were approved and published. The regulations require that until November 1, 2017public service providers to make necessary modifications at their own expense to ensure that their services are accessible to people with disabilities. The provision of public services is defined, among other things, as services provided in a public place. According to the Equal Rights for Persons with Disabilities Law, 1998, supermarkets are considered public places. The regulations include various requirements to increase accessibility for people with disabilities in public places to be implemented within the timeframe provided in the proposed regulations, such as modifying passages between fixtures in public places, modifying procedures, proceedings and customs, modifying signposts and public address and loudspeaker systems, installing aids and accessories to ensure accessibility and to provide services to aid in ensuring the accessibility of services for people with disabilities, publicizing the accommodations made to ensure accessibility of, appointment of a coordinator to ensure accessibility, among others.

 

In April 2013, the Regulations for Equal Rights for Persons with Disabilities (improving access to service), 2013, were approved and published. Under these regulations, any entity that provides a public service must adapt its practices to ensure the provision of independent and safe service to people with disabilities. The regulations provide for gradual adjustments to be completed until November 1, 2017.

 

Manufacturing and Import Standards

 

We are required to comply with certain manufacturing standards in connection with our manufacturing activities, and specifically those activities that relate to the manufacturing of our private label products. We endeavor to ensure that that the products that are manufactured on our behalf comply with any relevant standards and legal requirements.

 

In addition, we must comply with import standards relating to the sale of imported products, including obtaining a general import license from the Ministry of Health for importing food products that we sell, as well as requirements relating to electrical appliances.

 

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C.Organizational Structure

 

We operate our BSRE segment through our TASE traded 53.92% subsidiary, BSRE, which owns, leases and develops yield generating commercial properties and projects.

 

We operate all of our “Housing and Textile” outlets through our wholly owned subsidiary Bee Group, which in turn held, as of March 31, 2015, approximately 77.51% held Naaman Group (N.V.) Ltd. which is designated for sale and is classified as a discontinued operation. The shares of Naaman are traded on the Tel Aviv Stock Exchange.

 

We operate our Dor Alon segment, which is designated for sale and is classified as a discontinued operation, through our 63.13% subsidiary, Dor Alon, which is listed on the TASE. Dor Alon is one of the four largest fuel retail companies in Israel based on the number of filling stations and a leader in the field of convenience stores. Dor Alon operates a chain of 211 filling stations and 218 convenience stores in different formats in Israel.

 

The 127 supermarkets are operated through Mega Retail, which since January 17, 2016 has been managed by court-appointed trustees. See “Item 4. Information on the Company – B. Business Overview – Mega Retail – Stay of Proceedings and Appointment of Trustees.” Mega Retail leases from BSRE and third parties the real estate underlying the stores that it operates. Below is a chart indicating our holdings in our material subsidiaries as of March 31, 2016.

 

 

 

 

* Listed on the Tel Aviv Stock Exchange.

 

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Dor Alon, and BSRE, Bee Group and each of our subsidiaries has its own board of directors. We appoint all or a majority of the board of directors of each of these companies and typically our appointee serves as the chairman of the board of directors of each of these companies. As of January 2016, Mega Retail is operated by court-appointed trustees. Although we appoint all or most of the board of directors of each of Dor Alon, and BSRE, Bee Group and Bee Group’s subsidiaries, each company’s board of directors has independent fiduciary obligations to all of its shareholders and to the company itself. Alon Blue Square is obligated to deal with its partially owned subsidiaries at “arm’s-length.” Moreover, in the case of BSRE, Dor Alon, and Naaman which are publicly traded on the Tel Aviv Stock Exchange, the board of directors must include at least two external directors appointed under Israeli law. These external directors must satisfy all the requirements of external directors under the Israeli Companies Law, 1999, referred to as the Israeli Companies Law.

 

Alon Blue Square owned 100% of the outstanding shares of Mega Retail as of March 31, 2016, and we undertook to transfer 33% of Mega Retail's share capital to an Israeli corporation to be formed by the employee union of Mega Retail.

 

Bee Group has signed a merger agreement with us.

 

Alon Blue Square owned 53.92% of the outstanding shares of BSRE as of March 31, 2016. The balance of BSRE’s outstanding shares is publicly held and traded on the Tel Aviv Stock Exchange. Alon Blue Square receives fees from BSRE as payment for the management services it provides to BSRE for the Chairman of the board of directors services, financial and accounting management services (including bookkeeping), computer management and maintenance service, legal consulting and corporate secretary services, office space and related office services, and internal audit services. At the request of BSRE, at the end of 2015 the management services were terminated.

 

Alon Blue Square owned 63.13% of the outstanding shares of Dor Alon as of March 31, 2015.

 

See “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions” for a description of the agreements relating to the fees Alon Blue Square receives from its subsidiaries and services that Dor Alon receives from Alon. For information concerning the flow of funds between Alon Blue Square and its direct and indirect subsidiaries, see also “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources.”

 

Set forth below is a list of our significant holdings as of March 31, 2016. The companies marked with an asterisk (*) are not consolidated in our consolidated financial statements.

 

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Company (1)

  Operations  % Ownership
Held by Alon
Blue Square
 
        
Blue Square Real Estate Ltd.(2)  Real estate   53.92 
         
Dor Alon Energy in Israel (1988) Ltd.  Filling stations and convenience stores   63.13 
         
Bee Group Retail Ltd.(3)  Retail and wholesale of houseware and home textile and leisure   100 
         

Naaman Group (NV) Ltd.

  Houseware and Textile   77.51 
         

Mega Retail Ltd. (4)

  Supermarkets   100 

 

(1)All companies are incorporated under Israeli law.

 

(2)As of March 31, 2016, BSRE held approximately 50% of the outstanding shares of Tel Aviv City Mall Ltd., and 49.5% of the outstanding shares of Tel Aviv Towers Ltd. The remaining shares of BSRE are held by the public and institutional investors and traded on the Tel Aviv Stock Exchange.

 

(3)In October 2010, we increased our holding in Bee Group Retail Ltd. to 100%. As of March 31, 2016, Bee Group Retail Ltd., held approximately 77.51% of the outstanding shares of Naaman Group (N.V.) Ltd., which is traded on the Tel Aviv Stock Exchange.

 

(4)Since January 17, 2016, Mega Retail has been operated by court-appointed trustees. We undertook to transfer 33% of Mega Retail's share capital to a corporation to be formed by the employee union of Mega Retail

 

D.Property, Plants and Equipment.

 

For details regarding the properties that we and our subsidiaries own and/or lease, see “Item 4. Information on the Company – B. Business Overview – Dor Alon Sites Strategies”, “Item 4. Information on the Company – B. Business Overview – Naaman”, and “Item 4. Information on the Company – B. Business Overview – BSRE.”

 

During first nine months of 2015, Mega Retail closed or sold 38 supermarkets with a total area of 73,600 square meters. We do not have information for Mega Retail for the entire year ended December 31, 2015.

 

During the first nine months of 2015, we spent more than NIS 38 million (or $9.7 million at the exchange rate as of December 31, 2015) on the acquisition and development of new store branches and the remodeling of our existing supermarkets.

 

In July 2014, a lot constituting a part of the logistic center in Rishon Lezion was sold for NIS 35 million. In December 2014, the logistic center was sold for NIS 95 million. A total of NIS 65 million were deposited in trust and were transferred on January 4, 2015. The remaining consideration is secured by a financial guarantee of the purchasers and will be paid until the end of March 2015. Exclusive possession of the logistic center was delivered in favor of the purchasers on December 31, 2014. The profit from the sale amounted to NIS 57.0 million before taxes, of which NIS 29 million was recorded in other gains in the fourth quarter of 2014.

 

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In 2015, as a result of the loss of control over Mega Retail, all branches that were presented in the consolidated financial statements as property and equipment, were transferred and classified upon deconsolidation, as investment property of the Company (for further information please see Note 5a to our consolidated financial statements).

 

In 2016 and 2017, we plan to open approximately seven to nine additional filling stations. For additional information, see “Item 4. Information on the Company – B. Business Overview – Dor Alon Segment”.

 

For further information regarding our real estate, including the transfer of the Company’s real estate to BSRE and the transfer of Mega Retail’s real estate to BSRE, please see “Item 4. Information on the Company - B. Business Overview - BSRE” and “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions.”

 

ITEM 4A. UNRESOLVED STAFF COMMENTS

 

Not applicable.

 

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

 

The following discussion and analysis should be read together with “Item 3. Key Information - Selected Financial Data” and our consolidated financial statements and notes included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in “Item 3. Key Information - D. Risk Factors.”

 

General

 

We are a holding company which operates in three reportable operating segments (two as discontinued operations). In our BSRE segment, we own, lease and develop yield-generating commercial properties and projects. In our Dor Alon segment, which is held for sale we operate a chain of fueling stations and convenience stores in different formats in Israel, and we are considered to be one of the four largest fuel retail companies in Israel based on number of petrol stations and is a leader in the field of convenience stores. In our Naaman segment (operated through Bee Group), which is also held for sale, we operate specialist outlets in self-operation and franchises and offer a wide range of houseware and home textile products as a retailer and wholesaler in the houseware and home textile markets. In addition, we have another operation that consists of Bee Logistics Service Center Ltd. our wholly-owned operator of a logistics center, which provides services to Naaman as well as third party activities.

 

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Discontinued Operations

 

Following the control loss in Mega Retail and the liabilities assumed by the Company to support Mega Retail under the plan of recovery, Mega Retail was presented in our consolidated financial statements from the third quarter as discontinued operations. The effect of deconsolidation resulted in recording of a loss of NIS 78 million deriving from liabilities and guarantees granted to Mega Retail in the past and liabilities the Company assumed under the plan of recovery in the amount exceeding the Company's share in Mega Retail's accumulated losses on the deconsolidation date.

 

During the third quarter, the Company's Board of Directors decided to put up for sale our entire holdings in Dor Alon at that time (71.17%). Following this decision, Dor Alon is presented starting from the third quarter of this year as part of activities designated for sale according to its market value; as a result, the Company recorded a loss of NIS 714 million. During the fourth quarter, it was resolved to sell our entire holdings in Naaman at that time (77%) which is also presented as part of activities designated for sale starting from the fourth quarter of this year.

 

As a result of such changes, the results of the Group's continuing operations primarily reflect the results of BSRE and changes in the liabilities prior to the plan of recovery and the liabilities assumed by the Company as part of Mega Retail's plan of recovery. The consolidated balance reflects – mainly the assets and liabilities of BSRE and the Company (solo) and in addition the assets and liabilities of discontinued operations.

 

BSRE Segment

 

Through our subsidiary BSRE, we are engaged in generating yield from supermarkets, commercial centers, logistics centers and offices, land for capital appreciation and deriving long-term yield as well as developing projects, which include tens of thousands of square meters of construction rights in different stages of design and construction, such as a partnership in a mall (50% ownership), residential (49.5% ownership) and parking lot (50% ownership) projects in the wholesale market complex in Tel Aviv, expanding the Hadar Shopping Mall (50% ownership) and property designated for a offices in Ra’anana (50% ownership), and the purchase of property in Point Wells, Washington while changing the land use designation from a heavy industrial area to a residential area. As of December 31, 2015, BSRE had rights to build a total of 104,000 square meters at different stages of construction (including the projects mentioned above).

 

We are currently in the process of examining acquisitions of additional commercial real estate and yield-generating assets in Israel in light of market conditions, while diversifying our real estate property base.

 

Naaman segment

 

As of March 31, 2016, we held approximately 77.51% of the outstanding shares of Naaman Group (N.V) Ltd. (“Naaman”), one of Israel’s major branded houseware retailers and wholesalers, which operated 120 stores as of December 31, 2015 and imports and markets various houseware products, such as kitchen utensils, cutlery and dinner sets. We have designated Naaman for sale.

 

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Dor Alon segment

 

Dor Alon is one of the four largest fuel retail companies in Israel based on the number of filling stations and is a leader in the convenience stores sector. In recent years, the Dor Alon segment has been characterized by fierce competition. This competition is reflected in price wars, improvement in credit terms in direct marketing, and improvement in the quality of services offered at fueling sites. We have designated Dor Alon for sale.

 

In an effort to improve our competitive position in this segment, we anticipate opening and operating approximately seven to nine additional filling stations during 2016 and 2017 as well as investing additional capital to renovate our existing fueling stations and convenience stores. In addition, we intend to expand the chain of convenience stores outside of our filling stations, as well as the activities of our countryside stores.

