UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, 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



| | x | ANNUAL 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
Boardx



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.



3









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 noticein 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 Winesfor 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                                                          |           
|                                                                                                                                    |  | NIS
    (in thousands, except per ordinary share or ADS data) |           
|Revenues                                                                                                                            |  |                                                               | 89,778    
|Cost
    of revenues                                                                                                                |  |                                                               | 22,973    
|Gross profit                                                                                                                        |  |                                                               | 66,805    
|Selling, general and administrative
    expenses                                                                                    |  |                                                               | 104,899   
|Other gains                                                                                                                         |  |                                                               | 4,569     
|Other losses                                                                                                                        |  |                                                               | (8,451    
|Increases in fair value of investment property,
    net                                                                             |  |                                                               | 41,913    
|Share in gains of associates                                                                                                        |  |                                                               | 3,321     
|Operating profit (loss) before loss in respect
    of guarantees to Mega                                                            |  |                                                               | 3,258     
|Loss in respect of guarantees to Mega                                                                                               |  |                                                               | -         
|Operating profit (loss)                                                                                                             |  |                                                               | 3,258     
|Finance income                                                                                                                      |  |                                                               | 101,687   
|Finance expenses                                                                                                                    |  |                                                               | (174,505  
|Finance expenses, net                                                                                                               |  |                                                               | (72,818   
|                                                                                                                                    |  |                                                               |           
|Loss before taxes on income                                                                                                         |  |                                                               | (69,560   
|Taxes on income                                                                                                                     |  |                                                               | 48,500    
|Loss from continuing operations                                                                                                     |  |                                                               | (118,060  
|Profit (loss) from discontinued
    operations                                                                                      |  |                                                               | 201,773   
|Net income (loss) for the year                                                                                                      |  |                                                               | 83,713    
|                                                                                                                                    |  |                                                               |           
|Loss from continuing operations                                                                                                     |  |                                                               |           
|Attributable to:                                                                                                                    |  |                                                               |           
|Equity holders of the Company                                                                                                       |  |                                                               | (129,240  
|Non-controlling interests                                                                                                           |  |                                                               | 11,180    
|                                                                                                                                    |  |                                                               | (118,060  
|                                                                                                                                    |  |                                                               |           
|Profit (loss) from discontinued
     operations                                                                                     |  |                                                               |           
|Attributable to:                                                                                                                    |  |                                                               |           
|Equity holders of the Company                                                                                                       |  |                                                               | 188,753   
|Non-controlling interests                                                                                                           |  |                                                               | 13,020    
|                                                                                                                                    |  |                                                               | 201,773   
|                                                                                                                                    |  |                                                               |           
|Earnings (loss) per Ordinary share or ADS attributable
    to equity holders of the Company:                                        |  |                                                               |           
|Basic and diluted                                                                                                                   |  |                                                               |           
|Continuing operations                                                                                                               |  |                                                               | (1.96     
|Discontinued operations                                                                                                             |  |                                                               | 2.86      
|                                                                                                                                    |  |                                                               | 0.90      
|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



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               |          
|                                                                             |  | NIS (in thousands) |          
|Balance Sheet Data:                                                          |  |                    |          
|In accordance with IFRS                                                      |  |                    |          
|Working capital (deficit)                                                    |  |                    | (494,401 
|Total assets*                                                                |  |                    | 9,094,217
|Short term credit from banks and others and current maturities of debentures |  |                    | 1,561,296
|Long term debt, net of current maturities                                    |  |                    | 3,657,957
|Total equity                                                                 |  |                    | 1,546,226



| | (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 motionin 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.



10







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.



11







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.



12







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 ofour 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”.



13







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.



14









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 Agreementwith 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.



15







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.



16







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;
| | - | --------------------------------------------



18







| | · | 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.



19







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.



20







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.



21







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.



22







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.



23







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.



24







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.



25







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.



26







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.



27







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.



28







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”.



29







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.



30







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.



31







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.



32







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).



MegaRetail'splan 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.



33







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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



34







| | · | 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.



35







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).



36







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.



37







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.







38











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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







39













| | - | 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 aboveamount, 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 bepaid semi-annually beginning on the sixth month following closing (untilfull 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





40









| | - | 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:





41









| | - | 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





42









| | - | 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);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





43









| | - | 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;
| | - | -----------------------------------------------------------------------------------





44





















| | - | 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 noticein 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 Winesfor 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.



45







| | · | 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.



46









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.



47







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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48







| | · | 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49







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.



50







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:



51







| | · | 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.



52







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 |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Warehouses and Logistics Centers                                                                   |  |                                      | 6   |  |                                                   |  | 58,000  |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Offices(1)                                                                                         |  |                                      | 6   |  |                                                   |  | 31,000  |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|Total Developed property(2)                                                                        |  |                                      | 119 |  |                                                   |  | 280,000 |                | 
|                                                                                                   |  |                                      |     |  |                                                   |  |         |                | 
|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:



53







| | · | 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.



54







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.



55







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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



56







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.



57







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.



58







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.



59







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.



60







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.



61







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 ofInvestments 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.



62







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.



63







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.



64







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 |  |               | 
|                    |  | Leased from BSRE   |  |        | 2   |  |               | 
|                    |  | Franchise operated |  |        | 3   |  |               | 
|                    |  | Franchises         |  |        | 13  |  |               | 
|Offices             |  | Leased             |  |        | 1   |  |               | 
|Total               |  |                    |  |        | 121 |  |               | 



65







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.



66







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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



67







| | · | 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.



68







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.



69







| | · | 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



70







| | · | 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.



71







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.



72







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 offilling stations,
brand identity, product price, the variety of related services offered to customers, the level of service, financial strength allowing
the establishment of newfilling stations, procurement of petroleum
products at competitive prices and the terms of agreement offered to fleet customers, real estate owners and/or owners offilling
stations. With respect to its direct marketing operations, Dor
Alon expects to face competition from Paz, Delek and SonolPazgas, 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.



73







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.



74







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;
| | - | -------------------------------------------------------------------------------



75







| | · | 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.



76







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.



77







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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



78







| | · | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



79







| | · | 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 theBill 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
| | - | ----------------------------------------------------------------------------------------------



80







| | · | 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);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



81







| | · | 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.



82







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;
| | - | ---------------------------------------------------------------------------------------------



83







| | · | 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
| | - | ------------------------------------------------------------------------------------------------------------------



84







| | · | 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.



85







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 |  |                             | 
|As of December 31, 2012 |  |               | 212 |  |                             | 
|As of December 31, 2013 |  |               | 213 |  |                             | 
|As of December 31, 2014 |  |               | 197 |  |                             | 
|As of March 28, 2016    |  |               | 127 |  |                             | 



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



86







|                                              |  | For the year ended December 31, |         |    | For the period ended September 30, 2015 | 
|--------------------------------------------- |  | ------------------------------- | ------- | -- | --------------------------------------- | 
|                                              |  | 2013                            |         |    | 2014                                    | 
|Selected Operating Data:                      |  | NIS (in thousands)              |         |    | U.S. Dollars (in thousands) (4)         | 
|Number of supermarket stores (at year end)    |  |                                 | 213     |    |                                         | 
|                                              |  |                                 |         |    |                                         | 
|Increase (decrease) in same store sales(1)    |  |                                 | (1      | )% |                                         | 
|                                              |  |                                 |         |    |                                         | 
|Total square meters (at year end)(2)          |  |                                 | 360,000 |    |                                         | 
|                                              |  |                                 |         |    |                                         | 
|Supermarket sales per square meter (in NIS)   |  |                                 | 18,171  |    |                                         | 
|                                              |  |                                 |         |    |                                         | 
|Supermarket sales per employee (in thousands) |  |                                 | 812     |    |                                         | 



(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.



87







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”.



88







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”.



89







Dr. Baby –which sold baby and young children accessoriesoperated 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.



90







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), 5772-2012was 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.



91







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.



92







| | 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.



93







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.



94







|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.



95







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.



96







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 ourconsolidatedfinancial 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)andproperty 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.



97











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 Retailby
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.



98







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.”



99







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 theholders
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 theholders
of our Series C Debenturesand 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 acquirethe 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  |   |      | 
|Gross profit                                                  |  |      | 72.0   |   |      | 
|Selling, general and administrative expenses                  |  |      | 51.0   |   |      | 
|Operating profit before loss in respect of guarantees to Mega |  |      | 24.9   |   |      | 
|Operating loss                                                |  |      | (42.0  | ) |      | 
|Taxes on income                                               |  |      | 2.5    |   |      | 
|Net loss for the year from continuing operations              |  |      | (73.8  | ) |      | 
|                                                              |  |      |        |   |      | 
|Discontinued Operations                                       |  |      |        |   |      | 
|Net loss from discontinued operation                          |  |      | (583.0 | ) |      | 



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, netother 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
associatesin 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 51.2million (U.S.
$13.1million) 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 86.3million (U.S. $22.1million)
as compared to operating profit of NIS 31.0 million in 2014.



Mega Retail's guarantees
expensesin 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) andeliminations 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 ourconsolidatedfinancial 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                                               | 
|                                                   |  | NIS in millions                |     |   |      |  |     | U.S. $                                                 | 
|Segment Revenues, net                              |  |                                | 230 |   |      |  | 224 |                                                        | 
|Appreciation of Investment Property                |  |                                | (16 | ) |      |  | 114 |                                                        | 
|Segment profit                                     |  |                                | 189 |   |      |  | 338 |                                                        | 
|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                                               | 
|                                                          |  | NIS in millions                |       |    |      |  |      | U.S. $                                                 | 
|Segment Revenues, net                                     |  |                                | 291   |    |      |  | 300  |                                                        | 
|Segment profit (loss)                                     |  |                                | (10.2 | )  |      |  | 11.5 |                                                        | 
|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                                               | 
|                                                    |  | NIS in millions                |       |   |      |  |       | U.S. $                                                 | 
|Segment Revenues, net                               |  |                                | 4,012 |   |      |  | 4,908 |                                                        | 
|Segment profit                                      |  |                                | 116   |   |      |  | 143   |                                                        | 
|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),
netother 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
associatesin 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 profitin 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                                               | 
|                                                   |  | NIS in millions                |     |   |      |  |     | U.S. $                                                 | 
|Segment Revenues                                   |  |                                | 224 |   |      |  | 214 |                                                        | 
|Appreciation of Investment Property                |  |                                | 114 |   |      |  | 113 |                                                        | 
|Segment profit                                     |  |                                | 338 |   |      |  | 320 |                                                        | 
|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                                               | 
|                                                          |  | NIS in millions                |      |   |      |  |      | U.S. $                                                 | 
|Segment Revenues                                          |  |                                | 300  |   |      |  | 300  |                                                        | 
|Segment profit (loss)                                     |  |                                | 11.5 |   |      |  | (2.2 | )                                                      | 
|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                                               | 
|                                                    |  | NIS in millions                |       |   |      |  |       | U.S. $                                                 | 
|Segment Revenues                                    |  |                                | 4,908 |   |      |  | 5,180 |                                                        | 
|Segment profit                                      |  |                                | 143   |   |      |  | 141.1 |                                                        | 
|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                                       | 
|               |  | (In thousands) |         |  |                                                               | 
|2015           |  |                | 205,529 |  |                                                               | 
|First quarter  |  |                | 43,878  |  |                                                               | 
|Second quarter |  |                | 32,713  |  |                                                               | 
|Third quarter  |  |                | 67,320  |  |                                                               | 
|Fourth quarter |  |                | 61,618  |  |                                                               | 
|               |  |                |         |  |                                                               | 
|2014           |  |                | 96,548  |  |                                                               | 
|First quarter  |  |                | 26,494  |  |                                                               | 
|Second quarter |  |                | 34,398  |  |                                                               | 
|Third quarter  |  |                | 31,435  |  |                                                               | 
|Fourth quarter |  |                | 4,221   |  |                                                               | 



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 | 
|2012                    |  |            | 3.73 | (2) |                 |  | 3.86 |      |  |  | 4.08 | 
|2013                    |  |            | 3.47 | (2) |                 |  | 3.61 |      |  |  | 3.79 | 
|2014                    |  |            | 3.89 | (2) |                 |  | 3.58 |      |  |  | 3.99 | 
|2015                    |  |            | 3.90 | (2) |                 |  | 3.88 |      |  |  | 4.05 | 



(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 | 
|November |  |            | 3.88 |  |                 |  | 3.89 |      |  |  | 3.92 | 
|December |  |            | 3.90 |  |                 |  | 3.88 |      |  |  | 3.91 | 
|January  |  |            | 3.95 |  |                 |  | 3.95 |      |  |  | 3.98 | 
|February |  |            | 3.91 |  |                 |  | 3.91 |      |  |  | 3.96 | 
|March    |  |            | 3.77 |  |                 |  | 3.87 |      |  |  | 3.91 | 



(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 inthe 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.



111







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.



112







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.



113







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.



114







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.



115







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 dividendsfrom 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 354.3million, or $90.8millionand
received long term loans from the parent company of NIS 170million 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.



116







In 2015, we funded
our support of Mega Retail primarily from sale of shares of our subsidiaries, financing from our controllingshareholder 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.



117







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    |  | NIS3.18 ($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%.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



118







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             |          
|                                      |  | NIS in thousands |          
|                                      |  |                  |          
|Bank overdrafts                       |  |                  | 5,490    
|Bank loans                            |  |                  | 657,939  
|Loan from parent company              |  |                  | -        
|Commercial paper                      |  |                  | 111,197  
|Current maturities of long-term loans |  |                  | 283,342  
|                                      |  |                  | 1,057,968



*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.



119











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*  | 
|                                                                            |  | NIS in thousands |           |  | %      | 
|In Israeli currency:                                                        |  |                  |           |  |        | 
|Linked to the Israeli CPI bearing a fixed
    interest rate                 |  |                  | 694,861   |  |        | 
|Linked to the Israeli CPI bearing a variable interest
    rate              |  |                  | -         |  |        | 
|Unlinked and bearing a fixed interest rate                                  |  |                  | 28,483    |  |        | 
|Unlinked and bearing a variable  interest
    rate                          |  |                  | 974,605   |  |        | 
|Linked to the Israeli CPI from
    controlling shareholder without interest |  |                  | -         |  |        | 
|                                                                            |  |                  |           |  |        | 
|Total                                                                       |  |                  | 1,697,949 |  |        | 
|Less - current maturities                                                   |  |                  | 283,342   |  |        | 
|                                                                            |  |                  | 1,414,607 |  |        | 



| | (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 NIS113.7 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             |          
|                            |  | NIS in thousands |          
|Convertible debentures:     |  |                  |          
|Issued by BSRE              |  |                  | 60,425   
|Less - current maturities   |  |                  | 29,686   
|                            |  |                  | 30,739   
|                            |  |                  |          
|Non-convertible debentures: |  |                  |          
|Issued by the Company       |  |                  | 342,416  
|Issued by BSRE              |  |                  | 1,642,512
|Issued by Dor Alon          |  |                  | 464,320  
|                            |  |                  | 2,449,248
|                            |  |                  |          
|Less - current maturities   |  |                  | 437,249  
|                            |  |                  | 2,011,999



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





120







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.



121







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.



122







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%.



123







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.



124







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.



125







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 | 
|Non Convertible Debentures issued by the   Company
    (2) |  |      | 359,974   |  |      |  | -       |      |  |  | -       |  |  |      | -       |  |      |  | -       |                                                              |  |  | -      | 
|Non-Convertible  Debentures issued by BSRE  (3)            |  |      | 173,751   |  |      |  | 274,562 |      |  |  | 303,604 |  |  |      | 214,867 |  |      |  | 214,867 |                                                              |  |  | 29,041 | 
|Convertible   Debentures issued by BSRE
    (3)            |  |      | 29,420    |  |      |  | -       |      |  |  | -       |  |  |      | -       |  |      |  | -       |                                                              |  |  | -      | 
|Loan from parent company                                   |  |      | -         |  |      |  | -       |      |  |  |         |  |  |      |         |  |      |  |         |                                                              |  |  |        | 
|Short term credit from banks and
    others (4)            |  |      | 491,427   |  |      |  | -       |      |  |  | -       |  |  |      | -       |  |      |  | -       |                                                              |  |  | -      | 
|Total contractual cash obligations                         |  |      | 1,246,567 |  |      |  | 301,750 |      |  |  | 330,792 |  |  |      | 242,055 |  |      |  | 242,055 |                                                              |  |  | 56,229 | 



126







| | (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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



127







|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 Kaplanhas 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.



128







David Alphandaryhas 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 Baramhas
served as our external director since March 2006. He served as a member of Israel’s parliament, the Knesset, from1977
to 2001.He served asthe 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 Meronhas 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-financeof 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 Havahas 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.



129







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 Lazarhas 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 Otsarhas 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 Yanivhas 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.



130







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 Steinhas 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 Brookmayerserved 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.



131







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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



132







|(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) |  |                                              | $



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.





133







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.



134







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 andChief 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.



135







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) and that he or she has the ability to dedicate an appropriate
amount of time for the performance of his or her duties as a director of the Company.





Under the Israeli
Companies Law, the entering by a public company into a contract with a non-controlling director as to the terms of his or her
office, including exculpation, indemnification or insurance, requires the approval of the compensation committee, the board
of directors and the shareholders of the Company.



Under amendments to the Companies Law, the engagement with a public company’s directors need not
be approved by the shareholders of the company with respect to the period from the commencement of the engagement until the next
shareholder meeting convened by the company, if the terms and conditions of such engagement are approved by the compensation committee
and the board of directors of the company, the terms and conditions of such engagement are in accordance with the company’s
compensation policy approved in accordance with the Companies Law, and the terms and conditions of such engagement are no more
beneficial than the terms and conditions of the person previously serving in such role or there is no substantial difference in
the terms and conditions of the new engagement as opposed to the previous engagement under the circumstances, including the scope
of engagement.



The appointment and terms of office of a company's officers, other than directors and the general manager
(chief executive officer) are subject to the approval by first, the company’s compensation committee; second, the company’s
board of directors, in each case subject to the company's compensation policy, and then approved by its shareholders. However,
in special circumstances, they may approve the appointment and terms of office of officers inconsistent with such policy provided
that they have considered those provisions that must be included in the compensation policy according to the Companies Law and
that shareholder approval is obtained (by a majority
of shareholders that does not include the controlling shareholders of the company and any shareholders interested in the approval
of the compensation). However, if the shareholders of the company do not approve a compensation arrangement with an officer inconsistent
with the company’s compensation policy, in special situations the compensation committee and board of directors may override
the shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for
their decision. In addition, non-material amendments to the compensation of a public company’s officers (other than the chief
executive officer and director) may be approved by the chief executive officer of the company if the company’s compensation
policy establishes that non-material amendments within the parameters established in the compensation policy may be approved by
the chief executive officer, and the compensation is consistent with the company’s compensation policy.



136







We and our subsidiaries
have no service contracts with any of our directors that provide for benefits upon termination of their service as directors.





The compensation paid to a public company’s chief executive officer is required to be approved by,
first, the company’s compensation committee; second, the company’s board of directors, in each case subject to the
company's compensation policy, and by the company’s shareholders (by
a majority of shareholders that does not include the controlling shareholders of the company and any shareholders interested in
the approval of the compensation). However, in special circumstances, they may approve compensation terms of a chief executive
officer that are inconsistent with such policy provided that they have considered those provisions that must be included in the
compensation policy according to the Companies Law and that shareholder approval is obtained (by a majority of shareholders that
does not include the controlling shareholders of the company and any shareholders interested in the approval of the compensation).
However, if the shareholders of the company do not approve the compensation arrangement with the chief executive officer inconsistent
with the company's compensation policy, in special situations the compensation committee and board of directors may override the
shareholders’ decision if each of the compensation committee and the board of directors provide detailed reasons for their
decision. In addition, the renewal or extension of the engagement with a public company’s chief executive officer need not
be approved by the shareholders of the company if the terms and conditions of such renewal or extension are no more beneficial
than the previous engagement or there is no substantial difference in the terms and conditions under the circumstances, and the
terms and conditions of such renewal or extension are in accordance with the company’s compensation policy.



The compensation committee may waive the shareholder approval requirement with regards to the approval
of the initial engagement terms of a candidate for the chief executive officer position, if it determines that the compensation
arrangement is consistent with the company’s compensation policy and that the chief executive officer did not have a prior
business relationship with the company or a controlling shareholder of the company and that subjecting the approval of the engagement
to a shareholder vote would impede the company’s ability to employ the chief executive officer candidate. In addition, the
engagement with a public company’s chief executive officer need not be approved by the shareholders of the company with respect
to the period from the commencement of the engagement until the next shareholder meeting convened by the company,
if the terms and conditions of such engagement are approved by the compensation committee and the board of directors of the company,
the terms and conditions of such engagement are in accordance with the company’s compensation policy approved in accordance
with the Companies Law, and the terms and conditions of such engagement are no more beneficial than the terms and conditions of
the person previously serving in such role or there is no substantial difference in the terms and conditions of the new engagement
as opposed to the previous engagement under the circumstances, including the scope of engagement.





Substitute Directors



Our Articles of
Association provide that any director may appoint another person to serve as a substitute director and may cancel such appointment.
The identity of a substitute director requires the approval of the board of directors. Under the Israeli Companies Law, a person
who is not qualified to be appointed as a director, a person who is already serving as a director or a person who is already serving
as a substitute director for another director, may not be appointed as a substitute director. Nevertheless, a director already
serving as a director may be appointed as a substitute director for a committee of the board of directors so long as he or she
is not already serving as a member of such committee, and if the substitute director is to replace an external director, he or
she is required to qualify as an external director and to have either “financial and accounting expertise” or “professional
expertise”, depending on the qualifications of the external director he or she is replacing. Otherwise, a substitute director
cannot be appointed as an external director.



The
term of appointment of a substitute director may be for one meeting of the board of directors or until notice is given of the
cancellation of the appointment. To our knowledge, no director currently intends to appoint any other person as a substitute director,
except if such director is unable to attend a meeting of the board of directors.



Independent and
External Directors



Israeli
Companies Law Requirements





We
are subject to the provisions of the Israeli Companies Law. The Israeli Minister of Justice has adopted regulations exempting companies,
like us, whose shares are traded outside of Israel, from some provisions of the Israeli Companies Law.









Under the Israeli
Companies Law, subject to an exception applicable to companies with no controlling shareholder, companies incorporated under
the laws of Israel whose shares are either (i) listed for trading on a stock exchange or (ii) have been offered to the public
in or outside of Israel, and are held by the public (Public Company) are required to appoint at least two external directors.
The Israeli Companies Law provides that a person may not be appointed as an external director if the person is a relative of
the controlling shareholder or if the person or the person’s relative, partner, employer, someone to whom he or she is
subordinated directly or indirectly or any entity under the person’s control, has, as of the date of the person’s
appointment to serve as external director, or had, during the two years preceding that date, any affiliation with us, our
controlling shareholder, any relative of our controlling shareholder, as of the date of the person’s appointment to
serve as external director, or any entity in which, currently or within the two years preceding the appointment date, the
controlling shareholder was the company or the company’s controlling shareholder; and in a company without a
controlling shareholder or without a shareholder holding 25% or more of the voting rights in the company – any
affiliation to the chairman of the board of directors, to the general manager (chief executive officer), to a shareholder
holding 5% or more of the company’s shares or voting rights, or to the chief officer in the financial field as of the
date of the person’s appointment. The term “affiliation” includes:







137







| | · | an
                                         employment relationship;
| | - | --------------------------------------------------------------------



| | · | a
                                         business or professional relationship maintained on a regular basis;
| | - | ---------------------------------------------------------------------------------------------------------------



| | · | control;
                                         and
| | - | -----------------------------------------------------



| | · | service
                                         as an office holder, other than service as a director who was appointed in order to serve
                                         as an external director of a company when such company was about to make an initial public
                                         offering.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the Israeli Companies
Law, an “office holder” is defined as a general manager, chief business manager, deputy general manager, vice-general
manager, any person filing any of these positions in a company even if he or she holds a different title, director or any manager
directly subordinate to the general manager.



Without derogating
from the above, a person may not serve as an external director if the person or the person’s relative, partner, employer,
someone to whom he or she is subordinated directly or indirectly or any entity under the person’s control has business or
professional relationship with an entity with which an affiliation is prohibited as detailed above, even if such relationship
is not on a regular basis (excluding negligible relationship). In addition, a person who received compensation other than the
compensation permitted by the Israeli Companies Law may not serve as an external director.



Regulations under
the Israeli Companies Law provide for various instances and kinds of relationships in which an external director will not be deemed
to have an “affiliation” with the public company for which he or she serves.



No person can serve
as an external director if the person’s positions or other businesses create, or may create, a conflict of interests with
the person’s responsibilities as a director or may impair his or her ability to serve as a director. In addition, a person
who is a director of a company may not be elected as an external director of another company if, at that time, a director of the
other company is acting as an external director of the first company. Until the lapse of two years from termination of office,
a company, its controlling shareholder, or a company controlled by its controlling shareholder may not engage an external director,
or his spouse, or his child to serve as an office holder in the company or in any entity controlled by the controlling shareholder
and cannot employ or receive professional services for consideration from that person, and may not grant such person any benefit
either directly or indirectly, including through a corporation controlled by that person. The same restrictions above apply to
relatives other than a spouse or a child, but such limitations shall only apply for one year from the date such external director
ceased to be engaged in such capacity. In addition, if at the time an external director is appointed all the current members of
the board of directors, who are neither controlling shareholders nor relatives of controlling shareholders, are of the same gender,
then the external director to be appointed must be of the other gender.



138







Under the Companies
Law, a public company is required to appoint as an external director, a person who has “professional expertise” or
a person who has “financial and accounting expertise,” provided that at least one of the external directors must have
“financial and accounting expertise”. Under regulations, a director having financial and accounting expertise is a
person who, due to his or her education, experience and qualifications is highly skilled in respect of, and understands, business-accounting
matters and financial reports in a manner that enables him or her to understand in depth the company’s financial statements
and to stimulate discussion regarding the manner in which the financial data is presented. Under the regulations, a director having
professional expertise is a person who has an academic degree in either economics, business administration, accounting, law or
public administration or another academic degree or has completed other higher education studies, all in an area relevant to the
main business sector of the company or in a relevant area for the board position, or has at least five years’ experience in one
of the following or at least five years of aggregate experience in two or more of the following: a senior management position
in the business of a corporation with a substantial scope of business, in a senior position in the public service or a senior
position in the main field of the company’s business.



Under the Companies
Law, each Israeli public company is required to determine the minimum number of directors with “accounting and financial
expertise” that such company believes is appropriate in light of the company’s type, size, the scope and complexity
of its activities and other factors. Once a company has made this determination, it must ensure that the necessary appointments
to the board are made in accordance with this determination. Our board of directors determined that two directors with “accounting
and financial expertise” is appropriate for the Company. Our board of directors currently has at least two directors with
such “accounting and financial expertise”.



External directors
are to be elected by a majority vote at a shareholders’ meeting, provided that either (1) the majority of shares voted
at the meeting, including at least a majority of the votes of the shareholders who are not controlling shareholders (as defined
in the Israeli Companies Law) 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), vote in favor of the election of the director
without taking abstentions into account; or (2) the total number of shares of the abovementioned shareholders voted against
the election of the external director does not exceed two percent of the aggregate voting rights in the company.



139







The initial term of
an external director is three years and may be extended for two additional three-year terms under certain circumstances and conditions.
Nevertheless, Regulations under the Israeli Companies Law provide that companies, like Alon Blue Square (whose shares are listed
for trading both on the Tel Aviv Stock Exchange and on the New York Stock Exchange), may appoint an external director for additional
three-year terms, under certain circumstances and conditions. An external director may be removed only in a general meeting, by
the same percentage of shareholders as is required for his or her election, or by a court, and in both cases only if the external
director ceases to meet the statutory qualifications for his or her appointment or if he or she violates his or her duty of loyalty
to the company. Each committee authorized to exercise any of the powers of our board of directors is required to include at least
one external director and our audit committee and compensation committee are required to include all of our external directors.



An external director
is entitled to compensation and reimbursement of expenses in accordance with regulations promulgated under the Israeli Companies
Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with serving as a
director except for certain exculpation, indemnification and insurance provided by the company.



David
Alphandary and Uzi Baram currently serve as Alon Blue Square external directors. Avraham Meron and Keren Bar-Hava are our independent
directors.





New York
Stock Exchange Requirements







See below “Item
6. Directors, Senior Management And Employees – C. Board Practices – Audit Committees – New York Stock Exchange
Requirements” for a description of the independence requirements for audit committee members under applicable NYSE rules.



Audit Committees



Israeli Companies
Law Requirements



Under the Israeli Companies Law, the board of directors of a public company must appoint an audit committee,
and, subject to an exception applicable to companies with no controlling shareholder, must be comprised of at least three directors
including all of the external directors.





The Israeli Companies
Law requires that a majority of the members of the audit committee, as well as the majority of members present at audit committee
meetings, must be “independent” (as such term is defined below) and the chairman of the audit committee must be an
external director, subject to an exception applicable to companies with no controlling shareholder. In addition, the following
are disqualified from serving as members of the audit committee: the chairman of the board of directors, the controlling shareholder
and his relatives, any director employed by the company or by its controlling shareholder or by an entity controlled by the controlling
shareholder, a director who regularly provides services to the company or to its controlling shareholder or to an entity controlled
by the controlling shareholder, and any director who derives most of their income from the controlling shareholder.





An “Independent
Director” is defined as an external director or a director who meets the following conditions: (i) satisfies certain conditions
for appointment as an external director (as described above) and the audit committee has determined that such conditions have
been met and (ii) he or she has not served as a director of the company for more than nine consecutive years, with any interruption
of up to two years in his or her service not being deemed a disruption in the continuity of such service.



140







The role of the audit
committee is to examine flaws in our business management, in consultation with the internal auditor or our independent accountants
and suggest appropriate course of action in order to correct such flaws. In addition, the approval of the audit committee is required
to effect specified actions and related party transactions.



Additional functions
to be performed by the audit committee include, among others, the following: determination whether certain related party actions
and transactions are “material” or “extraordinary” for purposes of the requisite approval procedures;
to assess the scope of work and compensation of the company’s independent accountant; to assess the company’s internal
audit system and the performance of its internal auditor and if the necessary resources have been made available to the internal
auditor considering the company’s needs and size; to determine arrangements for handling complaints of employees in relation
to flaws in the business management of the company and the protection for such employees; and to determine whether certain related
party actions and transactions are “material” or “extraordinary” for the purpose of the requisite approval
procedures under the Companies Law, whether certain transactions with a controlling shareholder will be subject to a competitive
procedure (regardless of whether or not such transactions are deemed extraordinary transactions) and to set forth the approval
process for transactions that are “non-negligible” (i.e. transactions with a controlling shareholder that are classified
by the audit committee as non-negligible, even though they are not deemed extraordinary transactions), as well as determining
which types of transactions would require the approval of the audit committee, optionally based on criteria which may be determined
annually in advance by the audit committee.





A recent amendment
to the Companies Law enacted on February 17, 2016, or Amendment 27, allows a company whose audit committee’s composition
meets the requirements set for the composition of a compensation committee (as further detailed below) to have one committee acting
as both audit and compensation committees.



New
York Stock Exchange Requirements



Under New York Stock
Exchange rules, we are required to maintain an audit committee consisting only of independent directors.



The independence requirements
of Rule 10A-3 of the Securities Exchange Act of 1934 Act implement two basic criteria for determining independence: (i) audit
committee members are barred from accepting directly or indirectly any consulting, advisory or other compensatory fee from the
issuer or an affiliate of the issuer, other than in the member’s capacity as a member of the board of directors and any
board committee, and (ii) audit committee members may not be an “affiliated person” of the issuer or any subsidiary
of the issuer apart from his or her capacity as a member of the board and any board committee.



141







The Securities and Exchange Commission has defined “affiliate” for non-investment companies
as “a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.” The term “control” is intended to be consistent with the other definitions
of this term under the Securities Exchange Act of 1934, as “the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract,
or otherwise.” A safe harbor has been adopted by the SEC, under which a person who is not an executive officer or 10% shareholder
of the issuer would be deemed not to have control of the issuer. The SEC has also provided certain limited exceptions for an audit
committee member, who also sits on the board of directors of an affiliate of a listed issuer, so long as, except for being a director
on such board of directors, the audit committee member otherwise meets the independence requirements for each entity.



The role of the audit
committee for New York Stock Exchange purposes includes assisting the board of directors in fulfilling its responsibility for
oversight of the quality and integrity of the accounting, auditing and reporting practices of Alon Blue Square.



Corporate Governance
Practices



Internal Auditor



Under
the Israeli Companies Law, the board of directors must also appoint an internal auditor proposed by the audit committee. The role
of the internal auditor is, among others, to examine whether our actions comply with the law and orderly business procedure. Under
the Israeli Companies Law, the internal auditor may not be an interested party, an office holder, a relative of an interested
party, or an office holder, nor may the internal auditor be our independent accountant or its representative. We comply with this
requirement. Mr. Gershon Lewinsky serves as our internal auditor.



Duties
of Office Holders and Approval of Specified Related Party Transactions Under Israeli Law



Fiduciary
Duties of Office Holders



The Israeli Companies
Law imposes a duty of care and a duty of loyalty on all office holders of a company, including directors and executive officers.
The duty of care requires an office holder to act with the level of care, according to which a reasonable office holder in the
same position would have acted under the same circumstances.



| | · | The
                                         duty of care includes a duty to use reasonable means to obtain information on the appropriateness
                                         of a given action brought for their approval or performed by them by virtue of their
                                         position and all other important information pertaining to the previous actions.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                         duty of loyalty requires an office holder to act in good faith and for the benefit of
                                         the company, and includes a duty to: (i) refrain from any action involving conflict of
                                         interest between the performance of their duties in the company and their personal affairs;
                                         (ii) refrain from any activity that is competitive with the company’s business;
                                         (iii) refrain from usurping any business opportunity of the company to receive a personal
                                         gain for themselves or others; and (iv) disclose to the company any information or documents
                                         relating to a company’s affairs which the office holder has received due to his
                                         position as an office holder.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



142









As detailed above,
subject to certain exceptions, under the Israeli Companies Law, directors’ compensation arrangements require compensation
committee approval, board of directors’ approval and shareholder approval.







The Israeli Companies
Law requires that an office holder of a company promptly and, in any event, not later than the first board meeting at which the
transaction is discussed, disclose any personal interest that they may have and all related material fact or document known to
them, in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes
a personal interest of their relative, of a company in which the office holder or their relative is, a shareholder which holds
5% or more of company’s share capital or its voting rights, a director or a general manager, or in which he or she has the
right to appoint at least one director or the general manager. A personal interest also includes a personal interest of a person
who votes according to a proxy of another person, even if the other person has no personal interest, and a personal interest of
a person who gave a proxy to another person to vote on their behalf – all whether the discretion of how to vote lies with
the person voting or not. In the case of an extraordinary transaction, the office holder’s duty to disclose applies also
to a personal interest of the office holder’s relative.



Under Israeli law,
an extraordinary transaction is a transaction which is not in the ordinary course of business, not on market terms or which is
likely to have a material impact on the company’s profitability, assets or liabilities.



Under the Israeli
Companies Law, once an office holder complies with the above disclosure requirement, the board of directors may approve an ordinary
transaction between the company and an office holder, or a third party in which an office holder has a personal interest, unless
the articles of association provide otherwise. A transaction that is adverse to the company’s interest cannot be approved.



If the transaction
is an extraordinary transaction, both the audit committee and the board of directors, in that order, must approve the transaction.
Under specific circumstances, shareholders approval may also be required. Whoever has a personal interest in a matter, which is
considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter.
However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence of
such person is required to present a matter to the meeting, such officer holder may be present at the meeting. Notwithstanding
the foregoing, if the majority of the directors have a personal interest in a matter, a director who has the personal interest
in this matter may be present at this meeting or vote on this matter, but the board of directors’ decision requires shareholder
approval.



143







Controlling
Shareholder Transactions and Actions



Under the Israeli
Companies Law, the disclosure requirements which apply to an office holder also apply to a controlling shareholder of a public
company and to a person who would become a controlling shareholder as a result of a private placement. A controlling shareholder
includes a person who has the ability to direct the activities of a company, other than if this power is derived solely from his/her
position on the board of directors or any other position with the company. In addition, for such purposes a controlling shareholder
includes a shareholder that holds 25% or more of the voting rights in a public company if no other shareholder owns more than
50% of the voting rights in the company.



Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a personal interest, including a private placement in
which a controlling shareholder has a personal interest; and the terms of engagement of the company, directly or indirectly, with
a controlling shareholder or his or her relative (including through a corporation controlled by a controlling shareholder), regarding
the company’s receipt of services, and if such controlling shareholder is also an office holder of the company or an employee,
regarding his or her terms of office and employment, require the approval of the audit committee or the compensation committee
(in case of terms of employment), the board of directors and the shareholders of the company, in that order. The shareholders
approval must include either:



| | · | a
                                         majority of the shareholders who have no personal interest in the transaction and who
                                         are participating in the voting, in person, by proxy or by written ballot, at the meeting
                                         (votes abstaining shall not be taken into account); or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                         total number of shares voted against the proposal by shareholders without a personal
                                         interest does not exceed two percent (2%) of the aggregate voting rights in the Company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, any such
transaction whose term is more than three years, requires the abovementioned approval every three years, unless (with respect
to transactions not involving receiving of services or compensation) the audit committee approves that a longer term is reasonable
under the circumstances.



However, under Regulations
promulgated pursuant to the Israeli Companies Law, certain transactions between a company and its controlling shareholder(s) (or
the controlling shareholder’s relative) do not require shareholder approval.



For information concerning
the direct and indirect personal interests of certain of our office holders and principal shareholders in certain transactions
with us, see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions.”



The Israeli Companies
Law requires that every shareholder that participates, either by proxy or in person, in a vote regarding a transaction with a
controlling shareholder indicate whether or not that shareholder has a personal interest in the vote in question, the failure
of which results in the invalidation of that shareholder’s vote.



144







The Israeli Companies
Law further provides that an acquisition of shares or voting rights in a public company must be made by means of a tender offer
if as a result of the acquisition the purchaser would become a holder of 45% of the voting rights of the company, unless there
is a holder of more than 45% of the voting rights of the company or would become a holder of 25% of the voting rights unless there
is another person holding 25% of the voting rights. This restriction does not apply to: (i) an acquisition of shares in a private
placement, if the acquisition had been approved in a shareholders meeting under certain circumstances; (ii) an acquisition of
shares from a holder of at least 25% of the voting rights, as a result of which a person would become a holder of at least 25%
of the voting rights; and (iii) an acquisition of shares from a holder of more than 45% of the voting rights, as a result of which
the acquirer would become a holder of more than 45% of the voting rights in the company.



The Israeli Companies
Law further provides that a shareholder has a duty to act in good faith towards the company and other shareholders when exercising
their rights and duties and shall refrain from oppressing other shareholders, including in connection with the voting at a shareholders’
meeting on: (i) any amendment to the articles of association; (ii) an increase in the company’s authorized share capital;
(iii) a merger; or (iv) approval of certain transactions with control persons and other related parties, which require shareholder
approval. In addition, any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome
of a shareholder vote and any shareholder who, pursuant to the provisions of a company’s Articles of Association, has the
power to appoint or prevent the appointment of an office holder in the company, or has any other power over the company, is under
a duty to act with fairness towards the company. Under the Companies Law, the laws that apply to a breach of a contract will generally
also apply to a breach of duty of fairness.



Exemption, Insurance
and Indemnification of Directors and Officers



Office Holder
Exemption



Under the Israeli
Companies Law, a company may not exempt an officer or director (each, an “Office Holder”) from liability with respect
to a breach of his duty of loyalty, but may exempt in advance an Office Holder from his liability to the company, in whole or
in part, with respect to a breach of his duty of care (except in connection with a prohibited distribution made by the company)
if so provided in its articles of association. Our Articles of Association so provide.



Following approval
by our audit committee and board of directors, on June 12, 2008 our shareholders approved a resolution exempting the Company’s
directors and officers, including any of the Company’s controlling shareholders who serve as directors or officers of the
Company, to the fullest extent permitted by law, from liability towards the Company with respect to any damage caused or that
will be caused to the Company by its directors and officers as a result of a breach of their duty of care toward the Company or
following a bona fide action taken by them in the connection with their position in the Company, including actions taken while
serving as directors or officers in another company, in connection with their position in the Company.



145







BSRE previously
approved a prospective (in advance) exemption to BSRE’s directors and officers from liability for damage resulting from
a breach of his duty of care towards BSRE in connection with actions taken in good faith in their capacity as a director and/or
officer of BSRE or in their capacity as an officer of another company at the request of BSRE.



Office
Holder Insurance



The Israeli Companies
Law and our Articles of Association provide that, subject to the provisions of the Israeli Companies Law, we may enter into a
contract for the insurance of the liability of any of our Office Holders for any act performed by him in his capacity as an Office
Holder with respect to any of the following:



| | · | a
                                         breach of such Office Holder’s duty of care to the Company or to another person;
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         breach of such Office Holder’s duty of loyalty to the Company, provided that the
                                         Office Holder acted in good faith and had reasonable cause to assume that his act would
                                         not prejudice the Company’s interests;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         financial liability imposed upon such Office Holder in favor of another person; or
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         breach of any duty or any other obligation, to the extent insurance may be permitting
                                         by law.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant
to resolutions adopted by our shareholders in March 2011, we participate in a directors’ and officers’ liability insurance
policy acquired by Alon. The extension of the directors’ and officers’ liability insurance was approved for each of
the years 2012, 2013, 2014, and 2015 by our Audit Committee and by the Board of directors. As extended, the insurance policy is
for a period beginning on January 1, 2015, and ending on December 31, 2015 covering the Company and affiliated entities, including
Dor Alon and its subsidiaries, BSRE and its subsidiaries, Naaman and its subsidiaries and Alon and its subsidiaries (collectively,
the “Group”). Such policy would cover a total liability of US $50 million (for each claim and in the aggregate) for
the Company, including legal fees, and US $30 million (for each claim and in the aggregate), including legal fees, for each of
the other members of the Group, excluding the Company, provided that in any event the maximum aggregate coverage of liability
for the entire Group would be US $50 million. Our audit committee, board of directors and shareholders have also approved any
renewal of the insurance policy or the participation by the Company in future directors’ and officers’ liability insurance
policies covering the Company and all or some members of the Group, under substantially the same terms and conditions as the original
insurance, upon its expiration, for a period of up to an additional four years from the end of the term of the original insurance
policy. The participation in any future insurance policies would be subject to the following conditions: (i) the determination
by the audit committee and board of directors that there will be no substantive changes between the original insurance policy
and the future insurance policies; a change to the scope of coverage under the future insurance policies will not be deemed to
be substantive so long as the premium paid by the Group for such future insurance policies will be as described in section (ii)
below; and (ii) the premium paid for the future insurance policies will not increase by more than the greater of (A) 25% over
the cost of the premium paid for the insurance policy of the previous year; or (B) 25% over the cost of the premium paid for the
original insurance policy (in each case plus the rate of depreciation of the NIS in relation to the US dollar, to the extent such
a depreciation occurred). We are in the process of approving a directors’ and officers’ liability insurance policy
for the Group for the period between January 1, 2016 until December 31, 2016. This new policy has been approved by our audit committee
and is subject to approval by our board of directors and shareholders.