 

Other Businesses

 

The Company had an activity of issuance and clearance of gift certificates. During December 2015, we decided to end the issuance of new gift certificates, but we continue to clear existing gift certificates. In addition, we through our 100% subsidiary, Alon Cellular Ltd, operated an MVNO network in Israel, which activity was sold in November 2015, and through Diners Club Israel Ltd., an associate held at 36.75%, operated in the sector of issuance and clearance of YOU credit cards to the customer club members of the group, which activity was sold in December 2015. In addition, through our 100% subsidiary, Bee Group Ltd., we operate the logistic center in Beer Tuvia.

 

Key Developments

 

Mega Retail

 

Following a deterioration in the financial results of Mega Retail, on June 29, 2015, Mega Retail submitted a plan of recovery with the District Court in Lod, Israel in a proceeding under section 350 of the Israel Companies Law. On July 14 and 15, 2015, the District Court approved the plan of recovery. Under the plan of recovery, we assumed various liabilities, including (i) extending to Mega Retail, effective June 1, 2015, an amount of NIS 320 million (NIS 240 million by way of loans or guarantees, of which NIS 160 million would be converted into Mega Retail's share capital (before transferring or issuing 33% of Mega Retail's outstanding shares to a corporation to be formed by the employee union of Mega Retail by virtue of the employees' agreement signed on June 21, 2015), and the balance of NIS 80 million would be extended as a shareholders' loan and repaid only after the full repayment of the debt to banks and suppliers, as defined in the plan of recovery)), (ii) NIS 80 million as a framework for working capital based on the current needs of Mega Retail and at its request if necessary) and (iii) the debts of Mega Retail and Eden Briut Teva Market Ltd. to financial creditors that were secured by our guarantee or debts that are shared by us and Mega Retail (the "guaranteed debt") would be paid by us, without derogating from our right to assume the rights of such creditors' shoes with respect to the paid debt, in accordance with the terms of the plan of recovery (total guaranteed debt as of March 31, 2016 is approximately NIS 300 million on account of Mega Retail and NIS 29 million as on account of Eden Teva). See Item 4. Information on the Company – A. History and Development of Alon Blue Square”. We also lost our majority in Mega Retail's Board and consequently lost the control of Mega Retail. Following this loss of control, the investment in Mega Retail is presented on an equity basis.

 

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Following approval of the plan of recovery, and to address the deterioration in its financial results, Mega Retail closed 32 supermarket branches and two other losing branches were closed, and 1,200 employees were dismissed. Additionally, Mega Retail negotiated a discount of 9% in rental fees for a period of time with its main lessor, BSRE. This discount was conditioned upon Mega Retail not being subject to a stay of proceedings. Once Mega Retail became subject to a stay of proceedings, this discount is no longer in effect. See “Item 8. Financial Information – A. Consolidated Statements of our Financial Information – Legal Proceedings”.

 

The terms of supply of Mega Retail's suppliers continued to worsen, resulting in substantial deterioration of sales, especially in the discount stores operated under the "YOU" brand. After further deterioration in relations with its suppliers, Mega Retail sold all 22 "YOU" brand supermarket branches (which constituted Mega Retail's discount chain) for a total of NIS 130 million and agreements for the termination of employment of more than an additional 1,000 employees were reached.

 

On January 17, 2016 we announced that at the voluntary request made by Mega Retail, the District Court in Lod approved the temporary stay of proceedings with respect to Mega Retail and the appointment of trustees for the operation of Mega Retail. Their role, among others, is to manage Mega Retail in an attempt to restore and sell Mega Retail, either as one unit or as groups of supermarket branches, and to inquire whether the plan of recovery was executed in full, and principally whether we fully complied with our obligations under the plan of recovery to support Mega Retail. The stay of proceedings was extended until May 17, 2016.

 

On March 7, 2016 the court-appointed trustees of Mega Retail submitted a claim with the District Court of Lod, Israel requesting the court to order us to pay approximately NIS 117 million alleging that we did not satisfy our obligations to inject funds into Mega Retail under Mega Retail's plan of recovery. In other court filings, the trustees also made other allegations, including that we must pay approximately NIS 300 million on account of bank loans to Mega Retail that we guaranteed or are jointly-owned and that we would have no right of recovery against Mega Retail following such payment and that we owe an estimated NIS 300 million in the aggregate on account of Mega Retail's employees, suppliers, credit insurers and lessors and on account of a dividend distributed by Mega Retail in 2013.See “Item 3. Key Information D. Risk Factors Risks Related to our Business as a Whole If all or certain parts of the claims submitted to the courts by the trustees of Mega Retail are accepted, we may be unable to pay our outstanding debts, which would have a material adverse effect on our liquidity and operations and our ability to continue as a going concern.”

 

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We are also exposed to actual and potential third party claims for a significant amount of Mega Retail's outstanding debt and liabilities. This includes social security (bituach leumi) payments due on account of employees of Mega Retail, outstanding VAT obligations for which we have joint and several liability with Mega Retail, guarantees extended by us to lessors and credit insurers of Mega Retail, payment obligations under various Mega Retail property leases and management agreements to which we are a party, real estate taxes, water expenses, municipal fines, and other obligations. See “Item 3. Key Information D. Risk Factors Risks Related to our Business as a Whole We are exposed to third party claims for a significant amount of Mega Retail's outstanding debt and liabilities. If we are found liable to satisfy these debts and liabilities it could have a material adverse effect on our liquidity and operations and our ability to continue as a going concern”.

 

A number of the creditors of Mega Retail to whom we previously granted guarantees of payment, have approached us with demands for payment.

 

Financial Creditors

 

We did not pay principal on our Series C Debentures due to our failure to principal in November 2015 as required. Starting from October 27, 2015, the holders of Debentures decided on the deferral of the payment dates on account of the principal amounts from November 4, 2015 to May 29, 2016 or unless a decision is otherwise made, subject to exceptions, including a notification by the holders of our Series C Debentures' trustee of termination of negotiations.

 

The holders of the Series C Debentures have instructed the Series C Debenture trustee to put for immediate repayment the full balance of the Company's debt to the holders of the Series C Debentures. The immediate repayment decision will enter into effect without further decision at the earlier of transfer of the control of the Company directly or indirectly (including by change in the control in the controlling shareholder) without the consent of the holders of the Series C Debentures or an application is not filed with the court to convene meetings for the approval of the debt arrangement between the Company and its financial creditors. At this stage, the entry into effect of the immediate repayment decision was extended to May 18, 2016. If the immediate repayment decision were to become effective, it could have a material adverse effect on our liquidity and operations and our ability to continue as a going concern.

 

In addition, on November 2, 2015, within the framework of the negotiations conducted by us with the representatives of the holders of our Series C Debentures and our financial creditors, guidelines were formulated for an outline of rescheduling and reorganizing the financial debt, including bank debt which was guaranteed by us in favor of Mega Retail. The guidelines also provided that debt repayment would be accelerated in the event Dor Alon or BSRE are sold. In addition, the debt holders would receive up to 10% of our shares. See “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Proposed Framework for Debt Repayment”.

 

100 

 

 

In addition, we are currently in breach of the financial covenants covering our long-term bank debt. We and the bank lenders have agreed on terms of renewal of existing on-call loans from the bank lenders to us. This agreement by the bank lenders is subject to no other creditors either accelerating their debt for immediate payment or not renewing their on-call loans to us. This arrangement is not binding on debenture holders. If any of the bank lenders or holders of the Series C Debentures accelerate their debt for immediate payment or do not renew their on-call loans, our assets may not be sufficient to satisfy our obligations to our debtors, our liquidity would be materially affected, and we may be forced to file for a stay of proceedings and cease operations.

 

As of April 30, 2016, we had cash and cash equivalents which is not sufficient to repay our outstanding indebtedness.

 

Proposal by Mr. Moti Ben Moshe

 

On February 28, 2016, an acceptance notice was given by Alon for the offer by Mr. Moti Ben Moshe (through a company under his control) to acquire the direct and indirect holdings of Alon in the Company, and the rights of Alon to a bridge loan of NIS 110 million and a loan of NIS 60 million extended to the Company by Alon, for consideration of NIS 115 million to be paid to Alon. The proposal, which includes a proposal for an arrangement with financial creditors of the Company providing for repayment of their debt, includes the injection of NIS 900 million into the Company for the full repayment of the financial debt to financial creditors interested in such repayment.

 

The proposal required that until the transaction closing date, we and our controlled companies will not carry out any disposition of our and their assets and/or any act to foil the purchase of control, or otherwise Mr. Ben Moshe will have the right to cancel his commitments. We have stopped promoting the sale of our assets, in order not foil the possibility of admitting Ben Moshe as the potential buyer.

 

The debt arrangement is subject to various conditions, including receipt of approval of the Company’s financial creditors and the District Court approval for the proposed debt arrangement and receipt of all of requisite regulatory and third party approvals, and there is no guarantee this acquisition and repayment of financial debt will occur.

 

On April 20, 2016, a hearing was held in the District Court in Lod, Israel, regarding motion 75, which details the trustees' fifth report. The court's decision was to grant an extension of 15 days for the Company to file a motion to convene creditors meetings to vote on for a proposed debt arrangement in accordance with section 350 of Israel Companies Law, 1999. The purpose of the extension is to allow the trustees of Mega Retail to utilize their negotiation with Mr. Ben Moshe, for reaching an arrangement regarding both the Company and Mega Retail as a whole. According to the court's decision, at the end of the period, the trustees are to submit a notice to the court detailing the outcome of the negotiations, if possible with the agreements of all sides. In addition, at the end of the stated period, Mr. Ben Moshe should submit a proposal for a reorganization of Mega, supported with a bank guarantee of NIS 40 million. If Ben Moshe and the trustees do not reach an agreement by the end of the period, or if Mr. Ben Moshe does not make such an offer, he will not be allowed to propose any alternative offers for purchasing Mega. The same applies with regard to any other proposal for the acquisition of Mega Retail made by that date by third parties. Therefore, the court has suggested that we and Mr. Ben Moshe delay the filing of the above mentioned motion until after the extension period, and recommended to the creditors of Alon Blue Square not to file any proceedings against the Company until the end of the extension period.

 

101 

 

 

On May 8, 2016 we filed a motion with the District Court of Lod, Israel to convene meetings of our financial creditors (consisting of holders of our bank debt and guaranteed bank debt and holders of our Series C Debentures) and shareholders for the approval of a proposed debt reorganization and arrangement under Section 350 of the Companies Law. Concurrently with the debt reorganization and arrangement, a company under control of Mr. Moti Ben Moshe would acquire the direct and indirect holdings of Alon in the Company, and the rights of Alon to a bridge loan of NIS 110 million and a loan of NIS 60 million extended to the Company by Alon, for consideration of NIS 115 million to be paid to Alon. See “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Offer to Acquire Holdings of Alon Oil in the Company” for more information.

 

Going Concern

 

In view of the uncertainty regarding the completion of the Ben Moshe Proposal, including the arrangement with our financial creditors, and in light of our stopping to negotiate for the sale of our assets, there are substantial doubts about our continued existence as a "going concern". See “Item 3. Key Information – D. Risk Factors – Risks Related To Our Business As A Whole – If the Ben Moshe Proposal, including the arrangement with our creditors does not close, there is substantial uncertainty whether we will be able to continue operating as a going concern, in which case you could lose your entire investment. In addition to the debt arrangement, Mr. Ben Moshe will need to inject additional funds into our company in order for us to continue our operations and repay our debts” and Note 1b to financial statements.

 

Operating Results

 

The following table sets forth certain statement of income data as a percentage of sales for the periods indicated:

 

   2015   2014 
Continuing Operations      % 
Sales   100.0    100.00 
Gross profit   72.0    23.8 
Selling, general and administrative expenses   51.0    90.4 
Operating profit before loss in respect of guarantees to Mega   24.9    32.1 
Operating loss   (42.0)   32.1 
Taxes on income   2.5    72.1 
Net loss for the year from continuing operations   (73.8)   (157.9)
           
Discontinued Operations          
Net loss from discontinued operation   (583.0)   (233.5)

 

102 

 

 

Year Ended December 31, 2015 compared with year ended December 31, 2014

 

The statements of income, including comparative figures, have been restated to separate the results of discontinued operations from continuing operations and presented them separately after the income from continued operations. Operating segment reporting presents the segments’ results from continued operations before taxes.

 

Net revenues. Revenues for 2015 amounted to NIS 205.5 million (U.S. $52.7 million) as compared to revenues of NIS 96.5 million in 2014, an increase of 113.0% mainly deriving from recording rental fees from Mega Retail in the second half of 2015 due to Mega Retail's deconsolidation in the course of the year.

 

Gross profit. Gross profit in 2015 amounted to NIS 147.9 million (U.S. $37.9 million) as compared to gross profit of NIS 23.0 million in 2014, an increase of 543%. The increase in the gross profit derived from recording rental income from Mega Retail in the second half of the year.