146







Indemnification
of Office Holders



The Israeli Companies
Law provides that a company may indemnify an Office Holder for the following liabilities or expenses imposed on them as a result
of an act performed in their capacity as an Office Holder of the company, provided the company’s articles of association
include the following provisions with respect to indemnification:



| | · | a
                                         provision authorizing the company to indemnify an Office Holder for future events with
                                         respect to a monetary liability imposed on them in favor of another person pursuant to
                                         a judgment (including a judgment given in a settlement or an arbitrator’s award
                                         approved by the court), so long as such indemnification is limited to types of events
                                         which, in the board of directors’ opinion, are foreseeable at the time of granting
                                         the indemnity undertaking in view of the company’s actual business, and in such
                                         amount or standard as the board of directors deems reasonable under the circumstances.
                                         Such undertaking must specify the events that, in the board of directors’ opinion,
                                         are foreseeable in view of the company’s actual business at the time of the undertaking
                                         and the amount or the standards that the board of directors deemed reasonable at the
                                         time;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         provision authorizing the company to indemnify an Office Holder for future events with
                                         respect to reasonable litigation expenses, including counsel fees, incurred by an Office
                                         Holder or which he is ordered to pay by a court, in proceedings that the company institutes
                                         against them or instituted on behalf of the company or by another person, or in a criminal
                                         charge from which they were acquitted, or a criminal charge in which they were convicted
                                         for a criminal offense that does not require proof of criminal intent;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         provision authorizing the company to indemnify an Office Holder for future events with
                                         respect to reasonable litigation fees, including attorney’s fees, incurred by an
                                         Office Holder in consequence of an investigation or proceeding filed against them by
                                         an authority that is authorized to conduct such investigation or proceeding, and that
                                         resulted without filing an indictment against him and without imposing on them financial
                                         obligation in lieu of a criminal proceeding, or that resulted without filing an indictment
                                         against them but with imposing on them a financial obligation as an alternative to a
                                         criminal proceeding in respect of an offense that does not require the proof of criminal
                                         intent or in connection with a monetary sanction; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



147







| | · | a
                                         provision authorizing the company to retroactively indemnify an Office Holder.
| | - | -------------------------------------------------------------------------------------------------------------------------



On June 12, 2008,
following approval of our audit committee and board of directors, our shareholders approved amendments to our Articles of Association
pertaining to indemnification of directors and officers that reflect the provisions of the Israeli Companies Law described above.



Our Articles of
Association provide that we may undertake to indemnify an Office Holder for obligations or expenses imposed on them as a result
of an act done in their capacity as an Office Holder in the Company or as a result of being an Office Holder, in another company
in which the Company holds shares or has interests, as specified above.



Our
Articles of Association further provide that the aggregate amount of indemnification (in addition to any insurance proceeds received)
shall not exceed 25% of the shareholders’ equity of the Company, as set forth in the Company’s most recent consolidated
financial statements prior to the applicable payment of indemnification.



Limitations
on Insurance, Exemption and Indemnification



The Israeli Companies
Law and our Articles of Association provide that a company may not exempt or indemnify an Office Holder nor enter into an insurance
contract, which would provide coverage for any monetary liability incurred as a result of any of the following:



| | · | a
                                         breach by the Office Holder of their duty of loyalty, except for insurance and indemnification
                                         where the Office Holder acted in good faith and had a reasonable basis to believe that
                                         the act would not prejudice the company;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | a
                                         breach by the Office Holder of their duty of care if the breach was done intentionally
                                         or recklessly (except if the breach was solely as a result of negligence);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any
                                         act or omission done with the intent to derive an illegal personal benefit; or
| | - | ---------------------------------------------------------------------------------------------------------------------------



| | · | any
                                         fine, civil fine, monetary sanctions, or forfeit imposed on the Office Holder.
| | - | ---------------------------------------------------------------------------------------------------------------------------



In addition, under
the Israeli Companies Law, exemption of, indemnification of, and procurement of insurance coverage for, our Office Holders must
be approved by our compensation committee and board of directors and, in specified circumstances, by our shareholders.



148







Letters
of Indemnification



On June 12, 2008,
following approval of our audit committee and board of directors, our shareholders approved the grant of indemnification and exemption
letters to the Company’s directors and officers (and to those who will serve as its directors and officers from time to
time). The aggregate amount of the indemnification (in addition to any insurance proceeds received) may not exceed 25% of the
Company’s equity as set forth in the Company’s most recent consolidated financial statements prior to the applicable
payment of indemnification.



Under the indemnification
letters, the Company undertook to indemnify its directors and officers for obligations or expenses that may be imposed on them
as a result of their actions in their capacity as an Office Holder in the Company or as a result of actions in their capacity
as an Office Holder or the holder of any other position in another company in which the Company holds rights or is an interested
party therein (unless fulfilling the position in the other company is not in connection with their function in the Company or
at its request), as permitted by the Company’s Articles of Association. For further information, see above “Item 6.
Directors, Senior Management And Employees – C. Board Practices – Exemption, Insurance and Indemnification of Directors
and Officers – Indemnification of Office Holders”.



Under the indemnification
letters, the Company undertook to indemnify its directors and officers prospectively and retroactively with respect to following
events:



| | · | Issue
                                         of securities, including, an offering of securities to the public pursuant to a prospectus,
                                         private placement, tender offer or offering of securities in any other manner;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                         event connected with the making of an investment by the Company before, during and after
                                         the effecting of the investment, in the course of negotiations, contractual arrangement,
                                         signature, development and monitoring the investment, including actions performed on
                                         behalf of the Company as an officer, employee or observer in the corporation in which
                                         the investment is made;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | A
                                         transaction or arrangement, including a transfer, sale or purchase of assets or liabilities,
                                         and including, goods, real estate, securities, or rights, or the giving or receiving
                                         of a right in any one of them and any action connected, directly or indirectly with such
                                         transaction, and including a tender offer of any sort and another transaction in securities
                                         which the Company has issued, whether or not the Company is a party thereto;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



149







| | · | A
                                         report or notice filed or submitted according to any law, including, an event arising
                                         from the fact of the Company being a public company or arising from the fact of its securities
                                         having been offered to the public, or arising from the fact of its securities being traded
                                         on a stock exchange, and including, a report or notice in accordance with the Companies
                                         Law - 1999 or the Securities Law - 1968, or the tax laws including regulations or directives
                                         made pursuant thereto, or in accordance with laws or provisions that apply outside of
                                         Israel or a report or notice lodged or submitted in accordance with rules, directives
                                         or instructions customarily practiced on the stock exchange in Israel or abroad and/or
                                         failure to submit such report or notice;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                         act in connection with voting rights in investee companies;
| | - | -------------------------------------------------------------------------------------------------------



| | · | An
                                         act in connection with the management of market risks.
| | - | --------------------------------------------------------------------------------------------------



| | · | A
                                         change in the structure of the Company or its reorganization or any resolution relating
                                         thereto, including, a merger, split, alteration of the capital of the Company, setting
                                         up of subsidiaries, winding-up or sale thereof.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Action
                                         connected directly or indirectly with employer-employee relationships in the Company
                                         and/or the commercial relations of the Company, including employees, external contractors,
                                         customers, suppliers and service providers, including negotiations, entering into and
                                         implementation of personal employment agreements or collective bargaining agreements,
                                         benefits to employees, including the issue of securities to employees.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                         act in connection, directly or indirectly, with the sale of products, purchase of products,
                                         import of products, operation of stores and sites of the Company, safeguarding of public
                                         health and safety instructions and provisions.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                         act in connection with the issue or non-issue of licenses and permits for the Company’s
                                         activities.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                         preparation and approval of financial statements, including the approval of resolutions
                                         regarding the application of accounting standards and restatement in the financial statements.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                         act in connection with a distribution, including, for a repurchase by the Company of
                                         its own securities.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                         transfer of information that is required or permissible for transfer according to law
                                         between the Company and/or the other companies and interested parties in any of them.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Remarks,
                                         statements including the expression of a position or opinion made in good faith by the
                                         officer in the course of performing his function and by virtue of his function, and including
                                         in the framework of meetings of the board of directors or any of its committees.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | An
                                         act or deed on matters of planning and building, work safety, the environment and recycling,
                                         public health, consumer protection.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



150







Pursuant to the
indemnification letters, upon their issuance, all previous indemnification letters previously issued to each director or officer
by the Company were cancelled, effective as of the date of approval of the indemnity resolution. Notwithstanding, such revocation
will not prejudice or derogate from the validity of previous indemnification letters issued to such director or officer by the
Company, to the extent that such undertaking is valid according to law and applies to actions with respect to the period preceding
the approval of the indemnity resolution, and provided that such entitlement to indemnity in respect of such liability and/or
expense will only be in accordance with one of the indemnification letters.



Committees





Our board of directors
has established an audit committee, a compensation committee, and a Compliance Committee.







Compensation
Committee





Under the Companies Law, the board of directors of a public company must establish a compensation committee,
which subject to an exception applicable to companies
with no controlling shareholder, must consist of at least three directors and including all of the external directors. The remaining
members must be qualified to serve on the audit committee, pursuant to Companies Law requirements described above, subject to an
exception applicable to companies with no controlling shareholder. The compensation committee chairman shall be an external director.
Any persons disqualified from serving as a member of the compensation committee may not be present at the compensation committee
meetings, unless the chairman of the compensation committee has determined that the presence of such person is required to present
a matter to the meeting or if such person qualifies under an available exemption in the Companies Law.





The provisions of
the Companies Law that govern the compensation and reimbursement terms of external directors also apply to members of the compensation
committee who are not external directors. Under New York Stock Exchange rules, listed companies must maintain a compensation consisting
of only independent directors. The role of the compensation committee for New York Stock Exchange purposes includes making recommendations
to the board with respect to executive officer compensation and incentive-compensation and equity-based plans that are subject
to board approval. Our compensation committee, which consists of Uzi Baram, David Alphandary, Keren Bar-Hava, and Avraham Meron,
administers issues relating to employee compensation for senior management.



Audit Committee



Our audit committee,
which consists of David Alphandary, Uzi Baram, Keren Bar-Hava, and Avraham Meron, has the powers as described above. The audit
committee also assists the board of directors in overseeing the quality and integrity of our accounting, auditing and reporting
practices and in the approval of our financial statements. For more information regarding the role of our audit committee see
also “Item 6. Directors, Senior Management And Employees – C. Board Practices – Audit Committees.”



151







Compliance Committee



Our Compliance Committee,
which consists of David Alphandary, Avraham Meron, and Uzi Baram convenes semi-annually to examine the internal compliance plan
of the Company and the management’s compliance with the plan. If case of a significant breach of the Company’s internal
compliance plan, the Compliance Committee will convene.



| | D. | Employees.
| | -- | ----------



According to Report
No. 4 of the trustees of Mega Retail, Mega Retail employed approximately 3,500 employees. As of December 31, 2014, Mega Retail
employed 6,716 employees (including employees of Eden Teva), counting multiple employees sharing a single position as a single
employee, including 2,304 temporary employees. 609 of our employees were employed in central management and administration and
in our logistics center and 5,311 in our stores. As of December 31, 2013, Mega Retail employed 7,454 employees (including employees
of Eden Teva), counting multiple employees sharing a single position as a single employee, including 1,477 temporary employees.



As of December 31,
2015, Dor Alon employed 2,786 employees, 101 of Dor Alon’s employees were employed in central management and administration
and in Dor Alon’s logistics center and 2,685 in Dor Alon’s direct marketing sector and filling stations and convenience
stores. As of December 31, 2014, Dor Alon employed 2,763 employees, 103 of Dor Alon’s employees were employed in central
management and administration and in Dor Alon’s logistics center and 2,660 in Dor Alon’s direct marketing sector and
filling stations and convenience stores. As of December 31, 2013, Dor Alon employed 2,763 employees, 108 of Dor Alon’s employees
were employed in central management and administration and in Dor Alon’s logistics center and 2,605 in Dor Alon’s
direct marketing sector and filling stations and convenience stores.



As of December 31,
2015, our Naaman segment employed 584 employees, 41 of our Naaman segment’s employees were employed in central management
and administration and 543 in our Houseware and Textile stores. As of December 31, 2014, our Naaman segment employed 615 employees,
50 of our Naaman segment’s employees were employed in central management and administration and in its logistics center
and 565 in our Naaman segment’s stores.



152







As of December 31,
2015, BSRE employed 11 employees, not including six members of BSRE’s senior management and other employees who provide
services to the Company under the services agreement with the Company and not including employees employed by entities held 50%
or less by BSRE. See “Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions –
Agreements between Alon Blue Square and its Subsidiaries.” As of December 31, 2014, BSRE employed ten employees. As of December
31, 2013, BSRE employed ten employees.



As of December 31,
2015 our logistics center employed 95 employees. As of December 31, 2014 our logistic center employed 92 employees.



We are subject to
labor laws and regulations in Israel. Most of Mega Retail’s employees are subject to collective bargaining labor agreements.
Under a Special Collective Bargaining Agreement, referred to as the Special Agreement, from May 1996, among the Co-Op, Alon
Blue Square, the Histadrut (General Federation of Labor in Israel) (Histadrut), the National Committee of the Co-Op Union Employees
and the Co-Op Union, all the Co-Op employees became employees of Alon Blue Square. The collective bargaining agreements in effect
as of that date apply to Alon Blue Square as if Alon Blue Square and these employees were originally parties to these agreements.
Alon Blue Square became responsible for the payment of all employee benefits that had been accrued in respect of these employees
during the term of employment of these employees with the Co-Op, to the extent these benefits were recorded on the Co-Op’s
records. Since 1996, we entered into new labor agreements with the Histadrut and the Co-Op union, which determine our employees'
wages structure, the employment conditions of new employees and a wage increase to the existing employees. The above applies to
Mega Retail employees. On January 1, 2011, substantially all of the employees of Alon Blue Square assigned to Mega Retail’s
supermarkets were transferred to Mega Retail.



Israeli law generally
requires the payment by employers of severance pay upon the retirement or death of an employee or upon termination of employment
by the employer or, in some circumstances, by the employee. We currently fund ongoing severance obligations by making monthly
payments to pension funds, employee accounts in a provident fund and insurance policies. In addition, Israeli employees and employers
are required to pay specified amounts to the National Insurance Institute, which is similar to the U.S. Social Security Administration.
Since January 1, 1995, these amounts also include payments for national health insurance payable by employees. Most of our
employees are covered by a pension fund. Our senior employees are covered by general and/or individual life and pension insurance
policies providing customary benefits to employees, including retirement and severance benefits.



| | E. | Share
                                         Ownership.
| | -- | ---------------------------------------------------------



As of March 31, 2015
other than indirect ownership through Alon or Alon Retail, none of our directors or officers owned more than 1% of our outstanding
equity securities.



153







| | ITEM 7. | MAJOR
                                         SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
| | ------- | ------------------------------------------------------------------------------------------



| | A. | Major
                                         Shareholders.
| | -- | ------------------------------------------------------------



The following table
sets forth certain information regarding the beneficial ownership of our ordinary shares as of March 31, 2016, by each person
or entity known to own beneficially 5% or more of our outstanding ordinary shares based on information provided to us by the holders
or disclosed in public filings with the Securities and Exchange Commission. Our major shareholders do not have voting rights different
from the voting rights of our other shareholders.



|Name                            |  | Number of Ordinary
    Shares Beneficially Owned |            |  | Percentage
    ofOutstanding OrdinaryShares(1) | 
|------------------------------- |  | ------------------------------------------------ | ---------- |  | ---------------------------------------------- | 
|Alon Israel Oil Company Ltd.(2) |  |                                                  | 47,957,264 |  |                                                | 
|                                |  |                                                  |            |  |                                                | 
|Alon Retail Ltd.(3)             |  |                                                  | 30,604,306 |  |                                                | 








| | (1) | The percentage of outstanding ordinary
                                         shares is based on 65,954,427 ordinary shares outstanding as of March 31, 2015 (excluding
                                         207,433 ordinary shares held by Alon Blue Square as treasury shares).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Alon may be deemed to beneficially
                                         own all of the shares held directly and indirectly by Alon Retail Ltd. due to the ownership
                                         structure of Alon Retail described in footnote (3); accordingly, the number of shares
                                         listed as owned by Alon includes all the shares that are listed as owned by Alon Retail
                                         Ltd.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Alon Retail Ltd. is a wholly owned
                                         subsidiary of Nissan Alon Retail Holdings Ltd., which is a wholly owned subsidiary of
                                         the Nissan Dor Chains Ltd., which is a wholly owned subsidiary of Dor Food Chains Holdings
                                         Ltd., a wholly owned subsidiary of Alon. To the Company’s best knowledge, Alon
                                         is owned approximately 48.21% (excluding shares held by Alon as treasury shares) by eight
                                         collective acquisition entities of kibbutzim in Israel and approximately 51.79% (excluding
                                         shares held by Alon as treasury shares) are held by Bielsol Investments (1987) Ltd. To
                                         the Company’s best knowledge, the shareholders of Bielsol Investments (1987) Ltd.
                                         consist of Shibag Ltd. (whose shareholders are Advocate Shraga Biran, and Gara, Boaz
                                         and Iftah Biran, and which is controlled by Advocate Shraga Biran who holds all of the
                                         voting rights in Shibag Ltd. through a direct holding in 85% of the shares that grant
                                         voting rights in Shibag Ltd. (“Voting Shares in Shibag”) and through a power
                                         of attorney relating to voting rights for the other 15% of the Voting Rights in Shibag
                                         held by Mr. Boaz Biran), holding 79.4% of the capital and voting rights of Bielsol Investments
                                         (and is the controlling shareholder of Bielsol Investments, and Advocate Shraga Biran
                                         is the controlling shareholder of Shibag Ltd.); D.B.W Investments Ltd. (a company owned
                                         and controlled by Mr. David Wiessman), holding 19.8% of the capital and voting rights
                                         of Bielsol Investments; Shibago Ltd. (whose partners are Shibag Ltd. (75%) and a company
                                         owned and controlled by David Wiessman (25%)), holding 0.8% of the capital and voting
                                         rights of Bielsol Investments.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of March 31, 2016,
Alon Blue Square had approximately 43 shareholders of record with a United States address. As of March 31, 2016, these United
States record holders held approximately 3,608,957 ordinary shares in the form of ADSs, representing approximately 5% of our then
outstanding share capital.



154







| | B. | Related
                                         Party Transactions.
| | -- | --------------------------------------------------------------------



Agreements
between Alon and Alon Blue Square



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, 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 27, 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 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).



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) at the market price. As part of the transaction, in the event of the sale of the sold shares
by Alon to third parties, we would 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.



Acquisition of
Controlling Share in Dor-Alon Energy In Israel (1988) LTD.



Alon Blue Square
and Alon, Alon Blue Square’s controlling shareholder, entered into a Share Purchase Agreement, which was completed on October
3, 2010, that provided for the acquisition by Alon Blue Square of Alon’s entire equity interest in Dor Alon (constituting
approximately 80% of the outstanding shares of Dor Alon (not including treasury shares)), or the Transferred Shares, at the closing
of the Acquisition. These shares constituted approximately 73.5% of the outstanding Dor Alon ordinary shares on a fully diluted
basis as of the closing date of the acquisition.



155







In consideration
for each share held by Alon in Dor Alon, Alon Blue Square issued to Alon 1.8 ordinary shares of Alon Blue Square, and in exchange
for all the Transferred Shares, Alon Blue Square issued to Alon 20,327,710 ordinary shares of Alon Blue Square, or the Issued
Shares. Immediately following the Acquisition, Alon beneficially owned in the aggregate, directly and indirectly, approximately
78.44% of the outstanding ordinary shares of Alon Blue Square. Upon completion of the Acquisition, Dor Alon became a majority-owned
subsidiary of Alon Blue Square and its shares have continued to trade on the TASE.