 

Selling, general and administrative expenses. Selling, general, and administrative expenses in 2015 amounted to NIS 104.9 million (U.S. $26.9 million), compared to expenses of NIS 87.3 million in 2014, an increase of 20.2%. The increase in expenses in this year compared to last year mainly derived from recording provisions mainly regarding legal procedures and in respect of demand from local authorities.

 

Changes in fair value of investment property in 2015, the Company recorded a profit in the amount of NIS 57.5 million (U.S. $14.7 million), compared to a profit of NIS 49.8 million in 2014. The main increase in value derived from the lowering the discount rate in the fourth quarter of this year in the amount of 0.25%-0.50% in assets leased to third parties.

 

Other expenses, net other expenses, net in 2015 amounted to NIS 51.9 million (U.S. $13.3 million) compared to other income, net of NIS 25.3 million in 2014. These expenses include mainly amortization of investment of NIS 54.7 million (U.S. $14.0 million) in Diners that was sold in the fourth quarter of this year.

 

Share in gains of associates in 2015 amounted to NIS 2.6 million (U.S. $0.7 million) compared to a profit of NIS 20.0 million in 2014. The main decrease in this period derived from a revaluation of the value of the commercial spaces of Tel Aviv Mall in the wholesale market in 2014.

 

Operating profit before loss in respect of guarantees to Mega in 2015 amounted to NIS 51.2 million (U.S. $13.1 million) as compared to operating profit of NIS 31.0 million in 2014. The increase in operating profit mainly derived from an increase in sales and gross profit and was partially offset by an increase in other expenses, as aforesaid.

 

Operating loss in 2015 amounted to NIS 86.3 million (U.S. $22.1 million) as compared to operating profit of NIS 31.0 million in 2014.

 

Mega Retail's guarantees expenses in 2015 amounts to NIS 137.5 million (U.S. $35.2 million). These expenses include the updates in the value of the guarantees granted by the company to Mega Retail.

 

103 

 

 

Finance expenses, net in 2015 amounted to NIS 60.4 million (U.S. $15.5 million) as compared to net finance expenses of NIS 113.8 million in 2014, a decrease of 46.9%. The decrease in finance expenses, net derived from a decrease in finance expenses in BSRE.

 

Taxes on income tax expenses in 2015 amounted to NIS 5.1 million (U.S. $1.3 million) as compared to tax expense of NIS 69.7 million in 2014. The decrease in tax expenses derived from recording a tax asset for the Company's investments in Bee Group and Alon Cellular and was partially offset by recording a tax provision due to investments in BSRE. The tax expenses derived from tax losses for which no deferred income tax assets was recognized of NIS 42.9 million (U.S. $11.0 million) and eliminations of intercompany transactions between continuing and discontinued operations of NIS 20.2 million (U.S. $5.2 million) and was offset by utilization of previously unrecognized tax losses of NIS 21.7 million (U.S $5.6 million).

 

Net loss from continuing operations amounted in 2015 amounted to NIS 151.7 million (U.S. $38.9 million) compared to a net loss of NIS 152.4 million in 2014. The loss from continued operations this year attributed to the Company's shareholders amounted to NIS 214.3 million (U.S. $54.9 million) or NIS 3.25 per share (U.S. $0.83), and the profit from continued operations attributed to non-controlling interests amounted to NIS 62.6 million (U.S. $16.0 million).

 

Net loss from discontinued operations in 2015 amounted to NIS 1,198.2 million (U.S. $307.1 million) compared to a loss of NIS 225.5 million in 2014. The loss from discontinued operations in 2015 attributed to the Company's shareholders amounted to NIS 1,055.0 million (U.S. $270.4 million) or NIS 16.00 per share (U.S. $4.01), and the loss from discontinued operations attributed to non-controlling interests amounted to NIS 143.1 million (U.S. $36.6 million).

 

The loss balance from discontinued operations this year included:

 

·Mega Retail's financial results in the first half of 2015, and a loss of loss of control in Mega Retail, including the value of liabilities and guarantees upon the control loss date;
·The results of Dor Alon in the first half of 2015 and a loss from the adjustment of value of the Company's investment in Dor Alon to the market value resulting from the Board resolution to sell the Company's holdings in Dor Alon; and
·The financial results of Naaman for 2015 and amortization of the Company's investment in Naaman to its equity resulting from the resolution of Bee Group's Board to sell the Company's holdings in Naaman.

 

For further information, see note 7 to our consolidated financial statements.

 

104 

 

  

Segment Information Analysis

 

Segment Information Analysis for the year 2015

 

Explanatory note: We are unable to provide segment information for Mega Retail for 2015 and have omitted this information in reliance on Rule 12b-21 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have requested this information from the trustees of Mega Retail, but they have not cooperated with our request, and we do not have the necessary records to prepare the required segment financial information.

 

BSRE Segment

 

  

For the year

ended December 31

       Convenience
translation for
the year ended
December 31
 
   2015   2014   % Change   2015 
   NIS in millions       U.S. $ 
Segment Revenues, net   230    224    2.7%   59 
Appreciation of Investment Property   (16)   114    N/A    (4)
Segment profit   189    338    (44)%   48 
Segment profit as a percentage of segment revenues   82%   150%          

 

In the year 2015, the BSRE segment recorded a loss in the amount of NIS 15.7 million (U.S. $4.0 million) from valuation of investment property compared to a profit of NIS 113.7 million in 2014.

Profit for the BSRE segment in the year 2015 decreased by 44% to NIS 189 million (U.S. $48 million) compared to the segment profit of NIS 338 million in the corresponding period. The decrease in the segment profit was due to revaluation loss in 2015.

 

Naaman segment

 

  

For the year

ended December 31

       Convenience
translation
for the year
ended
December 31
 
   2015   2014   % Change   2015 
   NIS in millions       U.S. $ 
Segment Revenues, net   291    300    (3)%   75 
Segment profit (loss)   (10.2)   11.5    N/A    (2.6)
Segment profit (loss) as a percentage of segment revenues   (3.5)%   3.8%          

 

The loss for the Naaman segment in the year 2015 amounted to NIS 10.2 million (US$ 2.6 million) (3.5% of segment revenues) compared to the segment profit of NIS 11.5 million (3.8% of segment revenues) in the corresponding period in 2014. The transition into loss derives from decrease in gross profit and increase in selling, general and administrative expenses.

 

105 

 

 

Dor Alon segment

 

  

For the year

ended December 31

       Convenience
translation for
the year ended
December 31
 
   2015   2014   % Change   2015 
   NIS in millions       U.S. $ 
Segment Revenues, net   4,012    4,908    (18.3)%   1,028 
Segment profit   116    143    (19)%   29.8 
Segment profit  as a percentage of segment revenues   2.9%   2.9%          

 

The profit for the Dor Alon segment in the year 2015 amounted to NIS 116.2 million (US $29.8 million) (2.9% of segment revenues) compared to the segment profit of NIS 143.1 million (2.9% of segment revenues) in the corresponding period in 2014. The main decrease in profit derived from decrease in revenues and decrease in selling, general and administrative expenses.

 

Year Ended December 31, 2014 compared with year ended December 31, 2013

 

The statements of income, including comparative figures, have been restated to separate the results of discontinued operations from continuing operations and presented them separately after the income from continued operations. The statements of income, including comparative figures of Supermarkets segment, have been restated to separate the results of branches which were resolved to cease their operations. Operating segment reporting presents the segments’ results from continued operations before taxes.

 

Net revenues. Net revenues amounted to NIS 96.5 million (U.S. $24.8) compared to revenues of NIS 102.7 million in 2013, a decrease of 5.9%.

 

Gross profit. Gross profit in 2014 amounted to NIS 23.0 million (U.S. $5.9 million) (23.8% of revenues) as compared to gross profit of NIS 28.3 million (27.5% of revenues) in 2013, a decrease of 18.7%. The decrease in the gross profit compared to the corresponding period last year was mainly due to the decrease in revenues.

 

Selling, general and administrative expenses. Selling, general, and administrative expenses in 2014 amounted to NIS 87.2 million (U.S. $22.4 million) (90.3% of revenues), compared to expenses of NIS 92.0 million (89.6% of revenues) in 2013, a decrease of 5.2%, deriving from reversal of provisions.

 

Changes in fair value of investment property, in 2014, the Company recorded a profit in the amount of NIS 49.9 million (U.S. $12.8 million) from valuation of investment property compared to a profit of NIS 45.5 million in 2013.

 

106 

 

 

Other income (expenses), net other income, net in 2014, amounted to NIS 25.3 million (U.S. $6.5 million) and included mainly profits from asset realization compared to other income, net of NIS 0.1 million in 2013.

 

Share in gains of associates in 2014, amounted to NIS 20.0 million (U.S. $5.1 million) compared to a share in gains of NIS 17.2 million in 2013.

 

Operating profit in 2014, amounted to NIS 31.0 million (U.S. $7.9 million) (32.1% of revenues) as compared to operating loss of NIS 0.8 million (0.8% of revenues) in 2013. The transition to operating profit mainly derived from decrease in selling, general and administrative expenses and from an increase in changes in fair value of investment property.

 

Finance expenses, net in 2014, amounted to NIS 113.8 million (U.S. $29.3 million) as compared to net finance expenses of NIS 167.4 million in 2013. The decrease in finance costs, net derives from the effect of the CPI on the Company's financial liabilities, part of which are linked to the CPI (in this period the CPI decreased at 0.1% compared to an increase of 1.90% in the comparable period last year), raising debt at lower interest rates and was partly offset from increase in the dollar exchange rate.

 

Taxes on income tax expenses in 2014 amounted to NIS 69.6 million (U.S. $18.0 million) as compared to tax expenses of NIS 23.6 million in 2013.

 

Loss from continuing operations amounted in 2014 to NIS 152.4 million (U.S. $39.2 million) compared to a loss of NIS 191.9 million in 2013. The loss from continued operations in this period attributed to the Company's shareholders amounted to NIS 197.6 million (U.S. $50.8 million) or NIS 2.99 per share (U.S. $0.77) and the income from continued operations attributed to non-controlling interests amounted to NIS 45.1 million (U.S. $11.6 million).

 

Net loss from discontinued operations in 2014 amounted to NIS 225.5 million (U.S. $65.7 million) compared to a profit of NIS 74.5 million in 2014. The loss from discontinued operations in 2014 attributed to the Company's shareholders amounted to NIS 234.2 million (U.S. $60.2 million) or NIS 3.55 per share (U.S. $0.91), and the profit from discontinued operations attributed to non-controlling interests amounted to NIS 8.7 million (U.S. $2.24 million).

 

Segment Information Analysis

 

Segment Information Analysis for the year 2014

 

107 

 

 

BSRE segment

 

  

For the year

ended December 31

       Convenience
translation for
the year ended
December 31
 
   2014   2013   % Change   2014 
   NIS in millions       U.S. $ 
Segment Revenues   224    214    5%   57 
Appreciation of Investment Property   114    113    0.9%   29 
Segment profit   338    320    5.6%   87 
Segment profit as a percentage of segment revenues   150%   149%          

 

In the year 2014, the BSRE segment recorded a profit in the amount of NIS 113.7 million (U.S. $29.2 million) from valuation of investment property compared to a profit of NIS 113.5 million in 2013.

 

Profit for the BSRE segment in the year 2014 increased by 5.8% to NIS 338 million (U.S. $87 million) compared to the segment operating profit of NIS 320 million in the corresponding period. The increase in the segment operating profit was due to increase in revenues compared to 2013.

 

Naaman Segment

 

  

For the year

ended December 31

      

Convenience
translation
for the year
ended

December 31

 
   2014   2013   % Change   2014 
   NIS in millions       U.S. $ 
Segment Revenues   300    300    0%   77 
Segment profit (loss)   11.5    (2.2)   N/A    3.0 
Segment profit (loss) as a percentage of segment revenues   3.8%   (0.7)%          

 

The profit for the Naaman segment in the year 2014 amounted to NIS 11.5 million (US$ 3.0 million) (3.8% of segment revenues) compared to the segment loss of NIS 2.2 million (0.7% of segment revenues) in the corresponding period in 2013. The transition into profit derives from increase in gross profit and decrease in selling, general and administrative expenses.

 

108 

 

 

Dor Alon segment

 

   For the year
ended December 31
       Convenience
translation for
the year ended
December 31
 
   2014   2013   % Change   2014 
   NIS in millions       U.S. $ 
Segment Revenues   4,908    5,180    (5.2)%   1,262 
Segment profit   143    141.1    1.3%   36.7 
Segment profit  as a percentage of segment revenues   2.9%   2.7%          

 

The profit for the Dor Alon segment in the year 2014 amounted to NIS 143.1 million (US$ 36.7 million) (2.9% of segment revenues) compared to the segment profit of NIS 141.1 million (2.7% of segment revenues) in the corresponding period in 2013. The main increase in the profit derived from increase in the company's share in gains of associates and increase in other income.