As a condition to
the closing of the Share Purchase Agreement, Alon Blue Square paid to its shareholders on October 18, 2010 an aggregate cash dividend
of NIS 800 million, or approximately US $223.4 million (based on the representative rate of exchange on October 18, 2010), which
represented a dividend of approximately NIS 12.31, or approximately US $3.44 (based on the representative rate of exchange on
October 18, 2010), per Alon Blue Square ordinary share (after taking into account the shares to be issued to Alon in the acquisition,
or the Dividend Distribution. The Dividend Distribution was made following the issuance of Alon Blue Square ordinary shares to
Alon pursuant to the Share Purchase Agreement and was conditioned thereon. The Dividend Distribution was approved by the Israeli
District Court.



Alon agreed to compensate
and indemnify Alon Blue Square and/or Dor Alon for various damages and/or losses and/or expenses that may be caused to Alon Blue
Square or Dor Alon, provided that the accumulated amount of indemnification to be paid will be no more than the product of (i)
the number of Issued Shares and (ii) the closing price of Alon Blue Square shares on the TASE on the date of the issuance of the
Issued Shares. Alon’s indemnification obligation will apply only to damages in an aggregate amount of over ten million NIS
(NIS 10,000,000). However if the accumulated amount of damages to Alon Blue Square or Dor Alon exceeds this amount, then Alon’s
indemnification obligation will apply to the full amount of damages.



In connection with
the proposed acquisition, Alon and Alon Blue Square obtained a pre-ruling from the Israeli Tax Authority. The pre-ruling is subject
to various conditions and provides, among other things, that the cost basis and the purchase date of the shares of Dor Alon for
tax purposes in the possession of Alon Blue Square following the acquisition will be the original price and acquisition date,
respectively, as they had been for Alon prior to the acquisition. Alon has clarified to Alon Blue Square that, in connection with
the payment of tax at the time of any future sale by Alon Blue Square of all or part of its shares in Dor Alon, if any, to a third
party, Alon will pay that portion of any applicable tax payable in an amount equal to the amount of tax deferred by the Tax Authority
in its pre-ruling (i.e., the amount of tax that would have been payable by Alon in connection with the acquisition had
the acquisition not been tax exempt according to the pre-ruling).



Directors
and Officers Insurance



We participate in
a directors’ and officers’ liability insurance policy acquired by Alon. For further information see “Item 6.
Directors, Senior Management And Employees – C. Board Practices – Exemption, Insurance and Indemnification of Directors
and Officers – Office Holder Insurance.”



156







Agreements between
Alon Blue Square and its Subsidiaries



Transactions
with Dor Alon in Connection with Establishment of a Joint Loyalty Plan



On November 29, 2005,
Alon Blue Square 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”). The agreement established,
among other things, the formation of the partnership, its management and the arrangements for providing the benefits to the Loyalty
Plan customers;



(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.



On May 25, 2011, we
agreed to an amendment to the agreement of principles between CAL, Diners Israel, Alon Blue Square, Dor Alon, and the Alon Blue
Square-Dor Alon Joint Loyalty Plan Partnership, and in July 2011, all suspending conditions set forth in the agreement were completed,
the amendment to the agreement came into effect. Pursuant to the amendment, Alon Blue Square and Dor Alon would have the right
to the profits of Diners Israel Ltd. in accordance with their holdings (49% of Diners Israel Ltd.), both related to the “You”
bearing credit cards, and to all other credit cards issued by Diners, effective as of January 1st, 2011. Additionally,
the amendment sets the terms as to the business relationship between the parties, including cancellation mechanism in the event
the Loyalty Plan is cancelled by the purchasers and specific provisions regarding distribution of dividends, and the ongoing relationship
between Diners and the Loyalty Club and Diners management. During July 2011, the Company and Dor Alon exercised their option to
purchase the shares and repaid the loan to CAL. On September 23, 2014, the Company, Diners and CAL approved changes in the agreement
for the purchase of Diners shares from CAL under the conditions of YOU club agreement which include, among others, extending the
club agreement until 2019 and modifications for the determining the value of Diners' share if CAL will repurchase such shares
in certain cases as detailed in the agreement.



157







Procurement
Agreement with Dor Alon Management



Dor Alon Retail Sites
Management Ltd., a subsidiary of Dor-Alon (hereinafter: “Dor Alon Management”), operates convenience stores in fuel
service stations and also in a number of cities in Israel that sell various food and “Non-Food” products. Under the
terms of the procurement agreement between Alon Blue Square and Dor Alon Management (the "Procurement Agreement"), in
consideration of the procurement of products to be supplied to convenience stores (both independent and within filling stations),
Dor Alon Management has agreed to pay Alon Blue Square (i) for products sent directly from suppliers to convenience stores, an
amount equal to the cost of such products plus 2%, and (ii) for products sent from Alon Blue Square's distribution center, an
amount equal to the cost of such products plus 2.75% and distribution costs. The Procurement Agreement provides for compensation
to Alon Blue Square in the event that Alon Blue Square’s income generated from the Procurement Agreement minus related expenses
from the sale of products to Dor Alon Management is less than NIS 1 million, Dor Alon Management will pay Alon Blue Square such
amounts necessary in order that Alon Blue Square’s income from such year will reach such NIS 1 million amount.



The term of the Procurement
Agreement is for five years commencing from May 1, 2004, and is automatically extended for additional one-year periods unless
either party gives notice to the other party of its desire to terminate the Procurement Agreement 90 days prior to the expiration
of the term of the Procurement Agreement.



Within the framework
of Alon Blue Square's acquisition by Alon, the Israeli Anti Trust Authority determined that it can issue an order to the parties,
in its sole discretion, based upon market conditions, Alon Blue Square's purchasing power, and market competition, that Alon Blue
Square's operations should be completely separated from those of Alon as such relate to operation of the "Alonit" stores
and to the purchase of products for the "Alonit" stores. In addition, the Anti Trust Authority is authorized to order
that there will be no cooperation or arrangement dealing with purchasing products for Alon Blue Square and the "Alonit"
stores. As of March 31, 2015, the Anti Trust Authority has not issued such orders.



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.



Arrangements
between Alon Blue Square and BSRE



Lease Agreements
with BSRE



A significant portion
of BSRE's investment properties (providing approximately 60% of its rental income in 2015), are leased to Mega Retail under long-term
lease agreements dated 2006 and 2009, and amendments thereto (including the court-approved addendum to the agreement from December
2015). The principle terms of these agreements include:



158







| | · | Lease
                                         term of 10 years, ending March 31, 2019. The lease is renewed for subsequent 5 year terms
                                         unless Mega Retail opts not to renew it, in which case 24 months early notice is required;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Annual
                                         rent fees are computed at 9% of the amount of BSRE's investment in the asset (linked
                                         to the CPI), or 2% of the turnover of the particular store in the relevant year, whichever
                                         is higher; according to the agreement addendum from December 2015,  the rental fees
                                         as percentage from turnover was increased to 2.75%, and in addition,  9% discount
                                         on the rental fees for the supermarkets and the office building in Rosh Ha'ayin is granted
                                         for a period of 24 months, commencing November 1, 2015;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Early
                                         termination of the lease for certain properties is possible, to the extent that their
                                         area, in aggregate, does not exceed 5% of the total rented space under the agreements
                                         at the beginning of the lease (subject to 12 months early notice by Mega Retail). In
                                         addition, at the time of the lease extension, subject to 12 months early notice, Mega
                                         Retail has the option to reduce the number of properties included in the lease, to the
                                         extent that their paid rentals (according to the average of lease fees in the two years
                                         preceding the renewal), does not exceed 15% of the total lease fees paid under the lease
                                         agreement;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                         lease agreements are "net lease" type; all payments and charges in respect
                                         of maintaining and using the assets during the lease term are born by the lessee, unless
                                         otherwise agreed; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In
                                         the case a leased property is sold or mortgaged by BSRE, Mega Retail will engage in a
                                         separate lease agreement with the buyer, and the rentals to BSRE will be reduced by the
                                         basic rentals attributed to the sold asset, under an agreed formula.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



BSRE has no collaterals
for the rental fee payments under the lease agreements.



During 2015, in the
framework of the Mega Retail's plan of recovery, it was agreed that Mega Retail will exit from 12 stores (out of the 86 stores
leased by Mega Retail from the Alon group). In addition, Mega Retail sold its "YOU" discount chain to third parties;
including 10 stores that are located on assets leased from BSRE (new lease agreements for 10 to 20 years were signed with these
third parties, commencing 2016).



On February 29,
2016, a notice was given to Mega Retail, claiming that since a trustee was appointed for the operation of Mega Retail and that
appointment was not revoked within 30 days, Mega Retail is in breach of the lease agreements, and therefore the discount granted
under the addendum for a period of 24 months (of 9%), is no longer valid.



159







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 14 and 15, 2015, the District Court approved the plan of recovery. Under the plan of recovery, we
assumed various liabilities. For more information regarding the commitments and guarantees we extended under the Mega Retail plan
of recovery, see “Item 4. Information on the Company – A. History and Development of Alon Blue Square – Mega
Retail's plan of recovery.”



Management Services
Agreement



Pursuant
to an agreement renewed in January 1, 2014, replacing an agreement entered in August 2006 and extended on December 27, 2010, the
Company provides to BSRE (directly or through its subsidiaries) the following services: Chairman of the board of directors services,
financial and accounting management services (including bookkeeping), guidance concerning financing and fundraising, payments
and collection, guarantees and collateral management, computer management and maintenance service, legal consulting and corporate
secretary services, office space and related office services, internal audit services, consulting services with regards to the
capital market, management consulting services regarding strategic moves, human resource services, payroll accounting services,
car fleet management and security consulting. In consideration for these services, BSRE will pay the Company an annual amount
of NIS 5 million. The consideration was based on an estimate of the Company total costs for these services attributable to BSRE.
The consideration is linked to changes to the Israeli CPI (since December 2013) plus VAT. In addition, BSRE may have request maintenance
services subject to additional consideration for such services in the amount of the direct costs to the Company plus 2%.



This agreement replaced
a substantially similar agreement entered in August 2006, effective as of January 1, 2006, and extended on December 27, 2010,
effective as of January 1, 2011. In consideration for these services, BSRE paid the Company an annual amount of NIS 4.2 million.
In addition, BSRE may have requested maintenance services for additional consideration equal to amount of the direct costs to
the Company plus 2%.



Under the previous
agreement, the consideration was based on an estimate of the Company total costs for these services attributable to BSRE. The
consideration was linked to changes to the Israeli CPI (since December 2005). The consideration is increased each year by an amount
equal to 0.2% of the difference between (x) the cost of BSRE assets (prior to depreciation and amortization) (“BSRE Asset
Cost”) which are classified as yield-generating real estate in accordance with BSRE’s consolidated financial statements
at the end of the preceding year and (y) the BSRE Asset Cost as of the end of the preceding year, linked to changes to the Israeli
CPI plus VAT. In 2014, the Company received approximately NIS 5.0 million for the services under the new agreement.



160







On January 16, 2016
the agreement was terminated effective December 31, 2015 (instead of December 31, 2016 as mentioned in the agreement).



Agreement with
respect to the Allocation of Various Insurance Expenses



Pursuant to an agreement
entered into on August 13, 2006, insurances obtained by BSRE, such as: elementary insurance including, structure insurance, insurance
for independent contractors, funds insurance, third party liability insurance and employers liability insurance will be obtained
within the group policy of the Alon Blue Square group. The insurance costs and expenses are allocated between the parties in accordance
with different ratios determined by the parties depending on the insurance involved. Pursuant to an amendment to the Israeli Companies
Law, on December 13, 2011, the audit committee of the Company determined that this agreement is not an extraordinary agreement,
is on market terms and in the ordinary course of business, and does not have a material influence on the Company’s profitability,
assets, or obligations, and therefore reapproved this agreement for additional three years. The audit committee also resolved
to receive an annual update regarding BSRE's insurance allocations. On December 15, 2014, BSRE's board of directors, following
audit committee approval, resolved to extend the insurance expenses allocation agreement for an additional three years, as a non-extraordinary
agreement and to receive an annual update regarding BSRE's insurance allocations. BSRE intends to convene a general meeting of
its shareholders, following approval by its compensation committee, audit committee, and board of directors for approval of the
entry into D&O Liability Insurance, including within the framework of the Company's group insurance policy.



Deposit of
Cash Balances Agreement



Pursuant to an
agreement effective February 28, 2014, extending an agreement entered in August 2006, BSRE may, with the Company’s
consent from time to time, deposit funds with the Company and receive in return funds on ON CALL terms (on an on-demand
basis). The amount of funds lent from each party to the other party may not exceed NIS 150 million at any time, and if the
Series C Debenture is lowered by more than 3 credit rating levels, the amount lent from each party to the other may not
exceed NIS 50 million. In case BSRE shall deposit funds with the Company as an ON CALL deposit, the Company shall grant
collateral to BSRE which shall be comprised of BSRE shares in a market value which is to be examined each quarter in order
that the Company retains a 2:1 ratio between the market value of the collateral and the amounts deposited by BSRE with the
Company. The interest paid by each party for funds received according to this arrangement will be at a rate equivalent to the
rate that the Company is charged by banks in such month for ON CALL credit (short-term loans) on a monthly weighted average
basis. The deposits will be deposited for periods of not exceeding one year and will be renewed from time to time. The
agreement may be terminated by either party upon seven days’ prior notice.



161







In addition, the
Company and BSRE entered into an agreement with respect to transfer of employees from the Company to BSRE.



Following the reduction
of the rating of the Company series C debentures, on April 1, May 20, July 7, July 29 and October 27, 2015 and pursuant to the
deposit of cash balances agreement, an additional 0.5% interest on the remaining deposit amount is added, per reduction of the
debentures’ rating on the above mentioned dates (an aggregate interest extension of 4.5% on the interest rate mentioned
in the agreement).



Agreements between
Alon and Alon Blue Square's Subsidiaries



Management
Services Agreement with Alon



In March 2014, Alon
and Dor Alon renewed their management services agreement, dated as of December 2010 (“Management Services Agreement”),
for an additional period of three (3) years effective from January 1, 2014, by which Alon shall provide the following services
and rights to Dor Alon (the “Services”): (i) various management services, including those related to the chairman
of the board and president of Dor Alon, day to day management of Dor Alon, strategy and business development, financial management,
supplementary legal counsel, corporate secretary services provided by Alon’s in-house counsel, and (ii) the right to use
the “Alon” and “Alonit” brand names.



In consideration
for the Services, since 2011, the quarterly management fees paid by Dor Alon to Alon equaled to the aggregate of 3% of Dor Alon’s
EBITDA profits according to Dor Alon’s quarterly consolidated financial statements, but not more than NIS 1,250 thousand
on a quarterly basis, linked to the consumer price index dated December 2004. Beginning as of January 1, 2014, the quarterly management
fees to be paid by Dor Alon to Alon shall equal the aggregate of 3% of Dor Alon’s EBITDA profits according to Dor Alon’s
quarterly consolidated financial statements, but not more than NIS 1,375 thousand on a quarterly basis, linked to the consumer
price index published on January 2014. In 2014 and 2015, Alon received approximately NIS 5.4 million and NIS 5.49 million, respectively
for the Services.



Dor Alon Deposit
of Cash Balances Agreement



Pursuant to the
agreement entered into in May 2005, and subsequently extended on January 6, 2011 until January 2016, such extension re-approved
by Dor Alon’s audit committee on December 22, 2013, Dor Alon may, from time to time, deposit funds with Alon and receive
in return funds on ON CALL terms (on an on-demand basis). The amount of funds lent from each party to the other party may not
exceed NIS 150 million at any time (linked to the prime rate less 1.25%). Against the deposits, the depositor is entitled to require
the recipient party to provide her /or third parties bank guarantees or letters of credit. Each party is entitled to redeem or
require redemption of the balance by giving notice of three banking business days. Either party may terminate the agreement by
providing three-month prior written notice.



162







As of March 31,
2016 the full amount of the deposit was paid and the parties did not renew the agreement.



Agreement
with the Wholesale Market Company



On June 3, 2010,
BSRE, Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (together with Gindi Investments 1
Ltd., “Gindi”) (the “Purchasers”) signed agreements with the Municipality of Tel Aviv and the Wholesale
Market Company (collectively, the “Sellers”) to acquire rights to a long term lease of property in the wholesale market
site in Tel Aviv (the “Property”). As of December 31, 2014, BSRE owned 49.5% of the company that owns the residential
building rights and50% of the company that owns the commercial building rights. One of the
Sellers was Tnuva, and to our knowledge, some of the collective acquisition entities of kibbutzim in Israel that hold shares of
Alon, our controlling shareholder, hold 23% of the shares of Tnuva. On June 2, 2010, the shareholders of BSRE approved the signing
of the final agreements. The agreements were approved by the Israeli Minister of the Interior in July 2010.



The long term lease
on the Property is until August 31, 2099, and the Purchasers, including BSRE, intend to plan, build and market on such Property
an apartment building complex and a shopping mall. 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.



The Purchasers were
required to pay the Sellers a purchase price of NIS 950 million payable in three installments. In addition to the purchase
price, the Sellers may be entitled to additional consideration calculated as a percentage of the sale price of apartments that
are sold in the apartment buildings complex, as described in the agreement. On May 31, 2012, the Purchasers completed the purchase
of the Property and paid the Sellers the balance of the consideration in the aggregate amount of approximately NIS 730 million
plus VAT.



The Purchasers plan
to build (i) 11 buildings, each building consisting of 14 floors, (ii) 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, and (iii) 32,000
square meters leased space for commercial use. As of January 7, 2014, the building permits for all 722 of the residential units
have been granted as well as permits to for the commercial space. The Sellers are to bear the expense of building buildings for
public use, such as a sport center, school and other neighborhood public facilities, and are to pay the Purchasers a fee (linked
to the Building Index) calculated as cost plus 10% plus VAT, based on certain milestones detailed in the agreement, up to a maximum
of approximately NIS 84 to 102 million. Any expenses that exceed this limit are to be borne by the Purchasers. The Purchasers
also committed to build an additional 40 parking spaces and to develop, at their own expense, an open public space within the
area of the Wholesale Market Project on an area of nine dunam, which would remain under the exclusive ownership of the municipality
of Tel Aviv.



163







Gindi is to provide
management services for the Wholesale Market Project in exchange for a management fee to be paid by the Purchasers and calculated
as 16% of the profits from the Wholesale Market Project, all subject to various terms of the agreement of principles between the
parties. In addition, they 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.



In order to pay
the balance of the consideration, the Purchasers received loans in the amount of NIS 730 million from a bank at an annual interest
rate of prime plus 2% for a 18 month term. The principal is due in one sum at the end of the term and interest is payable quarterly.
The bank also provided the Purchasers with a two-month loan in the amount of NIS 120 million to pay the VAT (which has since been
repaid). To secure the loan BSRE granted a lien to the bank on its shares in the Purchasers, and the lien was charged in favor
of the bank.



During the third
quarter of 2012, the excavation and reinforcement works in the Wholesale Market Project were completed and the performance of
skeleton work commenced. As of March 31, 2015, a work order was given for all buildings on the residential project.



As of March 31,
2016, 717 sale agreements had been signed and advance payments in the aggregate amount of NIS 1,328 (including vat) had been received
from the purchasers. For more information on the loan, see “Item 4. Information on the Company – A. History and Development
of Alon Blue Square – Other recent Developments – In Our BSRE segment.”



Purchase of
Property in Point Wells, Washington from Indirect Subsidiary of Alon



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. For more information on
the purchase and development agreements, see “Item 4. Information on the Company – B. Business Overview – BSRE.”



Arrangements
with Tnuva



To our knowledge,
Mega Retail purchases most of its dairy, fresh produce and poultry products from the Tnuva corporation, which holds a leading
position in the domestic dairy and poultry markets. To our knowledge, some of the collective acquisition entities of kibbutzim
in Israel that hold shares of Alon, our controlling shareholder, hold 23% of the shares of Tnuva. In 2014, Tnuva’s products
accounted for approximately 12.9% of all the products sold at Mega Retail's supermarkets. These arrangements are in the ordinary
course of our business, and the terms and conditions of these arrangements are at “arm’s-length”.



164







Agreements between
Alon Blue Square's Subsidiaries



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 addition, pursuant to this agreement BSRE
transferred to Eyal Baribua an amount based on the purchasing costs, development costs and an additional cost. In the event that
the costs exceed $100,000 per dunam, BSRE will have the right to terminate the Agreement. On July 11, 2011, following the approval
of BSRE’s audit committee and board of directors, BSRE’s shareholders approved entering into a lease agreement with
Mega Retail, pursuant to which BSRE will construct the logistics center in Kibbutz Eyal to be leased by Mega Retail. The construction
of the logistics center was completed in June 2014, with Mega Retail commencing operations in July 2014. For more information,
see “Item 4. Information on the Company – B. Business Overview – BSRE – Warehouses and Logistics Areas.”



Arrangements
between Bee Group and Naaman



On August 15, 2011,
Naaman and Vardinon entered into a Supply and Consignment Agreement (the “Supply Agreement”) with Bee Group, pursuant
to which Naaman and Vardinon will supply to Bee Group several products (the “Products”) to be sold on a future website
to be established by Bee Group. Under the Supply Agreement, Bee Group will pay Vardinon and/or Naaman, as applicable, for the
Products to be sold by Bee Group based on Naaman’s and/or Vardinon’s price list, as applicable, previously approved
between the parties. The term of the Supply Agreement is for a period of three years, until August 14, 2017. The Supply Agreement
will be extended for additional three year periods, subject to the required approvals under applicable law. Each party may terminate
the Supply Agreement by the delivery of a three months prior written notice to the other party. Following the merger between Naaman
and Vardinon on December 30, 2012, all rights and obligation of Vardinon under the Supply Agreement, were transferred to Naaman.



Arrangements
between Mega Retail and Eden Teva (each formerly a Company subsidiary)



Mega Retail has
arrangements with Eden Teva, according to which Eden Teva sells its products in certain Mega Retail stores (store in store format),
and Mega Retail receives a certain percentage of the sales of Eden Teva products.



165







Ordinary
Course Transactions



From time to time,
Alon Blue Square, or its subsidiaries, enter into agreements and engage in transactions in the ordinary course of business with
its subsidiaries and affiliates, such as for the purchases of merchandise, gasoline purchase agreements, including in connection
with the operation of our gasoline station(s) and gas supply agreements with the Alon Group, joint sales and marketing promotions
and legal consulting. Some subsidiaries enter into agreements and engage in transactions with other subsidiaries and affiliates
of Alon Blue Square. On March 17, 2016 we received a letter from a shareholder of our company claiming that payments on account
of legal services rendered by S. Biran & Co., a law firm in which our indirect controlling shareholder is a partner, did not
receive requisite corporate approvals.



The terms and conditions
of all of these agreements and transactions are at “arm’s-length.” We intend to enter into similar agreements
and to engage in similar transactions in the future. In addition to ordinary course agreements and transactions, Alon Blue Square
and certain of its affiliates have entered into other agreements and transactions.



Arrangements
with David Wiessman, our former Chief Executive Officer



See “Item
6. Directors, Senior Management and Employees – B. Compensation.”



Employment
Agreement with Moran Wiessman



During 2015 Ms.
Moran Wiessman, the daughter of David Wiessman ceased her employment with Mega Retail. Until her departure from Mega Retail, Ms.
Wiessman received a monthly salary of NIS 21,000, a cell phone at the expense of Mega Retail, and Mega Retail assigned a car to
Ms. Wiessman as was customary in Mega Retail for employees at the same level.



Arrangement
between Dor Alon and Alon



Natural gas purchase
agreement between the partners of Tamar Partnership and a subsidiary of Dor Alon



On December 9, 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”) signed a natural gas purchase agreement with the partners of Tamar Partnership, for the operation of
existing facilities and a power plant, if established, aimed to provide Sugat’s energy requirements. Alon is the indirect
holder of 4% of shares in Tamar Partnership. Pursuant to the agreement, Tamar Partnership is to supply the Partnership with natural
gas in the amount of up to 1.68 BCM in accordance with the terms of the Supply Agreement. For more information, see “Item
4. Information on the Company – B. Business Overview – Dor Alon Segment – Marketing – Establishment of
a Power Plant.”



166







On November 19, 2013,
Dor Alon entered into an agreement, through a subsidiary, for purchasing natural gas from the partners in Tamar partnership in
the amount of U.S. $85 million (0.36 BCM) over seven years while committing to a minimum annual quantity. The agreement is subject
to the approval of the anti-trust authority see “Item 4. Information on the Company – B. Business overview –
Dor Alon segment”.



| | C. | Interests of Experts
                                         and Counsel.
| | -- | --------------------------------------------------------------------------



Not applicable.



|ITEM 8. | FINANCIAL
    INFORMATION
|------- | -------------------------



| | A. | Consolidated Statements
                                         and Other Financial Information.
| | -- | -------------------------------------------------------------------------------------------------



The financial statements
required by this item are found at the end of this Annual Report, beginning on page F-1.



Board Resolution on
Dividend Distributions



Alon Blue Square’s
board of directors has resolved that Alon Blue Square would not distribute dividends in any quarter if the ratio of our net financial
obligations to EBITDA for any quarter exceeds 6.0. Alon Blue Square’s board of directors also resolved that Alon Blue Square
would not distribute dividends in any quarter if the ratio of the unencumbered fixed assets (net of depreciation) and investment
property as set forth in our consolidated financial statements to financial obligations for any quarter is below 120%.



The
ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations Alon Blue
Square’s debt which is related by the company to real estate
that is not in use by Alon Blue Square (which is equal
to 75% of the investment property as recorded on the balance sheet). As
of December 31, 2015, we did not have any earnings to distribute as a dividend.



Legal Proceedings
Legal Proceedings Initiated by the Trustees of Mega Retail Against Us



Following their
appointment by the District Court in Lod, Israel in January 2016, the trustees of Mega Retail filed several motions to the District
Court claiming that Mega Retail and some of Mega Retail's creditors are our direct creditors. As per Mega Retail's trustees, this
indebtedness is due among other things to our contractual obligations towards Mega Retail and Mega Retail's creditors, and from
liabilities incurred as part of the plan of recovery in July 2015, as well as from other causes of action. According to Mega Retail's
trustees, we are required to meet the following obligations:



| | 1. | Completion of our liabilities to
                                         inject NIS 320 million. The trustees initially claimed that we had not yet transferred
                                         an amount of NIS 63-70 million, and on March 7, 2016, that amount was increased to NIS
                                         117 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



167







| | 2. | Completion of a rights offering
                                         of no less than NIS 150 million and the allocation of options to Mega Retail's large
                                         suppliers. See ”Item 4. Information on the Company –A. History and Development
                                         of Alon Blue Square – Mega Retail’s Plan of Recovery“.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Repayment of the guaranteed and
                                         shared debt to financial creditors of approximately NIS 300 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Repayment of our guarantee towards
                                         the Company employees transferred to Mega Retail in an amount estimated by the trustees
                                         at NIS 40 million.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | Repayment of our guarantees to suppliers,
                                         insurance companies, suppliers' credit and property owners amounting to NIS 150 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | Contingent liability in connection
                                         with the return of NIS 117 million resulting from a dividend distributed by Mega Retail
                                         in 2013, as argued in the application for approval of a derivative claim. 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.”
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In their request,
Mega Retail's trustees claimed that the indebtedness owed to Mega Retail should rank equally to that owed to our financial creditors.
Therefore, we would not be permitted to carry out a debt arrangement with our financial creditors without including a suitable
arrangement agreed upon with the trustees. The trustees also demanded that we not make any payments nor place liens in favor of
our financial creditors, since these actions would be deemed a preference of the financial creditors.



168







On February 24,
2016 (Motion 38), the trustees filed with the court a report and a motion for remedies in connection with our liabilities
towards Mega Retail. Among other things the trustees claim that we have the following obligations:



| | 1. | We owe NIS 118 million to complete
                                         our liability under the plan of recovery from July 2015 to inject NIS 320 million to
                                         Mega Retail, issuance of an option to large suppliers of Mega Retail for a debt of NIS
                                         193 million to convert their debt into the Company's shares. The trustees also argue
                                         that we have no right to return to Mega Retail for the Company's liabilities for the
                                         repayment of Mega Retail's debts to banks (the guaranteed and the shared debt of approximately
                                         NIS 300 million).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Other liabilities of NIS 186 million
                                         mainly for transferring employees, guarantees to suppliers, and to insurers of suppliers'
                                         credit, and property owners. The trustees claim that we extended to Mega Retail these
                                         guarantees as a substitute for the equity required for Mega Retail and as part of the
                                         policy of its conduct in thin financing.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Contingent indebtedness in connection
                                         with a dividend of NIS 100 million that was distributed in 2013 from Mega Retail to us
                                         in respect of which a derivative claim of NIS 117 million was filed.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | 4. | We transferred to Mega Retail our holdings in Eden Teva where during the period it was held by
Mega Retail (2010 and onwards) it lost NIS 100 million and a minority shareholder filed an application against Mega Retail and
us (and this while ignoring the fact that the original claim was filed for NIS 77 million and was subsequently lowered to NIS 40
million for purposes of court fees).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





The trustees of Mega
Retail also argue that:



| | 1. | Following the split of our real
                                         estate activity in 2009 from Mega Retail to BSRE, the trustees of Mega Retail claim that
                                         allegedly, under the split (i) a dividend of tens of millions of NIS was distributed
                                         to us (ii) the lease agreements between Mega Retail and BSRE are higher than market prices,
                                         and (iii) BSRE forced Mega Retail to continue leasing losing branches and did not allow
                                         Mega Retail to terminate such agreements. The trustees of Mega Retail also raised a concern
                                         regarding Mega Retail's consent to receive a discount of 9% on the rental fees owed to
                                         BSRE for a period of two years in exchange for a waiver of any claim or demand against
                                         BSRE with respect to the lease agreement and split agreements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Mega Retail was operated with thin
                                         financing and therefore, the trustees of Mega Retail believe that in these circumstances
                                         they have a cause of action to charge us for all of Mega Retail's debts and/or the rejection
                                         of the debts.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Mega Retail conducted
                                         itself through a deteriorated system of corporate governance resulting from poorly made
                                         board decisions which were in contrast to Mega Retail's best interest.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



169







Under Motion 38,
two operative legal remedies are sought by the trustees of Mega Retail:



| | 1. | The appointment of an appraiser
                                         to assess the split agreements of the real estate assets from Mega Retail to BSRE and
                                         the rental fees and terms to which Mega Retail is committed.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Authorizing the
                                         trustees of Mega Retail to investigate their claims and the reasons for the collapse
                                         of Mega Retail including by way of summoning officers and controlling shareholders of
                                         Mega Retail, BSRE, us and Alon (the Company's parent company) for investigation and instructing
                                         them to produce any document required by the trustees of Mega Retail for the purpose
                                         of examinations and investigations.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 2, 2016,
the court approved the motions of the trustees of Mega Retail. On March 6, 2016, BSRE filed a motion with respect to the court's
decision, and on April 5, 2016, the court denied the motion.



On March 7, 2016,
Mega Retail's trustees filed a motion with the court for leave of instructions regarding our liability to inject funds to Mega
Retail by virtue of the plan of recovery from July 2015 and pay on account of the injection of NIS 320 million, the amount of
NIS 117 million. As per the trustees' arguments, the injections of NIS 320 million took effect from the arrangement approval date
(from July 15, 2015) and not from June 1, 2015 (as claimed by us and as stated in the agreement), and accordingly, the amount
balance that was not yet injected by us amounts to NIS 117 million (Motion 46).



On February
21, 2016, several employees of Mega Retail filed a motion to court (Motion 32) to allow them participate in the negotiations to
be held between us and Mega Retail's trustees in connection with a guarantee granted to the employees transferred from us to Mega
Retail and in connection with the central compensation fund for severance. They claim that the guarantee applies also to the early
termination notice component and the employment period in Mega Retail and not only to their employment period in with us. Responses
to the motion were filed by us, Mega Retail's trustees and the Official Receiver. On March 27, 2016 the court dismissed the application.



On February 3, 2016,
several employees of Mega Retail filed a motion with the court (Motion 22) in which they requested we transfer the balance of
our central compensation fund for severance to the trustees. In response to the motion, the trustees have extended the application
and demanded that we transfer to them NIS 26 million in respect of the amounts, allegedly guaranteed by us for the employees transferred
from us to Mega Retail in 2011. Responses to the motion were filed and the motion is still pending.



On March 11, 2016,
we filed a motion (Motion 96) that we are no longer obligated to grant options to Mega Retail's large suppliers because Mega Retail
entered into a stay of proceedings. The trustees as well as some suppliers (including the manufacturers association) responded
that we should issue the option to suppliers.



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Our responses to the
claims of Mega Retail are as follows:



The Company objects
to the arguments of Mega Retail's trustees and in the context of the legal proceedings, it argues among others, that it fully
complied with its obligations to Mega Retail, and the Company also claims that with Mega Retail's entry into stay of proceedings,
even determined that it did not complete all its liabilities under the plan of recovery, their liabilities expire according to
the plan of recovery. The Company claims, among others, all of the following:



| | 1. | Regarding our liability to inject
                                         up to NIS 320 million, our position is that we have no liability whatsoever, among others,
                                         because we injected all amounts required by Mega Retail, and the total amounts we injected
                                         or guaranteed in accordance with the plan of recovery, after deduction of amounts which
                                         will be paid by us on account of guarantees before and after the plan of recovery are
                                         in excess of NIS 320 million. The Company claims that if determined that it did not inject
                                         all amounts, the sums that were not injected are amounts for liabilities so as to extend
                                         a framework for the working capital for Mega Retail's needs, if required, which was purported
                                         to assist dealing with "peaks" (short term loan purported to reconcile the
                                         timing differences between the payment date of Mega Retail for goods purchased from suppliers
                                         and the date of receiving the consideration when goods are sold to customers which is
                                         not designated to finance losses), and these were not required by Mega Retail. We further
                                         claim that once Mega Retail entered into a stay of proceedings, the liabilities that
                                         were not yet performed by us, if any, are canceled by virtue of the entire plan of recovery
                                         being void following Mega Retail's entry into a stay of proceedings.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Regarding the grant of options
                                         to Mega Retail's large suppliers, we argued, among other things, that considering the
                                         stay of proceedings of Mega Retail, our obligation to issue the option has no effect,
                                         among others, on the grounds that the obligation was incurred in consideration of the
                                         large suppliers' commitment to defer their debt. Such commitment by the large suppliers
                                         was not met due to the stay of proceedings. It was also argued that the suppliers have
                                         improved their position following the injection of funds made by us.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On April
13, the court ruled that this request of the trustees with respect to the options will be addressed together with the issue of
our liability to inject up to NIS 320 million (Petition 46).



| | 3. | As to motions of the employees
                                         claiming the central compensation fund for severance should be transferred to the trustees
                                         of Mega Retail, our claim is that neither the trustees of Mega Retail nor the employees
                                         have any right to the central compensation fund for severance which belongs to us since
                                         the amounts in the central compensation fund for severance that were used by Mega Retail
                                         from June 1, 2015 are debts of Mega Retail towards us, and therefore should be recorded
                                         on account of the liability to inject funds to Mega Retail. As for the claims of the
                                         employees and trustees regarding the scope of our guaranteed, our position is that the
                                         amounts we guaranteed are significantly lower than the claimed amounts. In addition,
                                         the Company also objected to the motion of the employees to join to the negotiation process.
                                         The court accepted our objection (Motion 32).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 4. | As to the guaranteed
                                         debt to financial creditors, our position is that we have the right to make claims against
                                         Mega Retail for any amount to be paid by us to the financial creditors.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The above
does not exhaust our claims and those that are argued as part of the relevant legal proceedings, where our claims and other arguments
will be deliberated as well as our claims and the allegations of the trustees of Mega Retail and its creditors.Considering the unique circumstances of the cases and the stage of the proceedings and the fact that the claims will be
decided in legal proceedings, there is no certainty that our position on these matters will be accepted and at this stage it is
impossible to estimate the probability that our allegations will be accepted.



On April 10, 2016,
the trustees submitted their answer with respect to the issue of our liability to inject up to NIS 320 million (Motion 46). According
to the trustees, our obligation to inject this amount was not subject to any condition, the amounts paid before the plan of recovery
should not be taken into account, and that guarantees should also not be taken into account in calculating the amounts we were
required to inject. The trustees also claimed that the central compensation fund for severance should not be taken into account
in calculating the amounts we were required to inject.



On February 29,
2016, BSRE notified Mega Retail that according to the addendum of the lease agreements between the parties, in the circumstances
under which a trustee was appointed for Mega Retail and the decision was not cancelled with, in 30 days from the date it was granted,
then Mega Retail is in breach of the lease agreements including the addendum and therefore the discount set forth in the addendum
is null and void. The trustees claim that the nullification is invalid





On March 23, 2015,
the trustees filed a motion with the court in which the court was requested to register caveats in their names in the various land
registry offices on property transferred by Mega Retail to BSRE in 2009. BSRE responded to Motion 37 and claimed that the
trustees' motion should be dismissed regarding the assets that were transferred to BSRE under the asset transfer agreement from
Mega Retail where the process of registering them in the Company's name was not yet completed. The court did not accept the position
of BSRE and on March 20, 2016, it rendered a decision that the trustees will register caveats in their names in the various land
registry offices. BSRE filed a motion for stay of execution and a motion for leave of appeal with the Supreme Court.



172







On March 8, 2016,
BSRE filed a motion with the court in which the court was requested to appoint a receiver for the purpose of exercising the rights
of BSRE in accordance with a bond issued by Mega Retail for BSRE on September 13, 2009, in relation to assets acquired by BSRE
from Mega Retail pursuant to an agreement dated March 31, 2009, and as of the report date, the registration in BSRE's name in
Israel Lands Authority and/or the Land registry Office had not yet been completed. On March 13, 2016 the court ruled that the
motion is not in accordance with the stay of proceedings order granted to Mega Retail and therefore decided to strike such motion.
On March 15, 2016, BSRE filed with the stay of proceedings court a motion to allow it exercise the pledged rights according to
the bond.



On March 9, 2016,
BSRE filed a motion for leave of instructions to be paid NIS 1.8 million representing the balance of the rental fees due to BSRE
for leasing the assets for the period from February 17, 2016 through March 16, 2016. The Official Receiver has suggested to combine
this petition with the Petition 64 (described below) relating to rental fees for the rest of March 2016.



On March 22, 2016,
BSRE filed a motion for leave of instructions to be paid NIS 8.3 million representing the rental fees due to BSRE for leasing
the assets for the period from March 17, 2016 through April 16, 2016 (Petition 64). The trustees of Mega Retail have responded
that all required payments have been made. On April 13, 2014, the court ruled that the Mega Retail trustees should not offset
amounts from before the stay of proceedings against amounts due afterwards and should only offset against amounts from after the
stay of proceedings. On April 19, 2016, the trustees notified the court that they had done the necessary calculation and the amounts
due for March will be paid to BSRE. They also responded that the rental fees for February had been paid in full and therefore Petition
54 should be dismissed. On April 20, 2016 the court accepted the response of the trustees, and on April 21, 2016, BSRE applied
to the court for a clarification.



On March 4, 2016,
the trustees of Mega Retail applied to the court to release them from a “burdensome” lease for a supermarket branch,
of which a third party is lessor. In the past, we granted to the third party a guarantee of Mega Retail’s performance until
the end of the lease term in 2023, which is alleged by the third party to be NIS 30 million. In light of the early stages of these
proceedings, we are not in a position to evaluate the success of Mega Retail’s motion or the scope of our actual obligations
under the guarantee to the third party.



On March 31, 2016,
April 6, 2016, and April 11, 2016, the trustees of Mega Retail applied to the court to release them from three other “burdensome”
leases, consisting of two supermarket branches and a portion of the main offices of Mega Retail, of which BSRE is lessor. To date,
BSRE has submitted its opposition to release from two of the leases.



On April 7,
2016, the trustees of Mega Retail filed a report (Report No. 5) and a motion for leave of instructions to the court (Motion
75) with respect to the conduct of Mr. Moti Ben Moshe and our controlling shareholder. In which they repeated a number of
their claims. The first relief sought is that that we and Mr. Ben Moshe can keep full ownership of Mega Retail only if the
full amounts are paid to the Mega Retail creditors. The trustees also requested that negotiations with respect to our
obligations to Mega Retail will be conducted on our behalf only members of our Audit Committee who are our directors,
including external directors, who have no affiliation with our controlling shareholder in the pyramid structure and who
don’t serve as directors or officers in other companies in the pyramid structure.



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On April 12, 2016,
the trustees submitted another court motion with respect to Report No. 5 requested an alternative relief primarily with respect
to Mr. Ben Moshe and how he is to submit an offer to acquire Mega Retail. The motion includes a request that if Mr. Ben Moshe
doesn’t submit the offer according to the instructions of the trustees, he would be prohibited to submit an offer also through
us. On April 17, 2016, Mr. Ben Moshe submitted his response. We also submitted a response that day, in which we argued that the
trustees’ request is based solely the trustees' reports, among others, on Report No. 3 (Motion 38), to which we were not
granted an opportunity to respond. In addition, we argued that the factual statements in the motion do not support the requested
relief. With respect to the trustees' request that the negotiations will be conducted by members of the Audit Committee, we
argued that it is a gross interference in the conduct of our business. We also argued that the trustees did not provide any good
reason for their first relief in which they asked that we and Mr. Ben Moshe be only able to keep full ownership of Mega Retail
if the full amounts are paid to the Mega Retail creditors – especially because any agreement regarding Mega Retail will
have to be approved in the creditors meeting and by the court.



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 acquistion 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 till after the extension period, and recommended to the creditors
of Alon Blue Square not to file any proceedings against the Company till the end of the extension period.



Governmental Proceedings



We are subject
to legal proceedings in connection with tax assessments



In January 2012
the Company received a demand from the National Insurance for additional payments, related to certain benefits granted to employees
in the Company’s branches in the amount of NIS 30 million for the years 2001-2004. The Company's appeal was rejected by
the National Insurance. In August 2013 the Company filed an appeal to the Labor Court.



174







In December 2013,
the Company received a demand from the National Insurance for additional payments with respect to years 2005 – 2006 in the
sum of approximately NIS 3 million, and in January 2014 the company filed an appeal with regard to this demand. In February 2015
during deliberations in the Labor court and notwithstanding the statute of limitation arguments, the parties have agreed that
the correct amount for the years 2001-2004 is approximately NIS 12 million (including CPI linkage differentials and fines).