 

Quarterly Fluctuations

 

Our business is subject to fluctuations in quarterly sales and profits. These fluctuations are primarily attributable to increased sales and higher operating income in the holiday seasons occurring in different quarters from year to year. Thus, for example, in our “Naaman” and “Vardinon” chains increased sales attributable to Passover, which occurs in either March or April, may be realized in either the first or the second quarter, and sales attributable to the Jewish New Year, which occurs in either September or October, may be realized in either the third or the fourth quarter. In our filling stations, there is an increase in activity during vacations and holidays.

 

Many of our expenses are unrelated to the level of sales, and therefore a relatively modest increase or decrease in sales, whether or not related to the timing of holidays, tends to have a disproportionately large impact on our profitability.

 

109 

 

 

The following table sets forth certain quarterly information.

 

   Net revenues  

Operating profit before loss

in respect of guarantees to Mega

 
   NIS   Percentage
of
Full Year
   NIS   Percentage
of
Full Year
 
   (In thousands)       (In thousands)     
2015   205,529    100%   51,245    100%
First quarter   43,878    21.3%   18,200    36%
Second quarter   32,713    15.9%   (59,066)   (115)%
Third quarter   67,320    32.8%   34,696    68%
Fourth quarter   61,618    30.0%   57,415    112%
                     
2014   96,548    100%   31,005    100%
First quarter   26,494    27.4%   2,889    9.3%
Second quarter   34,398    35.6%   15,096    48.7%
Third quarter   31,435    32.6%   26,098    84.2%
Fourth quarter   4,221    4.4%   (13,078)   (42.2)%

 

Exchange Rates

 

At December 31, 2015, the representative rate of exchange of the NIS to the dollar, as published by The Bank of Israel, was NIS 3.90 = $1.00. On March 31, 2016, the representative rate of exchange of the NIS to the dollar, as published by The Bank of Israel, was NIS 3.77 = $1.00. The table below sets forth, for the periods and dates indicated, certain information concerning the representative exchange rate of the NIS to the dollar, as published by The Bank of Israel for the years ended December 31, 2011 through 2015:

 

Year Ended
December 31,
  Period End   Average Rate(1)   High   Low 
       (NIS per $1.00)         
                 
2011   3.82(2)   3.58    3.82    3.36 
2012   3.73(2)   3.86    4.08    3.70 
2013   3.47(2)   3.61    3.79    3.47 
2014   3.89(2)   3.58    3.99    3.40 
2015   3.90(2)   3.88    4.05    3.76 

 

(1) The average of the daily exchange rates in each year.

(2) During 2011, 2012, 2013, 2014, and 2015 the US dollar depreciated in value vis-à-vis the NIS by (7.6)%, 2.3%, 7.0%, (12.0%) and (0.3%), respectively.

 

The following table sets forth certain information concerning the representative exchange rate of the NIS to the dollar, as published for the months October 2015 through March 2016:

 

Month  Period End   Average Rate(1)   High   Low 
       (NIS per $1.00)         
October   3.87    3.86    3.92    3.82 
November   3.88    3.89    3.92    3.87 
December   3.90    3.88    3.91    3.86 
January   3.95    3.95    3.98    3.91 
February   3.91    3.91    3.96    3.87 
March   3.77    3.87    3.91    3.77 

 

(1) The average of the daily exchange rates.

 

110 

 

 

Impact of Inflation and Currency Fluctuations

 

Inflation in Israel increases some of our expenses, which, because of competitive pressures, are generally not offset, fully or as quickly, by increases in our selling prices and revenues. See “Item 3. Key Information – D. Risk Factors – Risks Related To Our Business As A Whole – Fluctuations of inflation may adversely affect our financial expenses and value of our assets” and “Item 3. Key Information – D. Risk Factors – Risks Related To Our Business as a Whole – Currency fluctuations might affect the value of our assets and translation of operating results.”

 

Dor Alon is exposed to fluctuations in the US dollar - NIS exchange rate due to credit that Dor Alon obtains from its suppliers (mostly from Oil Refineries Ltd., which is linked to the US dollar). In addition, any devaluation of the NIS against various non-Israeli currencies in which we or our suppliers pay for imported goods has the effect of increasing the selling price of those products which we sell in Israel in NIS and affects our operating results. In particular, a devaluation of the NIS against the Chinese currency could significantly increase the cost of production of our Houseware and Textile products at our Naaman stores and the selling price of those products to our customers. An increase in price of imported goods by our suppliers can usually be offset by an increase in the consumer price of such goods. This devaluation would have a greater effect on our Houseware and Textile retail business because a higher proportion of the goods that we sell in our Naaman stores is acquired from suppliers overseas. This devaluation would also cause an increase in our expenses as recorded in our NIS denominated financial results even though the expenses denominated in non-Israeli currencies will remain unchanged. Changes in interest rates, in the Israeli consumer price index and in the US dollar - NIS exchange rate could materially adversely affect our financial results. In addition, we have loans and debentures in NIS, some of which are subject to floating interest rates and some are linked to the Israeli consumer price index. Due to these loans and to the consumer price index linked debentures issued by us, we are exposed to changes in bank interest rates and in the Israeli consumer price index. We also have rent expenses and other operating expenses which are linked to the Israeli consumer price index. Due to these expenses, we are exposed to the changes in the Israeli consumer price index.

 

In addition, because our financial results are denominated in NIS and are translated into US dollars for the convenience of US investors, currency fluctuations of the NIS against the US dollar may impact our US dollar translated financial results.

 

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Political Conditions

 

We and all of our subsidiaries are incorporated under Israeli law and our principal offices and operations are located in the State of Israel. Political, economic, security and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors. A state of hostility, varying from time to time, in intensity and degree, has led to security and economic problems for Israel. Israel signed a peace treaty with Egypt in 1979 and a peace treaty with Jordan in 1994. Israel has not entered into any peace agreements with Syria and Lebanon. In the last few years, the establishment of a Hamas government in Gaza has created additional unrest and uncertainty in the region and has increased hostilities between Israel and the Palestinians. These hostilities have included terrorist acts in Israel and military operations in the West Bank and Gaza. During the last decade, there has been a high level of violence between Israel and the Palestinians, including missile strikes by Hamas against Israel.

 

The future of Israel’s relations with its Arab neighbors and the Palestinians is uncertain and several countries, companies and organizations continue to restrict business with Israel and with Israeli companies. We believe that in the past, these practices have not had a material adverse effect on us. However, we could be adversely affected by adverse developments in Israel’s relationships with its Arab neighbors and the Palestinians, or by restrictive laws, policies or practices directed towards Israel or Israeli businesses. In addition, ongoing violence between Israel and its Arab neighbors and Palestinians may have a material adverse effect on the Israeli economy, in general, and on our business, financial condition or results of operations. In particular, in recent conflicts, missile attacks have occurred on civilian areas, which could cause substantial damage to our infrastructure network, reducing our ability to continue serving our customers as well as our overall network capacity. In addition, in the event recent political unrest and instability in the Middle East, including changes in some of the governments in the region and the emergence of Islamic State causes investor concerns in a reduction in the value of the NIS, our expenses in non-NIS currencies may increase, with a material adverse effect on our financial results.

 

Most of Naaman’s imports during 2014 and 2015 were from suppliers located in the Far East. Because most of the products sold by Na'aman and Vardinon are manufactured overseas and imported from China, its activity may be affected by changes in the political and economic conditions in China. In addition, because this segment acquires most of its products from suppliers outside of Israel, and most of its products are imported via the sea, a prolonged general strike, shutdown or a disruption of any of the Israeli ports for an extended period of time, including as a result of a military conflict, would affect our ability to import such products or increase their prices. In addition, since the peak selling season of some of our Houseware and textile stores is during the holidays, disruptions in the ports during or adjacent to such holiday seasons may adversely affect our sales and financial results.

 

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Economic Conditions

 

Our financial performance is dependent to a significant extent on the economy of Israel. During 2013 and 2014, Israel’s Gross Domestic Product rose by 3.3% and 2.6%, respectively. Reports of the Israeli Central Bureau of Statistics indicate that during 2015 Israel’s Gross Domestic Product rose by 2.5%. 

 

Trade Agreements

 

Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development, the International Finance Corporation, and the Organization for Economic Co-operation and Development, also known as, OECD. Israel is a signatory to the General Agreement on Tariffs and Trade, which provides for reciprocal lowering of trade barriers among its members. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export the products covered by these programs either duty-free or at reduced tariffs. In addition, Israel, the EU (known as the European Union), and the European Free Trade Association have a free trade agreement.

 

Corporate Tax Rate

 

We and our subsidiaries are subject to corporate tax in Israel at a flat rate of 26.5% in 2015.

 

For further tax information, see “Item 10. Additional Information – E. Taxation –Israeli Tax Considerations.”

 

Critical Accounting Policies and Estimates

 

We have chosen accounting policies that we believe are appropriate to accurately and fairly report our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 2 to our consolidated financial statements.

 

We base our estimates on historical experience, where applicable, and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and could have a material impact on our reported results.

 

We believe that the following accounting policies are the most critical in the preparation of our consolidated financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

 

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Provisions with respect to guarantees and funding commitments in respect of Mega Retail.

 

As detailed in Note 5b to our consolidated financial statements, our provision with respect to our guarantees and funding commitments towards Mega Retail were measured under the best estimate model, and is based on the assessment of most likely scenarios. These scenarios may or may not happen, or have different timing than assumed. In addition, some of the amounts were determined on the basis of our legal interpretation and our legal advisors. Should the outcome and realization of such guarantees and commitments be different from the assumptions and interpretations used for measurement, we may be required to recognize additional expenses.

 

Provisions for claims

 

The provisions for legal claims are recorded based on the estimates of our management (after consulting with legal counsel) as to the likelihood that cash flows will be required to settle these liabilities and as to the discounted amounts of such cash flows.

 

Our assessments are based on our history in these cases, on the stage of these claims and on the experience of our legal advisers. The outcome of the legal cases in court could be different from our assessments.

 

Goodwill and indefinite life intangible assets

 

In accordance with the accounting policy stated in note 2 of our consolidated financial statements, we test at least annually whether goodwill and indefinite life intangible assets of continuing operations have been impaired. The recoverable amount of the cash-generating unit (CGU) to which goodwill has been allocated is determined mostly based on value-in-use calculations.

 

During, 2015, certain goodwill and property impairments were recognized, which relate to the discontinued operations of Na'aman and Mega Retail respectively see also note 7 to our consolidated financial statements.

 

Fair value of disposal groups

 

Following the classification during 2015, of the Dor Alon segment as discontinued operations (see also Note 7), this disposal group is stated at the lower of their book value, or its fair value less cost to sale. Estimates and judgments are required in order to determine whether the market value represents the fair value of those holdings and the amounts of costs to sell. Consequently, Dor Alon net assets at December 31, 2015, were written down to the market value of its shares (level 1).

 

Investment property and investment property under development

 

Under IAS 40 “Investment Property,” investment property is initially valued at cost, including costs directly attributable to the acquisition. Thereafter, IAS 40 allows us to measure the value of our investment property (i) at cost less depreciation and impairment or (ii) at fair value. We measure the value of investment property at fair value. Gains or losses arising from changes in fair value of our investment property are recognized in profit or loss when they arise. Accordingly, such changes can have a significant impact on our profit or loss. Investment properties are not systematically depreciated.

 

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Investment property is presented at fair value based on assessments of external independent appraisers, who have the appropriate qualifications. In certain cases fair value is determined using discounted cash flows that are based on various assumptions; judgments and estimates are required for cash flows projections that are expected during the remaining economic life of the asset, in accordance with the lease terms during the lease period and, after such period, based on suitable rentals that are determined on the basis of market surveys for similar assets with similar location and terms, using adjustments and discount rates that reflect the current market assessments as to uncertainties prevailing with respect to cash flow amounts and timing.

 

In some cases, mainly building rights or assets under development, the residual value approach is used to determine fair value. The evaluation of the asset's fair value is based on the value of the completed asset, less estimated constructor's profit and construction costs to complete.

 

As of December 31, 2015, substantially all of our investment property under development was measured at fair value. Changes in the assumptions that are used to measure the investment property may lead to a change in the fair value. See note 4(4) to our consolidated financial statements included elsewhere in this Annual Report for a sensitivity analysis regarding changes in the discount rates used in our fair value estimates.

 

Income taxes and deferred taxes

 

We recognize liabilities for anticipated tax exposures based on estimates of whether additional taxes will be due. Where the final outcome of these matters differs from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

 

In addition, we recognize deferred tax assets and tax liabilities based on the difference between the carrying value of such assets and liabilities and their amount for tax purposes. We continually assess the recoverability of deferred tax assets based on historical taxable income, expected taxable income, the expected timing of the reversals of temporary differences and the application of tax planning strategies taking into account market expectations, the duration of successive tax losses and their magnitude. When we, as a result of these assessments, reduce deferred tax assets (or increase deferred tax liabilities), our effective tax rate will increase and negatively affect our results.

 

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Recently issued accounting pronouncements

 

For information on recently issued accounting pronouncements, see note 2ae to our consolidated financial statements.

 

Liquidity and Capital Resources

 

Sources and Uses of Cash

 

Sources.

 

The principle sources of our liquidity are sale of shares of our subsidiaries, financing from our controlling shareholder and dividends from subsidiaries, long-term and short-term borrowing by BSRE and Dor Alon from banks and other institutions and issuance of debentures by BSRE and Dor Alon. During 2015, we received long-term loans from banks in the amount of NIS 354.3 million, or $90.8 million and received long term loans from the parent company of NIS 170 million or $43.6 million. For information regarding outstanding balances and repayment information see “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Long-Term Loans from Banks and other Financial Institutions” and “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Debentures.”

 

BSRE used its available cash resources and bank financing and debentures to finance the expansion of its activities and repay its obligations. The available cash resources of Dor Alon and its subsidiaries were used in 2015, and are expected to continue to be used, to finance the expansion of Dor Alon.

 

Cash generated by operations was approximately NIS 270.4 million, or $69.3 million, in 2015, a decrease of 46.5% compared with approximately NIS 505.9 million in 2014. The main decrease derived from changes in net working capital in the amount of NIS 297.3 (U.S $76.1 million) compared to last year and was partially offset by an increase from continued operations of NIS 92.9 million (U.S $23.8 million).

 

We incurred a substantial net loss from continuing operations and from discontinued operations in the year ended December 31, 2015. In the absence of disposal of properties or the completion of the Ben Moshe Proposal, we have liquid available sources sufficient at the most for financing our current operations for a few months (provided that no extraordinary events occur), at the end of which, if the transaction with the potential buyer is not completed, the Company will need to sell any of its assets to finance its continued operations. There exists substantial doubt whether we will be able to continue as going concern.

 

Uses.

 

During 2015, we repaid long-term loans in the amount of NIS 496.4 million, or $127.2 million, debentures in the amount of NIS 415.5 million, or $106.5 million, short-term borrowing from banks in the amount of NIS 206.2 million or $52.8 million and interest in the amount of NIS 178.3 million, or $45.7 million.

 

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In 2015, we funded our support of Mega Retail primarily from sale of shares of our subsidiaries, financing from our controlling shareholder and dividends from subsidiaries. During 2015, we invested approximately NIS 133.8 million, or $34.3 million, in property and equipment, intangible assets, investment property and payments on account of real estate, a 58.7% decrease from our 2014 investment of NIS 323.8 million. Of our investment in property and equipment, intangible assets and investment property in 2015, we invested NIS 21.0 million, or $5.4 million, in land and buildings, including land that we leased and investment property, as compared with NIS 79.6 million in 2014. During 2016 and 2017, we intend to open approximately seven to nine filling stations at a cost of approximately NIS 4 million to NIS 6 million per filling station. We intend to finance our store development, renovation, modeling, expansion and acquisitions mainly from cash generated by our operations, from borrowings from banks and others and sales of subsidiary shares.

 

Dividends

 

The following table sets forth dividends paid by the Company from January 1, 2011 until the date of this Annual Report:

 

Date of payment   Amount per share   Total amount(1)
December 29, 2011   NIS 1.13 ($0.30)   NIS 75 million (approximately $20.2 million)

 

(1)In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

 

Pursuant to the Israeli Companies Law, dividend distributions are limited to the greater of retained earnings or earnings generated over the previous two years, according to our then last reviewed or audited financial statements, provided that the date of the financial statements is not more than six months prior to the date of the distribution, or we may distribute dividends that do not meet such criteria only with court approval. As of December 31, 2015, the Company does not have any earning to distribute as dividends.

 

The loan agreements of BSRE and Dor contain financial covenants that may in the future, depending on their respective financial results and shareholders' equity, restrict them from transferring funds to us in the form of cash dividends, loans or advances, subject to any legal limitations. As of December 31, 2015, we did not have any earnings to distribute as a dividend.

 

Dividends paid by BSRE until the date of this Annual Report:

 

In March 2011, the Board of Directors approved a decision to adopt a policy, which has recently been extended for the years 2015 and 2016, according to which BSRE will distribute dividends in the amount of no less than 25% and not higher than 75% of the net profits of BSRE in each year, without taking into account revisions in the net fair value of real estate for investment. Such distributions are subject to the “profit test” under the Israeli Companies Law at the relevant dates and to other decisions of BSRE’s board of directors, including decisions designating a different use of BSRE’s profits and/or a change in the BSRE dividend policy. In December 2014, the Board of Directors approved the extension of the dividend policy for the years 2015 and 2016.

 

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The following table sets forth dividends paid by BSRE from January 1, 2010 until the date of this Annual Report

 

Date of payment   Amount per share   Total amount(1) (2)
April 7, 2016   NIS 2.59 ($0.7)   NIS 30 million (approximately $7.9 million)
June 11, 2015   NIS 2.59 ($0.7)   NIS 30 million (approximately $7.8 million)
April 15, 2015   NIS 2.59 ($0.6)   NIS 30 million (approximately $7.5 million)
December 8, 2014   NIS 4.32 ($1.1)   NIS 50 million (approximately $12.5 million)
October 28, 2013   NIS 3.18 ($0.9)   NIS 40 million (approximately $11.3 million)
April 23, 2013   NIS 3.98 ($1.1)   NIS 50 million (approximately $13.8 million)
December 25, 2011   NIS 2.71 ($0.71)   NIS 34 million (approximately $9.0 million)
April 13, 2011   NIS 3.82 ($1.1)   NIS 47.8 million (approximately $14.0 million)

 

(1)In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

 

(2)Alon Blue Square’s share in the distribution of the dividends was approximately between 53.92% - 80%.

 

Buy Back by BSRE

 

In February 23, 2014, BSRE completed a buyback by way of tender offer on a pro rata basis of an aggregate 979,220 of its ordinary shares, representing 7.8% of the outstanding shares and voting rights in BSRE for an aggregate amount of NIS 160 million. The tender offer was responded by shareholders holding 99.2% of BSRE shares, including the Company. The Company’s share in the purchase offer’s consideration was NIS 120 million.

 

Dividends paid by Dor Alon since the time Alon Blue Square acquired Dor Alon and until the date of this Annual Report:

 

Date of payment   Amount per share   Total amount(1) (2)
February 17, 2016   NIS 1.57 ($0.40)   NIS 25 million (approximately $6.4 million)
June 23, 2015   NIS 3.15 ($0.83)   NIS 50 million (approximately $13.2 million)
December 9, 2014   NIS 2.08 ($0.53)   NIS 30 million (approximately $7.6 million)
October 28, 2013   NIS 1.74 ($0.49)   NIS 25 million (approximately $7.1 million)
April 9, 2013   NIS 1.39 ($0.38)   NIS 20 million (approximately $5.5 million)
December 19, 2011   NIS 2.08 ($0.55)   NIS 30 million (approximately $7.9 million
April 14, 2011   NIS 1.73 ($0.5)   NIS 25.0 million (approximately $7.2 million

 

(1)In accordance with the representative rate of exchange of the NIS to the dollar as of the date of the payment of the dividend.

 

(2)Alon Blue Square’s share in the distribution of the dividends was approximately between 63.13% - 78.38%.

 

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Short-Term Credit from Banks and Others

 

The following table sets forth the principal terms of our short-term credit from banks and others:

 

   December 31 
   2014   2015* 
   NIS in thousands 
         
Bank overdrafts   5,490    - 
Bank loans   657,939    352,234 
Loan from parent company   -    139,194 
Commercial paper   111,197    - 
Current maturities of long-term loans   283,342    190,995 
    1,057,968    682,423 

 

*Does not include credit and loans of Dor Alon and Naaman which are designated for sale.

 

The short term credit described in the table above includes NIS 229.0 million of short term credit undertaken by the Alon Blue Square and NIS 140.4 million in current maturities in the aggregate amount of NIS 370.0 million as of December 31, 2015 and NIS 233.0 million as of December 31, 2014.

 

Current maturities of long-term loans for the year ended December 31, 2015 includes a bank loan granted to us in connection with our purchase of Naaman, which is secured by 60% of the shares that we hold in Naaman. We are in breach of a financial covenant in our loan agreement, and the bank has the right to foreclose on these shares in Naaman if we will not pay the amount due under the loan in May 2016.

 

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Long-Term Loans from Banks and other Financial Institutions

 

The following table sets forth the principal terms of our long-term loans from banks and other financial institutions:

 

   December 31   Annual 
   2014   2015*  

Interest Rate (1)

 
   NIS in thousands   % 
In Israeli currency:               
Linked to the Israeli CPI bearing a fixed interest rate   694,861    266,753    3.34 
Linked to the Israeli CPI bearing a variable interest rate   -    -    - 
Unlinked and bearing a fixed interest rate   28,483    10,778    6.23 
Unlinked and bearing a variable  interest rate   974,605    348,479    2.61 
Linked to the Israeli CPI from controlling shareholder without interest   -    29,194    - 
                
Total   1,697,949    655,204      
Less - current maturities   283,342    190,995      
    1,414,607    464,209      

 

(1)Weighted average rate as of December 31, 2015.

 

*Does not include credit and loans of Dor Alon and Naaman which are designated for sale.

 

The loans described in the table above include loans undertaken by Alon Blue Square in the aggregate amount of approximately NIS 140.5 million (presented in current maturities). The loan agreements contain undertakings BSRE to meet certain financial covenants. BSRE has a loan with a total balance of NIS 186.2 million, whereby BSRE has undertaken to meet certain financial covenants. As of December 31, 2015, BSRE met the above mentioned covenants. BSRE has a loan totaling approximately NIS 113.7 million as at December 31, 2015, with a group of institutional investors to finance the building of the addition to the Hadar Mall, for which BSRE has undertaken to meet certain financial covenants. As of December 31, 2015, BSRE met the above mentioned covenants.

 

Debentures

 

The following table summarizes debentures outstanding as of December 31, 2014 and 2015 issued by (i) the Company, and (ii) BSRE, of which we owned 53.92% of the shares as of March 31, 2016:

 

   December 31 
   2014   2015* 
   NIS in thousands 
Convertible debentures:          
Issued by BSRE   60,425    30,067 
Less - current maturities   29,686    - 
    30,739    30,067 
           
Non-convertible debentures:          
Issued by the Company   342,416    359,716 
Issued by BSRE   1,642,512    1,460,588 
Issued by Dor Alon   464,320    - 
    2,449,248    1,820,051 
           
Less - current maturities   437,249    532,844 
    2,011,999    1,287,207 

 

*Does not include debentures issued by Dor Alon and Naaman which are designated for sale.

 

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Alon Blue Square Series C Debentures

 

In November 2010, we issued NIS 100 million in aggregate principal amount of Series C CPI linked debentures bearing annual fixed interest of 2.5% payable in two semi-annual payments on May 4 and November 4 in each of the years 2011 to 2022. The principal will be repaid in 12 equal payments on November 4 of each of the years 2011 to 2022 (inclusive). The debentures were issued at a discount of 3.2% and for a consideration of NIS 96.8 million. All the debentures are linked (principal and interest) to the Israeli CPI, but in the event the Israeli CPI is less than the base index (index known at date of issuance), the amount of the debentures will not be adjusted below the base index.

 

On April 11, 2012, we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 35 million for an aggregate amount of NIS 31.3 million.

 

On July 10, 2013, we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 100 million for an aggregate amount of NIS 99.3 million.

 

On November 15, 2013, we issued additional Series C debentures in the framework of a private placement in the aggregate amount of NIS 62 million for an aggregate amount of NIS 63.9 million.

 

On April 3, 2014, the Series C debentures series was expanded by a private offering of NIS 150 million for an aggregate amount of NIS 151.9 million.

 

Ratings of Alon Blue Square Debentures

 

In January 2016, Midroog, an Israeli rating agency and 51% subsidiary of Moody’s Investors Services Inc., decreased the rating of Series C Debentures from B3to Caa1.