In the opinion of
the Company, based on the opinion of its legal advisers, the Company made the proper provisions for this claim in its consolidated
financial statements.





Dor Alon received
claims for additional retroactive municipality taxes for four of its filling stations by the Hof Hasharon district Council (“the
Council”). For one of the stations, the claim was significantly reduced as a result of an agreement reached between Dor Alon
and the Council. The other claims amount to approximately NIS 7 million. Dor Alon appealed the Council's Municipal Tax claims.
In the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%.





We are subject
to legal proceedings in connection with business licenses



The
operation of the Company’s stores in Israel requires permits from several authorities including the Health Ministry and
the Police and Fire Departments. In the event that the Company is unable to obtain or maintain the required permits, it may be
required to close the affected stores or departments or take other action. However, the Company does not anticipate that not obtaining
the necessary permits will have a material adverse effect on its business. From time to time the Company and some of its directors
and managers are indicted in connection with business licenses and planning and building regarding of the Company’s stores.
As of the date of this Report, there are provisional closure orders pending against some of the Company’s stores or departments.
The Company is working towards obtaining the required permits and at the same time delaying the effectiveness of the provisional
orders until such required permits are obtained. Management estimates that these matters will not have a material adverse effect
on the Company’s operations.



Legal Proceedings
Initiated by Mega Retail's Employees



On February 17, 2016,
several employees of Mega Retail filed a motion with the District Court of Lod, Israel requesting that they participate in the
negotiations to be held between us and Mega Retail's trustees in connection with a guarantee granted to the employees transferred
from us to Mega Retail and in connection with their central compensation fund for severance. They claim that the guarantee made
by us would also apply to the early termination notice component which would apply not only to their employment period in Mega
Retail in addition to their employment period with us. Responses to the motion were filed by us, Mega Retail's trustees and the
Official Receiver. On March 27, 2016 the court dismissed the application.



175







In addition, on February
3, 2016, several employees of Mega Retail filed a motion with the District Court in Lod, Israel requesting that we transfer the
balance of our central compensation fund for severance to the trustees of Mega Retail. In response to the application, the trustees
of Mega Retail demanded that we transfer to them NIS 26 million in respect of the amounts claimed, which are allegedly guaranteed
by us for the employees transferred from us to Mega Retail in 2011. Responses to the motion were filed and the motion is still
pending.



Legal Proceedings
Relating to Gift Cards Issued by Us





In February 2016, a
motion for approval of a claim as class action was filed with the Central District Court against us. The subject of the motion
for the approval according to the petitioner, stems from insolvency proceedings of Mega Retail, starting from the end of June 2015,
where severe damage was inflicted upon the customers holding gift cards issued by us, to use their rights and perform through such
coupons purchases of goods in general, but particularly purchases of food products in Mega Retail branches, as we have undertaken
towards the group members. The group was defined in the approval motion: "any person or corporation holding purchase coupon
from June 29, 2015 issued by the respondent". Accordingly, it is sought to determine that we have violated materially our
commitment by virtue of the purchase coupons towards the group members due to severe harm to the exercise ability of the coupons
which resulted in severe harm to the coupon's value. In addition, the court was requested to order us to compensate the petitioner
and any plaintiff included in the group for damages caused as a result of the claimed material violation. A monetary amount was
not stated in the lawsuit since at this stage the petitioner does not have accurate data concerning the aggregate claimed damage
of the group. Nevertheless, it is indicated in Mega Retail's arrangement motion, where Mega Retail stated that as of June 29, 2015,
the scope of unutilized gift cards was NIS 200 million and therefore, as per the petitioner, the damage caused to the group members
can be estimated as considerable. At this stage, the results of the proceeding cannot be estimated. A pre-trial hearing is scheduled
for July 14, 2016.











In January 2014, a
claim, and a request to recognize the claim as a class action, was filed against the Company and Mega, in the sum of approx. NIS
70 million. The claim is with respect to purchase vouchers, which are exercised in “Mega” supermarkets for 90% of their
value, and which cannot be exercised in “You” supermarkets. In the opinion of the Company, based on the opinion of
its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision
for this claim in its financial statements. A settlement agreement is scheduled for June 16, 2016.











176







Legal Proceedings
Related to Eden Teva Briut Market



On
July 14, 2015 a lawsuit was filed against us, Eden Teva's directors and officer serving in such capacity at our request, and
Mega Retail with the District Court of Tel - Aviv, with respect to Mega Retail's 51% subsidiary Eden Teva Briut Market Ltd.,
by the minority (49%) shareholders of Eden Teva. The plaintiffs are claiming that we and Mega Retail took actions that
oppressed the plaintiffs as minority shareholders in Eden Teva in connection with Mega Retail and Eden Teva's filing for
court approval for a stay of proceedings against Eden Teva. Plaintiffs are alleging that we breached the agreement we
executed with them when we had invested in Eden Teva (an investment later transferred to Mega Retail) in order to coerce the
plaintiffs to sell their holdings in Eden Teva for below their market value. The plaintiffs are requesting that the court
instruct us to acquire the plaintiffs' holdings in Eden Teva for their market value (as claimed by the plaintiffs) or at
their value at the time of our original investment 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.



Derivative
Claim Filed by a Dairy Product Supplier of Mega Retail



In
July 2015, a lawsuit was filed with the Tel Aviv District Court against the Company, Mega Retail, and whoever served as members
of the board of directors of Mega Retail, by one of Mega Retail's suppliers of dairy products (the petitioner). As a part of the
petition that was filed, an approval as a derivative claim is requested, alleging that in 2013 Mega Retail conducted a prohibited
distribution of dividends in the amount of approximately NIS 100 million. The plaintiff requests the court to order the Company
and directors to return to Mega Retail all payments and/or dividends and/or benefits and/or rights received by them in connection
with the said distribution. In addition, the plaintiff requests the court to order the Company and Mega Retail to provide documents
and information about Mega Retail, including its financial statements for the years 2011 - 2014. On January 3, 2016, the Company
with the directors filed a motion to strike the approval petition with the key allegation that the petitioner cannot be called
a "creditor" for the purpose of filing a derivative claim as prescribed in the Companies Law – 1999. Following
the stay of proceedings against Mega Retail and various motions filed by the Company and Mega Retail's trustees, the proceeding
was stayed as of March 31, 2016. The Company denies all allegations contrary, but at this early stage of the proceedings, it is
unable to assess the prospects of the lawsuit.



We are subject
to legal proceedings in connection with business licenses



The operation of
the Company’s supermarkets in Israel requires permits from several authorities including the Health Ministry and the Police
and Fire Departments. Some of these permits are currently in the name of the Co-Op Blue Square Services Society, or the Co-Op,
our former controlling shareholder, and entities other than the Company, and have not yet been transferred or re-issued to the
Company. In addition, as a result of the reorganization of the Supermarket and Real Estate operations conducted by the Company,
such permits are to be transferred to the name of Mega Retail. In the event that the Company is unable to obtain or maintain the
required permits, it may be required to close the affected stores or take other action. However, the Company does not anticipate
that not obtaining the necessary permits will have a material adverse effect on its business.



177







Legal Proceedings
related to our Dor Alon Sites



On December 3, 2003
a claim was filed in the amount of NIS 450 against the gas companies (including a subsidiary of Dor Alon) alleging that the defendants
were parties to a cartel, which they entered into beginning in 1994 (and even prior thereto) and up to 2003, in the course of
which the Restrictive Practices Authority gave notice of a recommendation to file charges against the gas companies and their
managers in connection with the existence of a cartel, as stated. The plaintiff contends that by means of the alleged cartel the
gas companies collected unfair and unreasonable prices. A request for certification of the claim as a class action pursuant to
the Restrictive Practices Law, the Consumer Protection Law and Rule 29 of the Rules of Civic Procedure (1984), was filed together
with the claim. The amount of the class action was set by the requesting party at an amount of at least NIS 1 billion, along with
punitive damages. The subsidiary of Dor Alon has submitted its response to the request for certification of the claim as a class
action. The parties twice reached a settlement agreement that was submitted to Court's approval. However, the Court rejected the
two settlement agreements and therefore the legal procedures continue. Accordingly, the Company did not make any provision for
this claim in its consolidated financial statements. On January 3, 2016 the court approved a settlement agreement between the
parties.



In October 2009,
Dor Alon received a statement of claim and an application for approval of the claim as a class action; the claim was lodged against
Dor Alon and other fuel companies. The claimant claims payment of damages of NIS 124 million (Dor Alon's share in the said claim
amount as per the statement of claim is NIS 21.9 million). According to the claimant, the defendants overcharged him for fuel
when filling up his car. According to the claimant, after passing his credit card but before starting to fill up, the payment
meter started operating without the provision of fuel. The overcharge has allegedly amounted at times to several Agorot and at
times to several NIS. The parties have reached a compromise that was rejected by court and the court asked the parties to file
their pleadings before the compromise agreement is filed. In the event the parties will not reach a compromise agreement, the
Company believes, based on the opinion of its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly,
the Company did not make any provision for this claim in its consolidated financial statements.



On August 22, 2011,
Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon and the three other gasoline
companies for a total of NIS 1 billion (of which Dor Alon's share is NIS 167 million). The claimants argue that the gasoline companies
inflated the “marketing expense item” which is incorporated into the calculation of the maximum price of gasoline
95 octane by adding expenses unrelated to the sale of gasoline, thus misleading the regulator and enabling themselves to sell
gasoline 95 octane at a higher price than the price that should be charged. The claimants assert that this is violation of legislated
provisions in the Supervision Order on Goods and Services (Maximum Prices in Gasoline Stations) – 2002; the Consumer Protection
Law – 1981; and the Damage Ordinance (new version) – 1968. In the opinion of the Company, based on the opinion of
its legal advisers, the chances that the claim will be rejected exceed 50%. Accordingly, the Company did not make any provision
for this claim in its consolidated financial statements. On April 13, 2016 the court issued a decision whereby the claim was revoked
by the plaintiff without damages.



178









On September 6, 2012, a letter of claim and motion for approval as a class action was filed against Dor
Alon and other defendants, for an aggregate amount of NIS 43.2 million. The plaintiff claims that as a customer of the Dor Alon
“Spidomat” arrangement for car fueling at reduced prices, she discovered that her reduction was less than the regular
discount given to all other customers at the station. As result, the Plaintiff claims she suffered financial damages from being
a member of the “Spidomat” arrangement. In October 2014, the court approved the claim as a class action, and Dor Alon
made a proper provision for this claim in its consolidated financial statements.The parties entered into mediation which did not succeed in settling the claim and proceedings reverted to court. Prior to then,
on November 8, 2015, the plaintiff filed an injunction requesting that Dor Alon be prevented from accepting payments using the
"Spidomat" mechanism which are in excess to payments made by regular customers. The court opined that the requested injunction
is excessive in nature. A final decision has not been rendered by the court. In April 2016, one of the co-defendants in the claim
notified the court that it would update its customer price list for diesel fuel. Dor Alon was granted until May 29, 2016 to provide
the court with its position regarding the notification by the co-defendant. Dor Alon has requested an extension to provide their
answer in this regard. Additionally, another co-defendant in the claim filed a request to enter into a settlement agreement (and
similar claims against such co-defendant). Dor Alon is evaluating the terms of the proposed settlement agreement and its effects
on Dor Alon.









On August 18, 2014
a letter of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon, for an aggregate amount
of NIS 9 million. The plaintiff claims that as a customer of the Dor Alon “Spidomat” arrangement for car fueling at
reduced prices, he discovered that his reduction for LPG was less than the regular discount given to all other customers at the
station. As result, the plaintiff claims he suffered financial damages from being a member of the “Spidomat” arrangement.
The parties are negotiation a settlement whereby the claim will be revoked in consideration of an immaterial monetary amount. In
the opinion of the Company, based on the opinion of its legal advisers, the chances that the claim and injunction will be rejected
exceed 50%.







In October 2013
a letter of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon, together with other defendants
including oil companies and credit card companies. It is claimed that there is an agreement between the oil companies and the
credit card companies, according to which extra charging is made for a limited period of time, when paying with certain credit
cards at gas filling stations, without prior notification to the client. In February 2015 the court approved a settlement agreement
between the parties.



In November 2013
two letters of claim and motions for approval as a class action were filed against a subsidiary of Dor Alon, one in the sum of
NIS 7 million, and the other in the amount of NIS 306 million. It is alleged in both claims that the subsidiary, Alon Intrade
Coffee Shops Ltd., replaced labels of the production dates of sandwiches, in a way that appeared as if the sandwich had been produced
no later than in the last 24 hours from the time it was bought. In the opinion of the Company, based on the opinion of its legal
advisers, the chances that the claims will be rejected exceed 50%. Accordingly, the Company did not make any provision for these
claims in its consolidated financial statements. A court hearing is scheduled for June 8, 2016.



179







In July 2014, a
letter of claim and motion for approval as a class action was filed against Dor Alon and a subsidiary of Dor Alon, in the sum
of approx. NIS 256 million, with regard to the alleged failure to comply with provisions requiring verification and calibration
of fuel pumps. In January 2015 the court approved the plaintiff's request to withdraw the claim.



In January 2015,
a letter of claim and motion for approval as a class action in the sum of approx. NIS 97 million was filed against a subsidiary
of Dor Alon. It is claimed that the subsidiary did not fulfill its commitment for a certain discount price, and that is failed
to properly display prices of fuel and diesel at its filling stations. The parties entered into a settlement agreement on April
18, 2016.



In March 2015 a letter
of claim and motion for approval as a class action in the sum of approx. NIS 71 million was filed against Dor Alon and a subsidiary
of Dor Alon. It is claimed that Dor Alon and its subsidiary charge higher prices for diesel purchased at self service pumps than
diesel purchased at full service pumps, and that they fail to comply with statutory requirements regarding the display of prices
at filling stations. A pre-trail hearing is scheduled for July 7, 2016 and the parties are negotiating a settlement agreement whereby
the claim will be revoked in consideration for an immaterial monetary amount. In the event a settlement is not reached, in the
opinion of the Company, based on the opinion of its legal advisers, the chances that the claim and injunction will be rejected
exceed 50%. We will continue to assess this matter as the request for the class action develops.





On May 7, 2015 a letter
of claim and motion for approval as a class action was filed against Dor Alon and a subsidiary of Dor Alon. The claim asserts
that the plastic packing bags provided at convenience stores in filling stations leave residue and small pieces of plastic which
may be a safety and environmental hazard. The plaintiff is requesting that the defendants cease providing such plastic bags. On
February 23, 2016 Dor Alon filed a request to be removed as a defendant, and a decision has yet to be rendered by the court. In
the event a settlement is not reached, in the opinion of the Company, based on the opinion of its legal advisers, the chances
that the claim and injunction will be rejected exceed 50%.





In April 2015 a letter
of claim and motion for approval as a class action in the sum of NIS 55 million was filed against Dor Alon and a subsidiary of
Dor Alon. The claim is with regard to video shooting and sound recording made in convenience stores without proper notice and
consent of the customers. The courts have removed this claim due to no-actions taken by the plaintiff.



Several bills of indictment
and verdicts are pending against Dor Alon and its subsidiaries for operating fueling stations or convenience stores without a
business license and non-compliance with permits. In addition, closing orders have been issued regarding public fueling stations
and convenience stores that operated without a business license. The closing orders are pending and Dor Alon is making efforts
to get the required business licenses. Bills of indictment have been filed against a subsidiary for operating convenience stores
without a business license. In the opinion of the Company, the closure of one or more of the filling stations and / or convenience
stores that were issued closure orders would not have a material effect on Dor Alon's results of operations.



180







As part of the ordinary
course of business Dor Alon receives claims relating to its activities. In the opinion of management, based on the opinion of
the legal advisers handling the claims and in light of the relevant circumstances, the provisions included in the consolidated
financial statements are sufficient to cover the potential liabilities and none of claims, individually or in the aggregate, will
have a material negative effect on the Company's activities, its financial condition or its results.



General



We
are involved in various other legal or other proceedings incidental to the ordinary course of our business. We do not believe
that any of these proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial
position or operating results.



Independent Accountants



Our auditors, Kesselman
& Kesselman have no relationship with us or with any affiliate of us, except as auditors.



| | B. | Significant Changes.
| | -- | --------------------



Except as otherwise
disclosed in this Annual Report, no significant change has occurred since December 31, 2015.



|ITEM 9. | THE
    OFFER AND LISTING
|------- | -------------------------



| | A. | Offer
                                         and Listing Details.
| | -- | -------------------------------------------------------------------



ADSs



The following table
sets forth the annual high and low closing prices for Alon Blue Square ADSs for the five most recent full financial years as reported
by the New York Stock Exchange.



|Year |  | High |      |  | Low |  
|---- |  | ---- | ---- |  | --- | -
|2011 |  | $    | 10.6 |  |     | $
|2012 |  | $    | 4.3  |  |     | $
|2013 |  | $    | 4.7  |  |     | $
|2014 |  | $    | 4.3  |  |     | $
|2015 |  | $    | 4.9  |  |     | $



The following table
sets forth the quarterly high and low closing prices for Alon Blue Square ADSs for each quarter of the two most recent full financial
years and the subsequent quarterly period, as reported by the New York Stock Exchange.



181







|Year           |  | High |     |  | Low |  
|-------------- |  | ---- | --- |  | --- | -
|               |  |      |     |  |     |  
|2014           |  |      |     |  |     |  
|First quarter  |  | $    | 4.3 |  |     | $
|Second quarter |  | $    | 4.0 |  |     | $
|Third quarter  |  | $    | 3.3 |  |     | $
|Fourth quarter |  | $    | 3.0 |  |     | $
|               |  |      |     |  |     |  
|2015*          |  |      |     |  |     |  
|First quarter  |  | $    | 3.1 |  |     | $
|Second quarter |  | $    | 3.0 |  |     | $
|Third quarter  |  | $    | 2.3 |  |     | $
|Fourth quarter |  | $    | 4.9 |  |     | $
|               |  |      |     |  |     |  
|2016           |  |      |     |  |     |  
|First quarter  |  | $    | 6.7 |  |     | $



* Beginning
on December 14, 2015, the ratio of ADS per ordinary share was increased to 10 ordinary shares per one ADS.



The following table
sets forth the monthly high and low closing prices for Alon Blue Square ADSs for the last six months, as reported by the New York
Stock Exchange.



|2015*    |  | High |     |  | Low |  
|-------- |  | ---- | --- |  | --- | -
|         |  |      |     |  |     |  
|October  |  | $    | 0.7 |  |     | $
|November |  | $    | 0.6 |  |     | $
|December |  | $    | 4.9 |  |     | $



|2016     |  | High |     |  | Low |  
|-------- |  | ---- | --- |  | --- | -
|         |  |      |     |  |     |  
|January  |  | $    | 6.7 |  |     | $
|February |  | $    | 4.3 |  |     | $
|March    |  | $    | 3.6 |  |     | $



* Beginning
on December 14, 2015, the ratio of ADS per ordinary share was increased to 10 ordinary shares per one ADS.



Ordinary Shares



The following table
sets forth the annual high and low closing prices for Alon Blue Square’s ordinary shares for the years 2011 to 2015 as reported
by the Tel Aviv Stock Exchange. Shares are traded on the Tel Aviv Stock Exchange in NIS, and the translation of the NIS to
dollars has been made at the representative exchange rate of exchange on the last day of each period, as published by The Bank
of Israel.



|Year |  | High |      |  | Low | 
|---- |  | ---- | ---- |  | --- | 
|     |  | NIS  |      |  | $   | 
|2011 |  |      | 36.5 |  |     | 
|2012 |  |      | 16.2 |  |     | 
|2013 |  |      | 16.7 |  |     | 
|2014 |  |      | 14.9 |  |     | 
|2015 |  |      | 12.4 |  |     | 



182









The following table
sets forth the quarterly high and low closing price for Alon Blue Square’s ordinary shares for the quarters set forth below,
as reported by the Tel Aviv Stock Exchange. The translation into dollars has been made at the representative rate of exchange
on the last day of each period, as published by The Bank of Israel.



|               |  | High |      |  | Low | 
|-------------- |  | ---- | ---- |  | --- | 
|               |  |      |      |  |     | 
|               |  | NIS  |      |  | $   | 
|2014           |  |      |      |  |     | 
|First Quarter  |  |      | 14.9 |  |     | 
|Second Quarter |  |      | 13.8 |  |     | 
|Third Quarter  |  |      | 11.6 |  |     | 
|Fourth Quarter |  |      | 11.2 |  |     | 
|               |  |      |      |  |     | 
|2015           |  |      |      |  |     | 
|First Quarter  |  |      | 12.4 |  |     | 
|Second Quarter |  |      | 11.8 |  |     | 
|Third Quarter  |  |      | 7.8  |  |     | 
|Fourth Quarter |  |      | 2.7  |  |     | 
|2016           |  |      |      |  |     | 
|First Quarter  |  |      | 2.5  |  |     | 



The following table
sets forth the monthly high and low closing prices for Alon Blue Square ordinary shares for the last six months, as reported by
the Tel Aviv Stock Exchange. The translation into dollars is based on the representative rate of exchange on the last day
of each period, as published by The Bank of Israel.



|         |  | High |     |  | Low | 
|-------- |  | ---- | --- |  | --- | 
|         |  | NIS  |     |  | $   | 
|         |  |      |     |  |     | 
|2015     |  |      |     |  |     | 
|October  |  |      | 2.7 |  |     | 
|November |  |      | 1.4 |  |     | 
|December |  |      | 2.0 |  |     | 
|         |  |      |     |  |     | 
|2016     |  |      |     |  |     | 
|January  |  |      | 2.5 |  |     | 
|February |  |      | 1.6 |  |     | 
|March    |  |      | 1.4 |  |     | 



For additional information
on our ordinary shares, see “Item 10. Additional Information – B. Memorandum and Articles of Association – Description
of Securities – Ordinary Shares.”