 

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BSRE Debentures

 

In August 2006, BSRE issued 2.5 million BRSE ordinary shares of NIS 1 par value each, together with NIS 100 million par value of registered BRSE Series A debentures, which are convertible into BSRE ordinary shares, and NIS 650 million par value of registered BSRE Series B debentures. In September 2008, BSRE completed the issuance of an additional NIS 125 million in principal amount of unsecured non-convertible (Series B) debentures to institutional investors. The terms of these debentures are identical to the terms of the non-convertible (Series B) debentures issued by BSRE in August 2006. Pursuant to a partial exchange tender offer, on January 27, 2014, BSRE completed the exchange of NIS 200 million par value of debentures (Series B) against the issuance of NIS 265.5 million par value of marketable debentures (Series E), which was effected as an expansion of Series E, with the same terms. The carrying amount of the liability relating to the exchanged debentures (series B) was NIS 238 million. The exchange is not considered substantive change in the terms of the debentures and therefore had no effect on the statement of income. In October 2009, BSRE issued NIS 300 million par value of registered Series C debentures. In July 2010, BSRE issued NIS 110 million par value of registered BSRE Series D debentures. During 2012 and 2013, the debentures (Series D) were expanded by several private offerings to institutional investors amounting to NIS 276 million and NIS 309 par value, respectively. Total net consideration received from such offerings, net of commissions to the institutional investors and distributors, amounted to NIS 439 million in 2013 and NIS 308 million in 2012. The annual effective interest rate payable on Series D debentures, taking into account the expansions and issuance expenses as above is 4.3%. On October 30, 2013, BSRE issued new Series E Debentures in the aggregate face amount of NIS 120 million for aggregate consideration of NIS 121.7 million.

 

The third partial maturity date of the principal (out of four) for the Series A and Series B Debentures was at August 31, 2015, when BSRE repaid an aggregate amount of NIS 180.6 million. On October 31, 2015 was the fifth partial maturity date (7.5% of the bond series principal) of series C bonds where BSRE repaid an aggregate amount of NIS 24.3 million.

 

BSRE Series A Debentures

 

The BSRE Series A debentures are to be redeemed in four equal annual installments on August 31 of each of the years 2013 to 2016. The Series A debentures are linked (principal and interest) to the known Israeli CPI and bear interest at an annual rate of 6.25%, which is payable semi-annually. The Series A debentures are convertible into BSRE ordinary shares from the date that they are first listed for trade on the stock exchange through August 16, 2016, except during the periods from August 17 through August 31 in each of the years 2013 to 2015. The conversion rate is subject to adjustments in the event of distribution of cash dividends. Until August 31, 2008, the conversion was effected at the rate of NIS 96.83 par value of registered Series A debentures (following adjustments due to distributions of cash dividends) for each ordinary share of NIS 1 par value; through August 16, 2016, the conversion rate is NIS 225.59 par value of registered Series A debentures (following adjustments due to distributions of cash dividends) for each ordinary share of NIS 1 par value.

 

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BSRE Series B Debentures

 

The BSRE Series B debentures are to be redeemed in four equal annual installments on August 31 of each of the years 2013 to 2016. The Series B debentures are linked to the known CPI and bear interest at an annual rate of 4.7%, which is payable semi-annually.

 

If, at the time of making any redemption/payment on account of the principal and of interest of the Series A or Series B debentures, it is found that the payment index is less than the base index (the CPI for July 2006), BSRE is required to make such payment according to the base index.

 

BSRE Series C Debentures

 

The BSRE Series C debentures are to be redeemed in eight non-equal annual installments on October 31 of each of the years 2011 to 2018, of which six installments each in the amount of 7.5% of the debentures’ principal amount are to be redeemed on October 31 of each of the years 2011 to 2016, and two installments each in the amount of 27.5% of the debentures’ principal amount are to be redeemed on October 31 of each of the years 2017 to 2018. The Series C debentures are linked to the known CPI and bear interest at an annual rate of 4.2% which is payable semi-annually on April 30 and October 31 of each of the years 2010 to 2018.

 

If, at the time of making any redemption/payment on account of the principal and of interest of the Series C debentures, it is found that the payment index is less than the base index (the CPI for August 2009), BSRE is required to make such payment according to the base index.

 

BSRE Series D Debentures

 

The BSRE Series D Debentures are linked (principal and interest) to the Israeli CPI and bear fixed interest of 4.5%. The Debenture principal is to be redeemed in four equal annual payments, on June 30 in each of the years 2017 to 2020 (inclusive). The Debenture interest is payable in semi-annual payments on June 30 of each of the years 2011 to 2020 (inclusive) and December 31 of each of the years 2010 to 2019 (inclusive).

 

The terms of the debentures determine that in case Midroog or another rating agency were to reduce the Company’s rating to A3, the annual interest rate will increase by 0.35%. If the rating were to be reduced further, then the annual interest rate will increased by 0.35% multiplied by the number of notches that the Company’s rating is reduced below A3. Midroog reduced the Company's rating to A3, and the interest rate increased by 0.35%.

 

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BSRE Series E Debentures

 

The BSRE Series E debentures are to be redeemed in six non-equal annual installments on May 31 of each of the years 2018 to 2023, of which four installments each in the amount of 7.5% of the debentures’ principal amount are to be redeemed on May 31 of each of the years 2018 to 2021, and two installments each in the amount of 35% of the debentures’ principal amount are to be redeemed on May 31 of each of the years 2022 to 2023. The Series E debentures are linked (principal and interest) to the Israeli CPI and bear fixed interest of 3.3% which is payable semi-annually on May 31 and November 31 of each of the years 2014 to 2023. BSRE has committed not to create a current charge on its entire assets in favor of any third party to secure any debt or liability unless a consent of the Series E Debenture holders is obtained or provided that a current charge, of the same ranking is created on its entire assets in favor of the Series E Debenture Holders.

 

The terms of the debentures determine that in case a rating agency were to reduce the Company’s rating to A3, the annual interest rate will increase by 0.5%. Similarly, if the rating were to be reduced further, then the annual interest rate will increased by 0.25% multiplied by the number of notches that the Company’s rating is reduced below A3, until an annual interest of 4.3%. Midroog reduced the Company's rating to A3, and the interest rate increased by 0.5%.

 

Following reports in connection with proposals for the sale of Company shares held by Alon, the trustee for BSRE's Series E Debentures notified BSRE that, based on a legal opinion it received regarding the definition of "the current controlling shareholder" contained in the deed of trust for the Series E Debentures, in the event of a transfer of control in the Company, a meeting of the holders of the Series E Debentures should be convened for the purpose of obtaining approval of the holders of the Series E Debentures prior to a sale by Alon of its holdings on the Company.

 

Rating of BSRE Debentures

 

On May 14, 2015, Midroog reduced the rating on the debentures (series A to E) issued by BSRE from A1 to A2, while maintaining the outlook at credit review with negative implications.

 

On July 7, 2015, Midroog reduced the rating on the debentures (series A to E) issued by BSRE from A2 to A3, while maintaining the outlook at credit review with negative implications.

 

On November 10, 2015, Midroog announced on the examination of the credit review with negative implications outlook of the debentures (series A to E) issued by BSRE. On March 21, 2016, Midroog announced that it is continuing examination of the credit review of BSRE with negative implications.

 

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Dor Alon Debentures

 

In November 2015, Dor Alon completed the issuance of new bond series (Series E) in the amount of NIS 250 million par value rated A3 with stable outlook. The total immediate consideration amounted to NIS 248 million. The bonds (Series E) were listed for trade on the stock exchange. The bonds are payable (principal) in seven equal annual installments effective from July 1, 2017, are unlinked and bear annual interest of 4.55% payable in semiannual effective from July 1, 2016.

 

Dor Alon committed to comply with financial covenants including, among others, complying with minimum equity and equity to balance sheet ratio and limitations on dividend distribution from current and accumulated earnings.

 

For additional information on charges pertaining to the collateralized long-term loans, see note 35 to our consolidated financial statements.

 

Commitments for Capital Expenditures

 

As of December 31, 2015, we had entered into agreements for investments in real estate, investment property, land and buildings and constructions work in the total amount of approximately NIS 218.1 million, or $55.9 million. We intend to finance these investments from cash generated by our operations and from loans from banks or other financial institutions.

 

C.Research and Development, Patents and Licenses.

 

Not applicable.

 

D.Trend Information.

 

Real Estate

 

The shopping centers industry is more moderately affected by macroeconomic changes, but is not immune to changes in the dynamic environment. There is currently a high demand for existing space in malls and shopping centers; however a slowdown in the economic growth and an increase in living costs may reduce the demand for new commercial space. In addition, shopping centers are considered to be immune because they have a large dispersion of tenants, are a preferred alternative for recreation and leisure time for families and there is a low impact of the store income on rent payments therefore there is stability in proceeds.

 

The average occupancy in the leading shopping centers in 2015 remained high. In locations in which competition was high, principally Beer Sheva and northern Haifa suburbs, there was low occupancy, downward pressure on rent and need to provide discounts to lessees. As a continuation of the trends from previous years, also in 2015, the fashion sector suffered from a reduction in prices and increased competition. Stores in the fashion industry took efficiency measures, including stores, reduction of space and increased investment in online shopping. The continued expansion of international fashion chains is expected to continue, adversely affecting local fashion companies. The trend towards on-line shopping, principally from overseas, is expected to strengthen. In addition, the security tension in the last year may lead to more shopping in closed, secure areas rather than on the street or open areas.

 

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Dor Alon

 

Dor Alon is the fourth leading company in Israel for the distribution of petroleum products, with 211 fueling stations. The three largest companies in Israel distributing petroleum products have an aggregate of 755 fueling stations. In addition, there are 140 filing stations operated by other smaller companies.

 

Dor Alon anticipates opening and operating an additional seven to nine commercial and filling stations during 2016 and 2017. Dor Alon has plans and agreements to plan, establish and operate additional filling stations, and these stations are currently in different stages of authorization and establishment.

 

Dor Alon intends to expand its market share as a supplier to natural gas industry. Dor Alon has entered into an agreement to purchase natural gas from Tamar Partnership in order to provide the energy requirements of Sugat. For further information see “Item 4. Information on the Company – B. Business Overview – Dor Alon Segment – Dor Alon Sites Strategies.” In addition, Dor Alon plans to expand its independent convenience stores chain outside of the filling stations.

 

Naaman

 

Based on data from the Bank of Israel, 2015 marked a decrease in market growth and demand compared to 2014 (2.3% compared to 2.6%), and expectations are that the decrease will continue in 2016. As of March 31, 2016 we are unable to determine the duration of this market trend.

 

E.Off-Balance Sheet Arrangements.

 

None.

 

F.Tabular Disclosure of Contractual Obligations.

 

The following table sets forth certain information concerning our obligations and commitments to make future payments under contracts, such as debt and lease agreements, but not include obligations and commitments of Dor Alon and Naaman which are designated for sale:

 

   2016   2017   2018   2019   2020   2021  

2022 and

thereafter

   Total 
                                 
Long term loans from  banks (1)   190,995    27,188    27,188    27,188    27,188    27,188    299,075    626,010 
Non Convertible Debentures issued by the   Company (2)   359,974    -    -    -    -    -    -    359,974 
Non-Convertible  Debentures issued by BSRE  (3)   173,751    274,562    303,604    214,867    214,867    29,041    271,056    1,481,745 
Convertible   Debentures issued by BSRE (3)   29,420    -    -    -    -    -    -    29,420 
Loan from parent company   -    -                        60,000    60,000 
Short term credit from banks and others (4)   491,427    -    -    -    -    -    -    491,427 
Total contractual cash obligations   1,246,567    301,750    330,792    242,055    242,055    56,229    630,131    3,049,577 

 

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(1)The table above does not include payments of interest on our long-term loans because the actual interest payments on most of the loans are dependent on variable parameters, such as changes in the Israeli CPI, or variable interest rates which cannot be predicted at the date of this report. Without taking into account any changes in the Israeli CPI or changes in foreign currency rates and assuming the relevant variable interest rate will remain at its level as it was as of December 31, 2015 (3.06% per annum), interest payments on the long term loans (in thousands) would be, NIS 19,140 in 2016, NIS 12,944 in 2017, NIS 12,135 in 2018, NIS 11,326 in 2019, NIS 10,517 in 2020, NIS 9,708 in 2021, and NIS 8,899 in 2022 and beyond. This includes a loan in the principal amount of NIS 163 million classified as a short-term loan because the Company is currently in breach of this loan.

 

(2)These debentures bear interest at an annual rate of 2.5% and are linked (principal and interest) to the Israeli CPI but in the event the Israeli CPI is less than the base index (index known at the date of issuance), the amount of debentures will not be adjusted below the base index. Without taking into account any changes to the Israeli CPI, interest payments on the Non-Convertible Debentures (in thousands) would be NIS 8,999 in 2016. The table above does not include payments of interest on our debentures because the actual interest payments on these debentures will depend on changes in the Israeli CPI, which cannot be predicted at the time of this report. These debentures are classified as short-term because the Company is currently in breach of these debentures.

 

(3)The Non-Convertible Debentures and the Convertible Debentures (Series A, Series B Series C, Series D and E) bear interest at an annual rate of 6.25%, 4.7%, 4.2%, 4.5 % and 3.3%, respectively, and are linked (principal and interest) to the Israeli CPI, but in the event the Israeli CPI is less than the base index (index known at date of issuance), the amount of debentures will not be adjusted below the base index. Without taking into account any changes to the Israeli CPI, interest payments on the Non- Convertible Debentures (in thousands) would be NIS 61,726 in 2016, NIS 53,681 in 2017, NIS 41,592 in 2018, NIS 28,544 in 2019, NIS 19,224 in 2020 and NIS 9,903 in 2021 and NIS 8,945 in 2022 and beyond. Without taking into account any changes to the Israeli CPI, based on the principal amount of the Convertible Debentures as of December 31, 2015 and assuming no additional conversion of debentures, interest payments on the Convertible Debentures (in thousands) would be NIS 1,839 in 2016. The table above does not include payments of interest on our debentures because the actual interest payments on these debentures will depend on changes in the Israeli CPI, which cannot be predicted at the time of this report.

 

(4)The table above does not include interest on our short term credit from banks (2015: 3.3%- per year).

 

*The table above does not include severance payment obligations because the actual severance payments will depend on the dates of payment, which cannot be predicted at the time of this report. As of December 31, 2015, the Company had severance payment obligations in an amount of NIS 7.2 million and a severance payment fund in an amount of NIS 3.9 million.

 

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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

Directors and Senior Management.

 

The following table lists the name, age and position of the directors and senior management of Alon Blue Square and four officers of our subsidiaries as of March 31, 2016.

 

Name   Age   Position
         
Avigdor Kaplan   76   Chairman of the Board of Directors and Director
David Alphandary (1) (2)   79   Director
Uzi Baram (1) (2) (3)   77   Director
Avraham Meron (1)   75   Director
Tal Yeshua   57   Director
Keren Bar-Hava   42   Director
Oded Zvulun   40   Director
Micheal Lazar   54   Director
Tzachi Otsar   47   Director
         
Israel Yaniv   69   Chief Executive Officer
Yehuda van der Walde   44   Chief Financial Officer
Merav Ben Kna'an Heller   44   Officer
         
Raviv Brookmayer   58   Chief Executive Officer of Mega Retail
Zeév Stein   61   Chief Executive Officer of Blue Square Real Estate Ltd.
Oded Blum   50   co – Chief Executive Officer of Dor Alon
Raz Schwartz   43   Acting Chief Executive Officer; Chief Financial Officer

 

(1) Member of the Compensation Committee, Audit Committee and Compliance Committee.

(2) External director.

 

Avigdor Kaplan has served as the chairman of the board of directors of the Company since August 2015, and as a member of the board of directors of the Company since. From March 2015 until August 2015, Mr. Kaplan served as the CEO of the Company. Mr. Kaplan has also served as CEO of Alon Israel Oil Company Ltd. since January 2015. From June 2013 to June 2014, he served as the Director General of Hadassah Medical Organization.  From June 2008 to May 2013, Mr. Kaplan served as the Chairman of the Board of Clal Insurance Group, and from May 1997 to May 2008, he served as CEO of the Clal Insurance Group. Mr. Kaplan holds a B.A. in Economics and Statistics from The Hebrew University, a Diploma in Business Administration from The Hebrew University, an M.sc in Industrial Engineering from Technion, and a PhD in Health Sciences from Ben Gurion University.

 

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David Alphandary has served as our external director since March 2006. He currently serves as an independent consultant to the retail industry. From 1991 to 1999, Mr. Alphandary served as President and Chief Executive Officer of Shufersal Ltd. and from 1982 to 1991 as Vice President to Shufersal. From 1976 to 1982, Mr. Alphandary served as President of Carmel Carpeting Industry in Ceasaria, Israel. He currently serves as a director of Yafora Tavori Ltd. Mr. Alphandary holds a degree in Public Administration from the Hebrew University in Jerusalem. Mr. Alphandary is a member and the Chairman of the Audit Committee of Alon Blue Square.

 

Uzi Baram has served as our external director since March 2006. He served as a member of Israel’s parliament, the Knesset, from 1977 to 2001. He served as the Minister of Tourism of Israel from 1992 to 1996, and from February 1993 to August 1995 he served as the Minister of Interior Affairs of Israel. He currently serves as a director of Master Plan, a company for strategic communication consulting, and of Bank Otsar Ha-Hayal. Mr. Baram holds a degree in Political Sciences and Sociology from the Hebrew University in Jerusalem. Mr. Baram is a member of the Audit Committee and the Compensation Committee of Alon Blue Square.

 

Avraham Meron has served as our director and member of the audit committee since August 20, 2007. Mr. Meron is currently an independent advisor and is an external director in Africa Israel Properties Ltd., a director in Discount Mortgage Bank Ltd., a member of the investments committee in Clal Finance group, and a director in A.I. America Israel Investments Ltd. For a period of 13 years, until October 2005, Mr. Meron served as senior vice president-finance of Africa Israel Investments Ltd. Mr. Meron also served as a director of Africa Israel’s subsidiaries, including Alon Oil Company group, the controlling shareholder of Alon Blue Square. Mr. Meron is a CPA and holds a degree in Accounting from the Hebrew University of Jerusalem.

 

Tal Yeshua has served as our director since February 11, 2015. He has served as the Chairman of Mishkey Emek Hayarden & Zemach Mifalim, a concern of various kibbutzim, since last year, and since 2007 has been an owner and Chairman of Travelers Hotels Ltd., a chain organizing accommodations for travelers. Mr. Yeshua also serves as a director of Alon Israel Oil Company Ltd. From 2007 to 2014, Mr. Yeshua served as Chairman of Amiad Water Systems, a global producer of filtration systems traded on AIM, the international market of the London Stock Exchange for smaller growing companies, and from 2002 and to 2010, Mr. Yeshua served as Chairman of Termokir Ltd., a factory owned by Kibbutz Horshim in the dry mixtures business for the building industry. From 2006 to 2008, Mr. Yeshua served as Chairman of Asiv Textile Industries Ltd., owned by Kibbutz Afek in the knit fabrics business for the garment and home textile industries. Mr. Yeshua has an Executive MBA from Tel Aviv University, a B.A. in Society and Management from the Open University and a dia in Practical Computer Engineering from Ruppin College.

 

Keren Bar Hava has served as our director since June 2015. Ms. Bar-Hava has served as the head of the accounting department at the Hebrew University of Jerusalem since 2012. Since 2010, Ms. Bar-Hava has held several positions with the Israel Securities Authority, including, member of its Board of Governors, chairperson of its finance committee, and member of its audit committee, secondary market committee, stock exchange committee, penalty matters committee, and tender committee. From 2006 to 2009 she served as an external director, chairperson of the audit committee, and member of investment committee of Halman-Aldubi Investment House. From 2007-2008, she served as an external director and chairperson of the audit committee of Edri El Israel Assets Ltd., a real estate company. Prior to that, from 1996-2003 she served as the CFO of a privately held company. Ms. Bar-Hava is a CPA (Isr.) and holds a B.A in economics and accounting and an M.A in economics from Tel-Aviv University, and a PhD in business administration from Tel-Aviv University.

 

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Oded Zvulun has served as our director since July 2015. Mr. Zvulun has served as the Business and Financial Manager (CEO) of Kibbutz Ze'elim in Israel and as Chairman of the subsidiaries of Kibbutz Ze'elim. Mr. Zvulun has serves as board member of Mishkey Hanegev and Hevel Ma'on Factories. Mr. Zvulun holds a B.A in Business and Economics from the Ben-Gurion University of the Negev and an M.A in economics from the Ben-Gurion University of the Negev.

 

Michael Lazar has served as our director since November 2015. Mr. Lazar has served as the Chairman of Mishkey Hadarom Aguda Haklait Shitufit Ltd. (Mishkey Hadarom) since September 2015. Prior to that, Mr. Lazar served as the business manager of Mesu'ot Yitzhak settlement, leading all its business fields and business development. Mr. Lazar currently serves as director also in Albad Ltd. and in the Economic Management of Mesu'ot Yitzhak. Mr. Lazar holds a B.A. degree in Economics and Human Resources from the Ben-Gurion University of the Negev.

 

Tzachi Otsar has served as our director since December 2015. Since 2011, Mr. Otsar has served as the chief executive officer and chairman of the board of directors of Rosebud Real Estate Ltd., an Israel-based company primarily engaged in real estate investments in high yield properties in Europe. In addition, he serves as the chief financial officer of Beilsol Investments (1987) Ltd., a real estate acquisition, development and holding company, which is the major shareholder of Alon Israel Oil Company Ltd., the Company's largest shareholder. Mr. Otsar also serves as a member of the board of directors of Alon Israel Oil Company Ltd. From 2006 until 2011 he served as the corporate controller of Electra Real Estate Ltd. an Israeli commercial real estate company. Prior to that, he served from 2003 until 2006 as the director of finance of Telmap Ltd. a mobile location-based service provider. Mr. Otsar is a certified CPA (ISR) and holds a B.A in economics from Haifa University, Israel and an LLM from Bar-Ilan University, Israel.

 

Israel Yaniv has served as our CEO since August 2015. Mr. Yaniv has also served as Chairman of the board of directors of Dor Alon Energy in Israel (1988) Ltd. ("Dor Alon") since August 2015. Prior to that Mr. Yaniv served as the Chief Executive Officer of Dor Alon from 2000 until 2015 and as Chief Executive Officer of Supergaz Ltd., from 1996 to 2000. He serves as chairman of Dor Alon Gas Technologies Ltd., Dor Alon Retail Sites Management Ltd., and Avrech-Alon G.S. Ltd. Mr. Yaniv holds a BSc and MSc in Chemical Engineering from the Technion in Haifa.

 

Yehuda van der Walde has served as our Chief Financial Officer since November 2013. Mr. van der Walde has also served as the Chief Accounting Officer from June 2012 to November 2013. From December 2007 until June 2012, Mr. van der Walde has served as controller of the Company and Mega Retail. Mr. van der Walde holds a B.A degree in Accounting and Economy and an M.A in Accounting, both from Bar Ilan University and is a Certified Public Accountant in Israel.

 

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Meirav Ben Kna'an Heller has served as an officer since August 2015. Mrs. Ben Kna'an Heller previously served as an officer in Midroog Ltd., a credit rating agency, and in Ampa Ltd. Mrs. Ben Kna'an Heller holds a B.A in accounting and business administration from the College of Management in Rishon Le'tzion, Israel.

 

Zeév Stein has served as the Chief Executive Officer of BSRE, since July 2006. Mr. Stein also serves as a director in various companies affiliated with Alon Group. Mr. Stein holds a B.Sc. degree in Civil Engineering and a degree in Architecture and Urban Design Planning from the Technion (Israel Institute of Technology) in Haifa.

 

Oded Blum has served as co-Chief Executive Officer of Dor Alon since June 2014. Mr. Blum previously served as Chief Executive Officer of Dor Alon Retail Sites Management Ltd. He holds a B.A in Economics and Accounting from the Hebrew University in Jerusalem, and is a Certified Public Accountant in Israel.

 

Raviv Brookmayer served as the Chief Executive Officer of Mega Retail from June 2015 until January 17, 2016 at the time Mega Retail entered into court ordered trusteeship. Prior to that he served as the Chief Executive Officer of the Naaman Group since September 2012. Mr. Brookmayer served as Chief Executive Officer of Home Center (DIY) Ltd. Prior to that, he served as Chief Executive Officer of Ten Petroleum Company Ltd. from 2007-2009. Mr. Brookmayer holds a B.A. in Business and Administration and an MBA from Derby University.

 

Raz Shwartz has served as the Acting Chief Executive Officer of Naaman since June 15, 2016. In addition, since February 2011 Mr. Shwartz serves as the Chief Financial Officer of Naaman. Prior to that, Mr. Shwartz served as Chief Financial Officer of the Bee Group. Mr. Shwartz holds a B.A. in Business and Accounting from the College of Management in Rishon Le'tzion and is an Israeli CPA.

 

Termination of Office

 

Motti Kerem served as the CEO of Mega Retail until May 2015. Dana Shlezinger served as a member of our board until June 2015. David Wiessman served as our chief executive officer and as a member of our board of directors until July 2015. Avshalom Haran served as a member of our board until July 2015. Amit Ben Itzhak served as our Chairman of the board of directors until August 2015. Yonel Cohen served as a member of our board until October 2015. Mordechai Ventura served as member of our board of directors until November 2015. Dan Weiss served as member of our board of directors until December 2015. Elli Levinson-Sela served as our Legal Counsel and Company Secretary until January 2016.