183







| | B. | Plan of
                                         Distribution.
| | -- | --------------------------------------------------------------



Not applicable.



| | C. | Markets.
| | -- | --------



Our ADSs, each representing
ten ordinary shares and evidenced by an American depositary receipt, or ADS, have been traded on the New York Stock Exchange,
Inc. under the symbol “BSI” since July 1996. The ADSs were issued pursuant to a Depositary Agreement Alon Blue
Square entered into with The Bank of New York.



On November 2000,
our ordinary shares began trading also on the Tel Aviv Stock Exchange.



| | D. | Selling
                                         Shareholders.
| | -- | --------------------------------------------------------------



Not applicable.



| | E. | Expenses
                                         of the Issue.
| | -- | ---------------------------------------------------------------



Not applicable.



|ITEM 10. | ADDITIONAL INFORMATION
|-------- | ----------------------



| | A. | Share
                                         Capital.
| | -- | -------------------------------------------------------



Not applicable.



| | B. | Memorandum
                                         and Articles of Association.
| | -- | --------------------------------------------------------------------------------



Securities Registers



Our transfer agent
and register is The Bank of New York Mellon (f/k/a The Bank of New York) and its address is 1 Wall Street, New York, New York
10286.



Objects and Purposes



According to Section
4 of our Articles of Association the company shall engage in any legal business. Article 3 of our Articles of Association provides
that our purpose is to act pursuant to business consideration to make profit. The company may contribute a reasonable amount for
an appropriate object even if the contribution is not within the said business considerations.



Private Placements



Under Alon Blue
Square’s Articles of Association, resolutions of the board of directors regarding a private placement of Alon Blue Square’s
shares constituting, or securities convertible into, more than ten percent of our outstanding share capital require the approval
of Alon Blue Square’s shareholders. With respect to the aforesaid, securities convertible or exercisable into shares are
deemed to have been converted or exercised on the date of their issue.



184







Under the Israeli
Companies Law, if (i) as a result of a private placement a person would become a controlling shareholder or (ii) a private placement
will entitle 20% or more of the voting rights of a company before the placement, and all or part of the private placement consideration
is not in cash or in publicly traded securities or is not on market terms and if as a result of the private placement the holdings
of a substantial shareholder shall increase or as a result of it a person shall become a substantial shareholder, then in either
case, the allotment must be approved by the board of directors and by the shareholders of the company. A “substantial shareholder”
is defined as a shareholder that holds five percent or more of the company’s outstanding share capital, assuming the exercise
of all of the securities convertible into shares held by that person. In order for the private placement to be on “market
terms” the board of directors has to determine, based on detailed explanations, that the private placement is on market
terms, unless proven otherwise.



Board of Directors



Under Alon Blue Square’s
Articles of Association, resolutions by the board of directors shall be decided by a majority of votes of the directors present
(or participating, in the case of voting by media) and voting, each director having one vote.



In addition, the Israeli
Companies Law requires that certain transactions, actions and arrangements be approved as provided for in a company’s articles
of association and in certain circumstances by the audit or compensation committee and by the board of directors itself. Those
transactions that require such approval pursuant to a company’s articles of association must be approved by its board of
directors. In certain circumstances, audit or compensation committee and shareholder approval is also required. The vote required
by the audit or compensation committee and the board of directors for approval of such matters, in each case, is a majority of
the directors participating in a duly convened meeting. For further information regarding the committees see “Item 6. Directors,
Senior Management and Employees – C. Board Practices – Committees.”



The Israeli Companies
Law requires that a member of the board of directors or senior management of the company promptly and, in any event, not later
than the first board meeting at which the transaction is discussed, disclose any personal interest that he or she may have, either
directly or by way of any corporation in which he or she is, directly or indirectly, a 5%or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or the general manager, as well as all
related material information known to him or her, in connection with any existing or proposed transaction by the company. In addition,
if the transaction is an extraordinary transaction (that is, a transaction other than in the ordinary course of business, other
than on market terms, or is likely to have a material impact on the company’s profitability, assets or liabilities), the
member of the board of directors or senior management must also disclose any personal interest held by his or her spouse, siblings,
parents, grandparents, descendants,spouse’s descendants, siblings and parents, and the spouses of any of the
foregoing.



185







Once the member of
the board of directors or senior management complies with the above disclosure requirement, a company may approve the transaction
in accordance with the provisions of its articles of association. Further, under Alon Blue Square’s Articles of Association,
subject to the provisions of the Companies Law, (i) a transaction between us and an officer or a person that controls us or (ii)
a transaction between us and another person in which an officer of ours or a person that controls us has a personal interest,
which transaction is not in any such case extraordinary (Ordinary Interested Transactions), will be approved by us in the following
manner:





By the board of directors,
or by the audit committee, or by the chief executive officer with two directors that have no personal interest in the transaction,
or by another body authorized by the board of directors, whether such body is authorized by the board of directors by means of
a specific resolution or by board practice, or whether such body is granted authority by means of a general authorization, an authorization
for a particular type of transaction or an authorization for a particular transaction.







The approval of Ordinary
Interested Transactions by the bodies or persons may be done by means of an approval of a particular type of transaction or an
approval of a particular transaction. The approval must confirm that the transaction is not adverse to the company’s interest.
Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the Articles
of Association, it also must be approved by the company’s audit committee and then by the board of directors, and, under
certain circumstances, by a meeting of the shareholders of the company. Under the provisions of the Israeli Companies Law, whoever
has a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not
be present at this meeting or vote on this matter, unless it is not an extraordinary transaction as defined in the Israeli Companies
Law. However, if the chairman of the board of directors or the chairman of the audit committee has determined that the presence
of an office holder with a personal interest is required for the presentation of a matter, such officer holder may be present
at the meeting. Notwithstanding the foregoing, if the majority of the directors have a personal interest in a matter, they shall
be allowed to participate and vote on this matter, but an approval of the transaction by the shareholders in the general meeting
shall be required.



Alon Blue Square’s
Articles of Association provide that, subject to the Israeli Companies Law, all actions executed in good faith by the board of
directors or by a committee thereof or by any person acting as a director or a member of a committee of the board of directors
will be deemed to be valid even if, after their execution, it is discovered that there was a flaw in the appointment of these
persons or that any one of these persons was disqualified from serving at his or her office.



186







The Articles of Association
provide that the board of directors may delegate its powers to such committees of the board of directors as it deems appropriate,
subject to the provisions of the Israeli Companies Law, and they may from time to time widen, narrow or cancel the delegation
of such power. The Israeli Companies Law provides that certain powers of the board of directors may not be delegated by the board
of directors. See “Item 6. Directors, Senior Management and Employees – C. Board Practices - Committees.”



According to the Israeli
Companies Law, a contract between a company and its directors, regarding their conditions of service, including the grant to them
of exemption from liability from certain actions, insurance, and indemnification as well as the company’s contract with
its directors regarding the conditions of their employment, in other capacities, require the approval of the audit or compensation
committee, the board of directors, and the shareholders.



Compensation Policy







The
Companies Law requires that each public company must adopt a compensation policy by approval of its compensation committee, its
board of directors and shareholders (by a majority of shareholders that does not include the controlling shareholders of the company
and any shareholders interested in the approval of the compensation policy) and also that the terms of service and engagement
of the chief executive officer, directors or controlling shareholders (or a relative thereof) receive the approval of the compensation
committee, board of directors, and shareholders, subject to limited exceptions. Similarly, the terms of service and engagement
of any officer other than the CEO must receive the approval of the compensation committee and board of directors. However, shareholder
approval is only required if the compensation of such officer other than the CEO is not in accordance with the company’s
compensation policy. Under certain circumstances, the compensation committee and the board of directors may approve a compensation
policy or terms of service even if rejected by the shareholders meeting.For further information regarding approvals required
for compensation of directors and officer see “Item 6. Directors, Senior Management And Employees – C. Board Practices
– Appointment of Directors and Terms of Officers.”









On September 30, 2013,
our shareholders approved the adoption of a Compensation Policy applicable to Company officers and directors for a period of three
years. Among other things, the Compensation Policy provides the manner and basis on which the terms of office and employment of
the Company Office Holders will be established and approved. The Company’s Compensation Policy takes into account, among
other things, providing proper incentives to directors and officers, taking into account the risk management of the company, the
officer’s contribution to achieving corporate objectives and increasing profits, and the function of the officer or director.
The Company’s compensation policy was submitted to the SEC on Form 6-K on September 12, 2013.



Description of Securities



Ordinary Shares





The following is a
description of our ordinary shares. Our authorized share capital is 300,000,000 ordinary shares, par value NIS 1.0 per share.







187







The ordinary shares
do not have preemptive rights, preferred rights or any other right to purchase the company’s security. Neither our Articles
of Association nor the laws of the State of Israel restrict the ownership or voting of ordinary shares by non-residents of Israel,
except for subjects of countries which are enemies of Israel.



Transfer of Shares.
Fully paid ordinary shares are issued in registered form and may be freely transferred pursuant to our Articles of Association
unless that transfer is restricted or prohibited by another instrument.





Notices.
Under the Israeli Companies Law and our Articles of Association, we are required to publish notices on our website at least 14
calendar days’ prior notice of a shareholders’ meeting. However, under regulations promulgated under the Israeli Companies
Law, we are required to publish notice on our website at least 35 calendar days prior any shareholders’ meeting in which
the agenda includes matters which may be voted on by voting instruments. Regulations under the Israeli Companies Law exempt companies,
like AlonBlue Square, whose shares are listed for trading both on a stock exchange in and
outside of Israel, from some provisions of the Israeli Companies Law. An amendment to these regulations exempts us from the requirements
of the Israeli proxy regulation, under certain circumstances.







According to the Israeli
Companies Law and the regulations promulgated thereunder, for purposes of determining the shareholders entitled to notice and
to vote at such meeting, the board of directors may fix the record date not more than 40 nor less than four calendar days prior
to the date of the meeting, provided that an announcement regarding the general meeting shall be given prior to the record date.



Election of Directors.
Our ordinary shares do not have cumulative voting rights in the election of directors. As a result, the holders of ordinary shares
representing more than 50% of our ordinary shares and voting power have the power to elect all of our directors, other than our
external directors, whose initial election requires, in addition to the vote of a majority of shareholders, that 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 less than two percent of the disinterested
shareholders vote against their nomination. Currently, Alon Retail has the power to elect all of our directors other than our
two external directors. See “Item 3. Key Information – D. Risk Factors – Risks Related to our Business as a
Whole – Alon is able to control the outcome of matters requiring shareholder approval.”



Dividend and Liquidation
Rights. Our profits, in respect of which a resolution was passed to distribute them as dividend or bonus shares, shall be
paid pro rata to the amount paid or credited as paid on account of the nominal value of shares held by the shareholders. In the
event of Alon Blue Square’s liquidation, the liquidator may, with the general meeting’s approval, distribute parts
of the company’s property in specie among the shareholders and he or she may, with similar approval, deposit any part of
the company’s property with trustees in favor of the shareholders as the liquidator, when the approval mentioned above deems
fit.



188







Voting, Shareholders’
Meetings and Resolutions.Holders of ordinary shares are entitled to one vote for each ordinary share held on all matters
submitted to a vote of shareholders. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders
present, in person or by proxy, or who has sent the company a voting instrument indicating the way in which he or she is voting,
who hold or represent, in the aggregate, 50% or more of the voting rights of our outstanding share capital. A meeting adjourned
for lack of a quorum is adjourned to the same day in the following week at the same time and place or any time and place as prescribed
by the board of directors in a notice to the shareholders. At the reconvened meeting one shareholder at least, present in person
or by proxy constitutes a quorum subject to the provisions of section 79 of the Israeli Companies Law.



With the agreement
of a meeting at which a quorum is present, the chairman may, and on the demand of the meeting he must, adjourn the meeting from
time to time and from place to place, as the meeting resolves.



Annual general meetings
of shareholders are held once every year within a period of not more than 15 months after the last preceding annual general shareholders’
meeting. The meeting shall be held at the company’s registered offices, unless the board of directors has determined otherwise.
The board of directors may call special general meetings of shareholders. The Israeli Companies Law provides that a special general
meeting of shareholders may be called by the board of directors or by a request of two directors or 25% of the directors in office,
whichever is the lower, or by shareholders holding at least 5% of the issued share capital of the company and at least 1% of the
voting rights, or of shareholders holding at least 5% of the voting rights of the company.



An ordinary resolution
requires approval by the holders of a majority of the voting rights present, in person or by proxy, at the meeting and voting
on the resolution.



Modification of
Class Rights.Under Alon Blue Square’s Articles of Association, unless otherwise provided, the rights attached to any
class may be varied after a resolution is passed by general meetings of the shareholders of each class of shares separately or
after obtaining the written consent of the holders of all the classes of shares.



Allotment of Shares.Alon Blue Square’s board of directors has the power to allot or to issue shares to any person, with restrictions and
condition, for their nominal value or with a premium, as it deems fit.



Private Placements



For information on
private placements, see “Item 10. Additional Information – B. Memorandum and Articles of Association – Private
Placements.”



189







| | C. | Material
                                         Contracts.
| | -- | ------------------------------------------------------------



For a summary of
other material contracts, see “Item 4. Information on the Company – B. Business Overview – General”, “Item
4. Information on the Company – B. Business Overview – Mega Retail”, “Item 4. Information on the Company
– B. Business Overview – Dor Alon Segment”, “Item 4. Information on the Company – B. Business Overview
– Naaman”, “Item 4. Information on the Company – B. Business Overview – BSRE”, “Item
4. Information on the Company – B. Business Overview – Additional Business Information Relating to our ‘Other’
Segment”, “Item 5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Debentures”,
“Item 6. Directors, Senior Management and Employees – C. Board Practices – Exemption, Insurance and Indemnification
of Directors and Officers – Limitations on Insurance, Exemption and Indemnification”, “Item 6. Directors, Senior
Management and Employees – D. Employees”, “Item 7. Major Shareholders and Related Party Transactions –
B. Related Party Transactions”, and our consolidated financial statements and notes included elsewhere in this Annual Report.



| | D. | Exchange
                                         Controls.
| | -- | -----------------------------------------------------------



Israeli law and regulations
do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. Dividends, if any, paid
to holders of our ordinary shares, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds
of any sale in Israel of our ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli
currency, may be converted into U.S. dollars at the rate of exchange prevailing at the time of conversion.



| | E. | Taxation
| | -- | --------



Israeli
Tax Considerations



General



The following is a
summary of the current tax regime of the State of Israel, which applies to us and to persons who hold our ordinary shares or ADSs
(the “Shares”).



This discussion
does not purport to constitute a complete analysis of all potential tax consequences applicable to investors upon purchasing,
owning or disposing of our Shares. In particular, this discussion does not take into account the specific circumstances of
any particular investor (such as tax-exempt entities, Financial Institutions, certain financial companies, broker-dealers,
investors that own, directly or indirectly, 10% or more of our outstanding voting rights, or foreign companies, if Israeli
residents holding 25% or more of their shares or having the right to 25% or more of their income or profit, all of whom are
subject to special tax regimes not covered under this discussion). To the extent that issues discussed herein are based on
legislation which has yet to be subject to judicial or administrative interpretation, there can be no assurance that the
views expressed herein will accord with any such interpretation in the future. This discussion is not intended and should not
be construed as legal or professional tax advice and does not cover all possible tax considerations.



190







Potential investors
are urged to consult their own tax advisors as to the Israeli or other tax consequences of the purchase, ownership and disposition
of the Shares, including, in particular, the effect of any foreign, state or local taxes.



General Corporate
Tax Structure in Israel



Israeli resident companies
are generally subject to corporate tax, currently at the rate of 25% of a company’s taxable income in 2016, and 26.5% in
2015.



TAXATION OF
SHAREHOLDERS



Capital Gains



Capital gains tax
is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non-Israeli resident
if those assets are either (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or
(iii) represent, directly or indirectly, rights to assets located in Israel. The Israeli Income Tax Ordinance of 1961 (New Version)distinguishes
between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain
over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and
the date of disposal. Inflationary Surplus is not subject to tax.



Real Gain accrued
by individuals on the sale of the Shares will be taxed at the rate of 25%. However, if the individual shareholder is a “Controlling
Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with another, 10% or more of one of the
Israeli resident company’s means of control) at the time of sale or at any time during the preceding 12 month period, such
gain will be taxed at the rate of 30%. In addition, capital gains generated by an individual claiming deduction of financing and
linkage differences expenses in respect of such gain will be taxed at the rate of 30% (until determining financing and linkage
differences expenses deduction according to section 101 a (b) to Israeli Income Tax Ordinance).



The Real Capital
Gain derived by Israeli resident corporations will be generally subject to a corporate tax rate of 25% in 2016.



Individual and corporate
shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (25%
in 2016 for corporations and a marginal tax rate of up to 50% in 2016 for individuals, including
an additional 2% tax which would be levied on individuals whose taxable income from Israeli sources exceeds NIS 810,720
in 2016). Notwithstanding the foregoing, capital gains generated from the sale of our Shares by a non-Israeli shareholder may be
exempt from Israeli tax under the Israeli Income Tax Ordinance provided that the following cumulative conditions are met: (i) the
Shares were purchased upon or after the registration of the Shares on the stock exchange, (ii) the seller does not have a permanent
establishment in Israel to which the generated capital gain is attributed, and (iii) Non-Israeli corporations will not be entitled
to the foregoing exemptions, if (i) an Israeli resident has a controlling interest, directly or indirectly, alone or together with
another (i.e., together with a relative, or together with someone who is not a relative but with whom, according to an agreement,
there is regular cooperation in material matters of the company, directly or indirectly), or together with another Israeli resident,
exceeding 25% in one or more of the means of control in such non-Israeli resident corporation or (ii) Israeli residents are the
beneficiaries of, or are entitled to, 25% or more of the revenues or profits of such non-Israeli resident corporation, whether
directly or indirectly.



In addition, the sale
of the shares may be exempt from Israeli capital gains tax under the provisions of an applicable double tax treaty. For example,
the U.S.-Israel Double Tax Treaty exempts a U.S. resident from Israeli capital gain tax in connection with the sale of the Shares,
provided that: (i) the U.S. resident owned, directly or indirectly, less than 10% of the voting power of the company at any time
within the 12 month period preceding such sale; (ii) the U.S. resident, being an individual, is present in Israel for a period
or periods of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not derived through a permanent
establishment of the U.S. resident in Israel (“U.S.-Israel Double Tax Treaty”).



191







In some instances where
our shareholders may be liable for Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject
to withholding of Israeli tax at source. Shareholders may be required to demonstrate that they are exempt from tax on their capital
gains in order to avoid withholding at source at the time of sale.



Either the purchaser,
the Israeli stockbroker or the financial institution through which the Shares are held are obligated, subject to the above mentioned
exemptions, to withhold tax upon the sale of Shares on the amount of the consideration paid upon the sale of the shares (or on
from the Real Capital Gain realized on the sale, if known) at the rate of 25% in respect of an individual or a corporation.



Upon the sale of
traded securities, a detailed return, including a computation of the tax due, must be filed and an advanced payment must be paid
to the Israeli Tax Authority on January 31 and June 30 of every tax year in respect of sales of traded securities made within
the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Israeli Income
Tax Ordinance and regulations promulgated thereunder, such return need not be filed and no advance payment must be paid. Capital
gain is also reportable on the annual income tax return.



Dividends



Dividends distributed
by the Company to a shareholder who is Israeli resident individual will be generally subject to income tax at a rate of 25%. However,
a 30% tax rate will apply if the dividend recipient is a Controlling Shareholder, as defined above, at the time of distribution
or at any time during the preceding 12 month period. If the recipient of the dividend is an Israeli resident corporation, such
dividend will be generally exempt from Israeli income tax provided that the income, from which such dividend had been distributed,
derived or accrued within Israel.



Dividends distributed
by an Israeli resident company to a non-Israeli resident (either individual or corporation) is generally subject to tax on the
receipt of such dividend at the rate of 25% (30% if the dividend recipient is a Controlling Shareholder at the time of distribution
or at any time during the preceding 12 month period). These rates may be reduced under the provisions of an applicable double
tax treaty. Thus, under the U.S.-Israel Double Tax Treaty, the following tax rates will apply in respect of dividends distributed
by an Israeli resident company to a U.S. resident: (i) if the U.S. resident is a corporation which holds during that portion of
the taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at
least 10% of the outstanding shares of the voting stock of the Israeli resident paying corporation and not more than 25% of the
gross income of the Israeli resident paying corporation for such prior taxable year (if any) consists of certain types of interest
or dividends the tax rate is 12.5%; (ii) if both the conditions mentioned in section (i) above are met and the dividend is paid
from an Israeli resident company’s income, which was entitled to a reduced tax rate applicable to a Privileged Enterprise
under the Law for the Encouragement of Capital Investments, 1959 – the tax rate is 20% for dividends distributed from profits
derived after January 1, 2014; (iii) in all other cases, the tax rate is 25%. The aforementioned rates under the U.S.-Israel Double
Tax Treaty will not apply if the dividend income is attributed to a permanent establishment of the U.S. resident in Israel.