 

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Arrangements for the Election of Directors

 

As of March 31, 2016, Alon, directly and indirectly through Alon Retail, owned approximately 72.71% of our outstanding ordinary shares. So long as Alon continues to own beneficially more than 50% of our outstanding ordinary shares and voting power, it will be able to control the outcome of matters requiring shareholder approval that do not require a special majority, including the election of all our directors, other than our two external directors. The election of the external directors requires that at least a majority of the votes of the shareholders who are not controlling shareholders and do not have a personal interest in the appointment (excluding a personal interest which did not result from the shareholder’s relationship with the controlling shareholder) who participate in the vote, vote for their nomination (without taking into account abstentions), or that the total number of shares voted against the proposal by shareholders who are not controlling shareholders and do not have a personal interest does not exceed two percent of the aggregate voting rights in the Company.

 

B.Compensation

 

The table and summary below outline the compensation granted to our five highest compensated directors and officers during the year ended December 31, 2015. The compensation detailed in the table below refers to actual compensation granted or paid to the director or officer during the year 2015.

 

Name and
Position of
director or

Officer

   

Salary or

Other

Payment (1)

    

Value of

Social

benefits (2)

    Bonuses    

Value of
Equity

Based

Compensation

Granted (3)

    

Other

Compensation (4)

    Total 
Amounts in $US dollars are based on representative U.S. dollar – NIS rate of exchange on December 31, 2015 
Israel Yaniv (5)(6)   832,217    101,853    179,395    -    -    1,113,465 
Zeév Stein (6)   478,462    186,069    314,967    -    -    979,498 
Motti Keren (6)   227,113    43,922    281,006    -    489,869    1,041,910 
Raviv Brookmayer (6)   334,464    124,349    -    -    -    458,813 
Oded Blum (6)   206,294    80,226    70,733    -    -    357,253 

  

(1)   “Salary or Other Payment” means the aggregate yearly gross monthly salaries or other payments with respect to the Company's Executive Officers and members of the Board of Directors for the year 2015.

 

(2)   “Social Benefits” include payments to the National Insurance Institute, advanced education funds, managers’ insurance and pension funds; vacation pay; and recuperation pay as mandated by Israeli law.

 

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(3)   Consists of the fair value of the equity-based compensation granted during 2015 in exchange for the directors and officers services recognized as an expense in profit or loss and is carried to accumulated deficit under equity. The total amount recognized as an expense over the vesting period of the options.

 

(4)   “Other Compensation” includes compensation payments and garden leave.

 

(5) Does not include salary Mr. Yaniv receives from our controlling shareholder, Alon, in Mr Yaniv’s capacity as Co-Chairman of the Board of Dor Alon, which is received as part of a management agreement between Alon and Dor Alon.

 

(6)See below for more information regarding terms of employment.

 

The following table sets forth the aggregate compensation paid or accrued on behalf of all persons who served as our directors or senior management for services they rendered us and our subsidiaries, for the year ended December 31, 2015. The table also includes compensation to individuals who ceased to serve as directors or executive officers during the year.

 

   Salaries, fees, expenses, directors’
fees, commissions and bonuses
   Pension, retirement
and similar benefits
 
   (in millions)   (in millions) 
All directors, senior management and Acting Chairman as a group  $4.7 (NIS 18.1)   $0.5 (NIS 2.2) 

 

In August 2015, we agreed to pay to each director (including our external directors) other than our chairman of the board of directors, the sum of NIS 85,705 per year and a meeting attendance fee of NIS 3,300, (50% of the per meeting attendance fee would be paid for meetings held by written consent and 60% would be paid for meetings held via teleconference) which amounts are equivalent to the amounts allowed to be paid to external directors of companies of comparable size under the second, third and fourth supplements to the Companies Regulations. The fees referred to above are adjusted from time to time based on changes to the Israeli Consumer Price Index in the same manner as the fees described in the Regulations are adjusted. The directors would also be entitled to reimbursement of expenses incurred by them in connection with their service as directors.

 

We also agreed to pay Israel Yaniv, our Chief Executive Officer, a monthly gross salary of NIS 52,600 and social benefits in accordance with the Company's compensation policy for officers and directors. The compensation is linked to changes in Israel’s CPI, and is updated every three months. Mr. Yaniv is entitled to 25 annual vacation days and an annual cash bonus as determined by the compensation committee subject to the provisions of the compensation policy. Either the Company or Mr. Yaniv may terminate the engagement at any time upon providing three month advance written notice (the "Notice Period") unless Mr. Yaniv's employment is terminated for Cause. During such Notice Period, Mr. Yaniv will continue to be employed by the Company unless otherwise instructed. Mr. Yaniv also serves as Co-Chairman of the Board of Dor Alon and in such capacity receives a salary from our controlling shareholder, Alon, as part of a management agreement between Alon and Dor Alon.

 

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BSRE incurred compensation costs of approximately NIS 2,593,000 for its CEO, Mr. Zeev Stein, for the year 2015 plus an annual bonus of NIS 1,229,000 to be paid subject to shareholder approval. Under his employment agreement, Mr. Stein is entitled to a salary and customary fringe benefits, including a car lease and social benefits. In addition, Mr. Stein is entitled to severance compensation in excess of that which is required under law (200% of required severance in the case of dismissal and 175% of required severance in case of voluntary termination by Mr. Stein). Mr. Stein holds 0.22% of BSRE’s issued and outstanding shares, following the exercise of options granted to him under BSRE’s option plan. On March 15, 2016, BSRE's board of directors approved the following terms of office and employment: (i) 15% raise in monthly salary effective January 1, 2016; (ii) grant of a bonus for 2015 in an amount equal to 12 monthly salaries; (iii) grant of a commitment bonus equal to 8 monthly salaries in consideration for Mr. Stein's commitment to maintain his employment with BSRE for a period of two years from grant of such bonus; and (iv) grant of equity based compensation.

 

Mega Retail incurred compensation costs of approximately NIS 4,065,000 for its CEO, Mr. Motti Keren, for the year 2015. Mr. Keren served as chief executive officer of Mega Retail until July 2015. In 2015, Mr. Keren received four monthly salaries for each of the years 2013 and 2014. Under his employment agreement, Mr. Keren was entitled to a salary and customary fringe benefits, including a car lease and social benefits. Mr. Keren was entitled to a notice period of six months, severance compensation in excess of that which is required under law (200% of required severance in the case of dismissal and 175% of required severance in case of voluntary termination by Mr. Keren) and “garden leave” (12 months in case of dismissal or six months in case of voluntary termination by Mr. Keren following appointment of new chairman of the board of Mega Retail).

 

Dor Alon incurred compensation costs of approximately NIS 2,050,000 for its former CEO, Mr. Israel Yaniv, for the year 2015 plus an annual bonus of NIS 630,000 on account of 2014. Under his employment agreement with Dor Alon, Mr. Yaniv was entitled to an annual bonus equal to no more than eight monthly salaries, at the discretion of Dor Alon’s board of directors. Following the approval of Dor Alon’s Board of Directors and Compensation Committee, Mr. Yaniv is entitled to an annual bonus of NIS 420,000 for the year 2015. Mr. Yaniv resigned from his position as Dor Alon’s CEO on August 11, 2015. Subject to Dor Alon’s shareholders approval Mr. Yaniv is entitled to a one-time grant of NIS 280,000 on account of 2015. On March 31, 2016, the one-time grant was approved by the shareholders of Dor Alon.

 

Dor Alon appointed Mr. Oded Blum to serve as CEO effective August 11, 2015 following his service as co-CEO of Dor Alon. Mr. Blum’s employment agreement can be terminated by either party upon provision of a 120 day prior notice. Under his employment agreement, Mr. Blum is entitled to a monthly salary of NIS 82,000, and is covered by the Company's professional insurance coverage and indemnification undertakings. Subject to approval of Dor Alon's shareholders, Mr. Blum is entitled to an adjustment bonus of up to six monthly salaries for the first year and up to four monthly salaries for each subsequent year. Additionally Mr. Blum is entitled to an annual bonus of NIS 290,000 for the year 2015.

 

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Naaman Group agreed to pay its CEO, Mr. Raz Shwartz a monthly salary of NIS 46,500. Under his employment agreement, Mr. Shwartz is entitled to a salary and customary fringe benefits, including a car lease. Mr. Shwartz's bonus for the fiscal year 2015 was approximately NIS 140,000. In the event of termination of employment, Mr. Shwartz is entitled to advance notice of 180 days.

 

Mr. Raviv Brookmayer received salary for his service as chief executive officer of Mega Retail since June 2015. Under his two-year employment agreement, Mr. Brookmayer is entitled to a monthly salary of NIS 120,000 (linked to CPI) and customary fringe benefits, including a car lease, cell phone, a home phone line at the expense of Mega Retail up to a cap set in the employment agreement, social benefits and reimbursement of actual expenses incurred by him in connection with his service as CEO. Mr. Brookmayer will also be entitled as of 2015 to an annual bonus of up to one month's salary for every calendar year of employment and an additional performance based bonus subject to Mega Retail financial results targets. In the event of termination of employment, Mr. Brookmayer’s is entitled advance notice of three months (175% of required severance in the case of dismissal and 150% of required severance in case of voluntary termination by Mr. Keren) severance pay as required by law, and nine months of “garden leave,” subject to the terms and conditions set forth in his employment agreement. The employment agreement provides that Mr. Brookmayer will be entitled to at least 24 months' salary from commencement of his service, under certain circumstances, which amount is guaranteed by the Company.

 

In his capacity of CEO of the Naaman Group until June 2015, Mr. Raviv Brookmayer was entitled to a monthly payment of NIS 84,000 plus an extra monthly salary. Under his employment agreement, Mr. Brookmayer is entitled to a salary and customary fringe benefits, including a car lease, cell phone, a home phone line at the expense of Naaman Group up to a cap set in the employment agreement, social benefits and reimbursement of actual expenses incurred by him in connection with his service as CEO. Mr. Brookmayer will also be entitled as of 2013 to an annual bonus of up to NIS 850,000 for every calendar year of employment and subject to Naaman Group financial results targets. Mr. Brookmayer's bonus for the fiscal year 2014 was NIS 109,000. In the event of termination of employment, Mr. Brookmayer’s is entitled advance notice of 90 days, severance pay as required by law, and three to six months of “garden leave,” subject to the terms and conditions set forth in his employment agreement.

 

During 2010, our controlling shareholder, Alon, granted an option to D.B.W Investments Ltd. a company controlled by Mr. David Wiessman, our former Chief Executive Officer and Chief Operating Decision Maker, and our former Executive Chairman of the Board and one of our current directors, to purchase 1,308,808 of our shares held by Alon. The option is exercisable in five equal portions at the end of each calendar year from 2010 until 2014 and for a period of 18 months from the time each portion vests. In addition, Alon granted Mr. Wiessman an option to convert his direct holdings in Alon (2.71% of outstanding shares) into 1.06% of the outstanding ordinary shares of Alon Blue Square. In December 2012, Mr. Wiessman exercised the option, pursuant to which he held approximately 1.06% of the outstanding shares of Alon Blue Square. Mr. Wiessman sold in an off-market transaction on December 17, 2014, an aggregate number of 699,100 of our ordinary shares, at a price of NIS 10.37 per share, for an aggregate consideration of NIS 7,249,667.

 

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On September 30, 2013, our shareholders approved the adoption of a compensation policy applicable to Company officers and directors. For further information, see “Item 10. Additional Information – B. Memorandum and Articles of Association – Compensation Policy.”

 

C.Board Practices

 

Appointment of Directors and Terms of Officers

 

Our directors, other than our external directors, are elected by our shareholders at an annual general shareholders’ meeting and hold office until the next annual general shareholders’ meeting which is required to be held at least once in every calendar year, but not more than fifteen months after the last preceding annual general shareholders’ meeting. Until the next annual general shareholders’ meeting, the board of directors or shareholders may elect new directors to fill vacancies on, or increase the number of, members of the board of directors in a special meeting of the shareholders. Our board of directors may appoint any other person as a director. Any director so appointed may hold office until the first general shareholders’ meeting convened after the appointment and may be re-elected.

 

Pursuant to the Israeli Companies Law, 1999, one may not be elected and may not serve as a director in a public company if he or she does not have the required qualifications and the ability to dedicate an appropriate amount of time for the performance of their duties as a director in the company, taking into consideration, among other things, the special needs and size of the company. In addition, a public company may convene an annual general meeting of shareholders to elect a director, and may elect such director, only if prior to such shareholders meeting, the nominee declares, among other things, that he or she possess all of the required qualifications to serve as a director (and lists such qualifications in such declaration)