192







The Company is obligated
to withhold tax upon the distribution of dividends at the following withholding tax rates: (a) for securities registered and held
by a clearing corporation: (i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%, and (iii)
non-Israeli residents - 25%, unless reduced by applying the provisions of an applicable double tax treaty; (b) in all other cases:
(i) Israeli resident corporations – 0%, (ii) Israeli resident individuals – 25%/30% (the 30% tax rate shall apply
if the dividend recipient is a “Controlling Shareholder” (as defined above) at the time of the distribution or at
any time during the preceding 12 months period)), and (iii) non-Israeli residents - 25%/30% as referred to above with respect
to Israeli resident individuals, unless reduced by applying the provisions of an applicable double tax treaty.



In addition, an additional
tax at rate of 2% will be imposed on high earners individuals whose annual taxable income exceed NIS 810,720 for the 2016 tax year.



Under the United States-Israel
Tax Treaty, the maximum rate of tax withheld at source in Israel on dividends paid to a holder of our ordinary shares who is a
U.S. resident (for purposes of the United States-Israel Tax Treaty) is 25%. However, for dividends not attributable to income generated
by a Benefited Enterprise or a Preferred Enterprise, and paid to a U.S. corporation holding 10% or more of the outstanding voting
rights throughout the tax year in which the dividend is distributed as well as during the distributing company's entire previous
tax year, the maximum rate of withholding tax is generally 12.5%, provided that no more than 25% of the gross income for such preceding
year consists of certain types of dividends and interest, if a certificate for a reduce withholding tax rate would be provided
in advance from the Israeli Tax Authority.



The aforementioned
rates under the U.S.-Israel Double Tax Treaty will not apply if the dividend income is attributed to a permanent establishment
of the U.S. resident in Israel.



A non-Israeli resident
who receives dividend income derived from or accrued from Israel, from which the full amount of tax was withheld at source is generally
exempt from the obligation to file tax returns in Israel with respect to such income, provided that (i) such income was not generated
from business conducted in Israel by the taxpayer, and (ii) the taxpayer has no other taxable sources of income in Israel with
respect to which a tax return is required to be filed.



Payors of dividends on
our shares, including the Israeli stockbroker effectuating the transaction, or the financial institution through which the securities
are held, are generally required, subject to any of the foregoing exemption, reduced tax rates and the demonstration of a shareholder
of his, her or its foreign residency, to withhold taxes upon the distribution of dividends at a rate of 25%, provided that the
shares are registered with a Nominee Company (for corporations and individuals).



Foreign Exchange
Regulations



Non-residents of
Israel who hold our Shares are able to receive any dividends, and any amounts payable upon the dissolution, liquidation and winding
up of our affairs, repayable in non-Israeli currency at the rate of exchange prevailing at the time of conversion. However, Israeli
income tax is generally required to have been paid or withheld on these amounts. In addition, the statutory framework for the
potential imposition of currency exchange control has not been eliminated, and may be restored at any time by administrative action.



United States
Federal Income Tax Considerations



The following is a
summary of the material U.S. federal income tax consequences that apply to U.S. Holders who hold Alon Blue Square’s ADSs
or ordinary shares (together “Shares”) as capital assets for tax purposes. This summary is based on current provisions
of the Internal Revenue Code of 1986, as amended (the “Code”), current and proposed Treasury regulations promulgated
thereunder, and administrative and judicial decisions as of the date hereof and the U.S.-Israel income tax treaty, all of which
are subject to change, possibly on a retroactive basis. This summary does not address all U.S. federal income tax matters that
may be relevant to a particular perspective holder or all tax considerations that may be relevant with respect to an investment
in Alon Blue Square’s Shares.



This summary does
not address tax considerations applicable to a holder of a Alon Blue Square Shares that may be subject to special tax rules including,
without limitation, the following:



| | · | dealers
                                         or traders in securities, currencies or notional principal contracts;
| | - | ----------------------------------------------------------------------------------------------------------------------

| | · | financial
                                         institutions;
| | - | ----------------------------------------------------------------

| | · | insurance
                                         companies;
| | - | -------------------------------------------------------------

| | · | real
                                         estate investment trusts;
| | - | -----------------------------------------------------------------------

| | · | banks;
| | - | ------



193







| | · | investors
                                         subject to the alternative minimum tax;
| | - | ------------------------------------------------------------------------------------------

| | · | tax-exempt
                                         organizations;
| | - | ------------------------------------------------------------------

| | · | traders
                                         that have elected mark-to-market accounting;
| | - | ---------------------------------------------------------------------------------------------

| | · | investors
                                         that hold Shares as part of a “straddle”, “hedge”, or “conversion
                                         transaction” with other investments;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | regulated
                                         investment companies;
| | - | ------------------------------------------------------------------------

| | · | investors
                                         that actually or constructively own 10 percent or more of our voting shares;
| | - | -------------------------------------------------------------------------------------------------------------------------------

| | · | investors
                                         that are treated as partnerships or other pass through entities for U.S. federal income
                                         purposes and persons who hold the Shares through partnerships or other pass through entities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | investors
                                         whose functional currency is not the US dollar: and
| | - | ------------------------------------------------------------------------------------------------------

| | · | expatriates
                                         or former long-term residents of the United States.
| | - | --------------------------------------------------------------------------------------------------------



This summary does
not address the effect of any U.S. federal taxation other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local, or foreign taxation or the indirect effects on the holders of equity interest in a holder
of the Shares.



You are urged to
consult your own tax advisor regarding the foreign and U.S. federal, state, and local and other tax consequences of an investment
in the Shares.



| | · | For
                                         purposes of this summary, a “U.S. Holder” means a beneficial owner of a Share
                                         that is for U.S. federal income tax purposes:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an
                                         individual who is a citizen or resident of the United States;
| | - | ---------------------------------------------------------------------------------------------------------

| | · | a
                                         corporation (or other entity taxable as a corporation for U.S. federal income tax purposes)
                                         created or organized in the United States or under the laws of the United States or any
                                         political subdivision thereof;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | an
                                         estate, the income of which is subject to U.S. federal income tax regardless of its source;
                                         or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a
                                         trust (1) if (a) a court within the United States is able to exercise primary supervision
                                         over the administration of the trust; and (b) one or more U.S. persons have the authority
                                         to control all substantial decisions of the trust; or (2) that has a valid election in
                                         effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | For
                                         purposes of this section, a “non-U.S. Holder” is any holder who is not a
                                         U.S. Holder.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If an entity that
is classified as a partnership for U.S. federal tax purposes holds Shares, the U.S. federal tax treatment of its partners will
generally depend upon the status of the partners and the activities of the partnership. Entities that are classified as partnerships
for U.S. federal tax purposes and persons holding Shares through such entities should consult their own tax advisors.



194







In general, if you
hold ADSs, you will be treated as the holder of the underlying shares represented by those ADSs for U.S. federal income tax purposes.
Accordingly, no gain or loss will be recognized if you exchange ADSs for the underlying shares represented by those ADSs.



The U.S. Treasury
has expressed concerns that parties to whom Shares are released may be taking actions that are inconsistent with the claiming
of foreign tax credits for U.S. holders of Shares. Such actions would also be inconsistent with the claiming of the reduced rate
of tax, described below, applicable to dividends received by certain non-corporate U.S. Holders. Accordingly, the analysis of
the credibility of Israeli taxes and the availability of the reduced tax rate for dividends received by certain non-corporate
U.S. Holders, each described below, could be affected by actions taken by parties to whom the Shares are released and the positions
of the U.S. Treasury.



U.S
Taxation of Shares



Distributions



Subject to the discussion
under “Passive Foreign Investment Companies” below, the gross amount of any distribution, including the amount of
any Israeli taxes withheld from these distributions (see “Item 10. Additional Information – E. Taxation – Israeli
Tax Considerations”), actually or constructively received by a U.S. Holder with respect to Shares, will be taxable to the
U.S. Holder as a dividend to the extent of our current and accumulated earnings and profits as determined under U.S. federal income
tax principles. The U.S. Holder will not, except as provided by Section 245 of the Code, be eligible for any dividends received
deduction in respect of the dividend otherwise allowable to corporations. Distributions in excess of earnings and profits will
be non-taxable to the U.S. Holder to the extent of, and will be applied against and reduce, the U.S. Holder’s adjusted tax
basis in the Shares. Distributions in excess of such adjusted tax basis will generally be taxable to the U.S. Holder as capital
gain from the sale or exchange of property. If we do not report to a U.S. Holder the portion of a distribution that exceeds earnings
and profits, the distribution will generally be taxable as a dividend even if that distribution would otherwise be treated as
a non-taxable return of capital or as capital gain under the rules described above. The amount of any distribution of property
other than cash will be the fair market value of that property on the date of distribution.



Under the Code, certain
dividends received by non-corporate U.S. Holders will be subject to a maximum income tax rate of 20%. This reduced income tax
rate is only applicable to dividends paid by a “qualified foreign corporation” that is not a “passive foreign
investment company” and only with respect to shares held by a qualified U.S. Holder (i.e., a non-corporate holder) for a
minimum holding period (generally 61 days during the 121-day period beginning 60 days before the ex-dividend date). We should
be considered a qualified foreign corporation because (i) we are eligible for the benefits of a comprehensive tax treaty between
Israel and the U.S., which includes an exchange of information program, and (ii) the ADSs are readily tradeable on an established
securities market in the U.S. In addition, based on our current business plans, we do not expect to be classified as a “passive
foreign investment company” (see “Item 10. Additional Information – E. Taxation – Israeli Tax Considerations
– Passive Foreign Investment Companies” below). Accordingly, dividends paid by us to individual U.S. Holders on shares
held for the minimum holding period should be eligible for the reduced income tax rate. In addition to the income tax on dividends
discussed above, certain non-corporate U.S. holders will also be subject to the 3.8% Medicare tax on dividends as discussed below
under “Medicare Tax on Unearned Income”.



195







The amount of any
distribution paid in a currency other than US dollars (a “foreign currency”) including the amount of any withholding
tax thereon, will be included in the gross income of a U.S. Holder in an amount equal to the US dollar value of the foreign currency
calculated by reference to the exchange rate in effect on the date of the U.S. Holder’s (or, in the case of ADSs, the depositary’s)
receipt of the dividend, regardless of whether the foreign currency is converted into U.S. dollars. If the foreign currency is
converted into US dollars on the date of receipt, a U.S. Holder generally should not be required to recognize a foreign currency
gain or loss in respect of the dividend. If the foreign currency received in the distribution is not converted into US dollars
on the date of receipt, a U.S. Holder will have a basis in the foreign currency equal to its US dollar value on the date of receipt.
Any gain or loss on a subsequent conversion or other disposition of the foreign currency will be treated as ordinary income or
loss.



Dividends received
by a U.S. Holder with respect to Shares generally will be treated as foreign source income for the purposes of calculating the
holder’s foreign tax credit limitation. Subject to certain conditions and limitations, any Israeli taxes withheld on dividends
at the rate provided by the U.S.-Israel income tax treaty may be deducted from taxable income or credited against a U.S. Holder’s
U.S. federal income tax liability. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately
with respect to “passive” income and “general” income. The rules relating to foreign tax credits and the
timing thereof are complex. U.S. Holders should consult their own tax advisors regarding the availability of a foreign tax credit
under their particular situation (including, in the case of a U.S. corporation that owns 10 percent or more of our voting stock,
the possible application of Section 902 of the Code).



Sale or
Other Disposition of Shares



If a U.S. holder sells
or otherwise disposes of its Shares, a gain or loss will be recognized for U.S. federal income tax purposes in an amount equal
to the difference between the amount realized on the sale or other disposition and such holder’s adjusted basis in the Shares.
Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally
will be a capital gain or loss and will be a long-term capital gain or loss if the holder had held the Shares for more than one
year at the time of the sale or other disposition. Long-term capital gains realized by individual U.S. Holders generally are subject
to a lower marginal U.S. federal income tax rate (currently up to 20%) than ordinary income. A U.S. Holder’s ability to
deduct capital losses is subject to limitations. In addition to the income tax on gains discussed above, certain non-corporate
U.S. holders will also be subject to the 3.8% Medicare tax on net gains as discussed below under “Medicare Tax on Unearned
Income”. Under most circumstances, any gain that a holder recognizes on the sale or other disposition of Shares will be
U.S. source for purposes of the foreign tax credit limitation and any recognized losses will be allocated against U.S. source
income.



196







If a U.S. Holder receives
foreign currency upon a sale or exchange of Shares, a gain or loss will be recognized as described above and in addition, a gain
or loss, if any, recognized on the subsequent sale, conversion, or disposition of such foreign currency will be ordinary income
or loss, and will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
However, if such foreign currency is converted into US dollars on the date received by the U.S. Holder, the U.S. Holder generally
should not be required to recognize any gain or loss on such conversion.



A U.S. Holder who
holds Shares through an Israeli stockbroker or other Israeli intermediary may be subject to Israeli withholding tax on any capital
gains recognized if the U.S. Holder does not obtain approval of an exemption from the Israeli Tax Authorities or claim any allowable
refunds or reductions. U.S. Holders are advised that any Israeli tax paid under circumstances in which an exemption from (or a
refund of or a reduction in) such tax was available will not give rise to a deduction or credit for foreign taxes paid for U.S.
federal income tax purposes. U.S. Holders are advised to consult their Israeli stockbroker or intermediary regarding the procedures
for obtaining an exemption or reduction.



Medicare
Tax on Unearned Income



Certain U.S. Holders
that are individuals, estates or trusts are required to pay an additional 3.8% tax on all or a portion of their “net investment
income”, which includes, among other things, dividends on, and net gains from the sale or other disposition of Shares (other
than Shares held in a trade or business).



Passive
Foreign Investment Companies



For U.S. federal income
tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either
75% or more of our gross income is passive income, or at least 50% of the average value of all of our assets for the taxable year
produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties,
rents, annuities, and the excess of gains over losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning Shares.



Based on our estimated
gross income, the average value of our gross assets, and the nature of our business, we do not believe that we will be classified
as a PFIC in the current taxable year. Our status in any taxable year will depend on our assets and activities in each year and
because this is a factual determination made annually at the end of each taxable year, there can be no assurance that we will
not be considered a PFIC for any future taxable year. If we determine that we have become a PFIC, we will notify our U.S. Holders
and provide them with the information necessary to comply with the qualified electing fund rules (discussed below). If we are
treated as a PFIC in any year during which a U.S. Holder owns Shares, certain adverse tax consequences could apply, as described
below. Given our current business plans, however, we do not expect that we will be classified as a PFIC in future years.



197







If we are treated
as a PFIC for any taxable year,



·        a
U.S. Holder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition
of Shares ratably over its holding period for such Shares,



·        the
amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition
would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed
with respect to the resulting tax liability allocated to each such year,



·        the
amount allocated to the year of the dividend payment or disposition would be taxable as ordinary income, and



·        a
U.S. Holder would be required to make an annual return on IRS Form 8621 regarding distributions received and gains realized with
respect to the Shares. Additionally, recently promulgated regulations impose an additional annual filing requirement for U.S.
Holders who are shareholders of a PFIC.



One method to avoid
the aforementioned treatment is for a U.S. Holder to make an election to treat us as a qualified electing fund. A U.S. Holder
that makes an election to treat us as a qualified electing fund (an “electing U.S. Holder”) is required for each taxable
year to include in income a pro rata share of the ordinary earnings of the qualified electing fund as ordinary income and a pro
rata share of the net capital gain of the qualified electing fund as long-term capital gain, subject to a separate election to
defer payment of taxes, which deferral is subject to an interest charge. A U.S. Holder may make a qualified electing fund election
only if we furnish the U.S. Holder with certain tax information. We have agreed to supply an electing U.S. Holder with such information
needed to report income and gain pursuant to a qualified election in the event Alon Blue Square is classified as a PFIC. Alternatively,
another method to avoid the aforementioned treatment is for a U.S. Holder to make a timely mark-to-market election in respect
of its Shares. If a U.S. Holder elects to mark-to-market its Shares, any excess of the fair market value of the Shares at the
close of each tax year over the adjusted basis in such Shares will generally be included in income. If the fair market value of
the Shares had depreciated below the adjusted basis at the close of the tax year, the U.S. Holder may generally deduct the excess
of the adjusted basis of the Shares over their fair market value at that time. However, such deductions generally would be limited
to the net mark-to-market gains, if any, that were included in income by such holder with respect to Shares in prior years. Income
recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of Shares
with respect to which the mark-to-market election is made, is treated as ordinary income or loss.



198







You are urged to
consult your own tax advisor regarding the possibility of us being classified as a PFIC and the potential tax consequences arising
from the ownership and disposition (directly or indirectly) of an interest in a PFIC.



Backup
Withholding and Information Reporting



Payments of dividends
with respect to Shares and the proceeds from the sale, retirement, or other disposition of Shares made by a U.S. paying agent
or other U.S. intermediary will be reported to the IRS and to the U.S. Holder as may be required under applicable U.S. Treasury
regulations. We, or an agent, a broker, or any paying agent, as the case may be, may be required to withhold tax (backup withholding),
currently at the rate of 28%, if a non-corporate U.S. Holder that is not otherwise exempt fails to provide an accurate taxpayer
identification number and comply with other IRS requirements concerning information reporting. Certain U.S. Holders (including,
among others, corporations and tax-exempt organizations) are not subject to backup withholding. Any amount of backup withholding
withheld may be used as a credit against your U.S. federal income tax liability provided that the required information is timely
furnished to the IRS. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding
and the procedure for obtaining an exemption.



Certain U.S. Holders
who are individuals may be required to report information relating to an interest in our ADSs on IRS Form 8938, subject to certain
exceptions (including an exception for shares held in accounts maintained by financial institutions). U.S. Holders are encouraged
to consult their tax advisors regarding their information reporting obligations, if any, with respect to their ownership and disposition
of our ADSs.



Backup
Withholding and Information Reporting for non U.S. Holders



Non-U.S. Holders generally
are not subject to information reporting or backup withholding with respect to dividends paid on, or upon the disposition of Shares,
provided that the non-U.S. Holder certifies to its foreign status and certain other conditions are met, or otherwise establishes
an exemption.



The amount of any
backup withholding will be allowed as a credit against a non-U.S. Holder’s United States federal income tax liability and
may entitle such holder to a refund, provided that certain required information is timely furnished to the IRS.



Non-U.S. Holders
are urged to consult legal and tax advisors in the countries of their citizenship, residence and domicile to determine the possible
tax consequences of holding and selling Shares under the laws of their respective jurisdictions in light of their own particular
circumstances.



| | F. | Dividends
                                         and Paying Agents.
| | -- | ---------------------------------------------------------------------



Not applicable.



| | G. | Statement
                                         by Experts.
| | -- | --------------------------------------------------------------



Not applicable.



199







| | H. | Documents
                                         on Display.
| | -- | --------------------------------------------------------------



Alon Blue Square is
subject to the informational requirements of the Securities Exchange Act of 1934, as amended, applicable to foreign private issuers
and fulfills the obligation with respect to these requirements by filing reports with the Securities and Exchange Commission (SEC).
You may read and copy any document Alon Blue Square files with the SEC without charge at the SEC’s public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of that material may be obtained by mail from the Public Reference Branch
of the SEC at such address, at prescribed rates. Please call the SEC at l-800-SEC-0330 for further information on the public reference
room. Recent reports filed by Alon Blue Square with the SEC can also be accessed at the SEC’s web site, www.sec.gov.



As a foreign private
issuer, Alon Blue Square is exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements,
and its officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, Alon Blue Square is not required under the Exchange Act to
file periodic reports and financial statements with the Securities and Exchange Commission as frequently or as promptly as United
States companies whose securities are registered under the Exchange Act. A copy of each report submitted in accordance with applicable
United States law is available for public review at Alon Blue Square’s principal executive offices.



| | I. | Subsidiary Information.
| | -- | -----------------------



Not applicable.



|ITEM 11. | QUANTITATIVE
        AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- | ------------------------------------------------------------------



Interest Rate Sensitivity



The Company is exposed
to various market risks, most of them related to changes in interest rates and changes in the Israeli CPI. Loans and
Debentures in the amount of approximately NIS 2,148.7 million and marketable securities in the amount of approximately NIS 135.3
million bear interest at fixed rates, and therefore changes in the interest rates will affect the fair value of such loans and
marketable securities. Other loans set forth below bear interest at variable rates (as a result of changing interest rates or CPI
linkage), and therefore a change in the CPI or the prime interest rate will affect future cash flow and interest expenses.



The table below provides
information about our financial instruments as of December 31, 2015 but not include obligations and commitments of Dor Alon and
Naaman which are designated for sale:



200







|                                                                                     |  | December 31, 2015                        |        
|------------------------------------------------------------------------------------ |  | ---------------------------------------- | -------
|                                                                                     |  | Expected maturity (NIS
    in thousands) |        
|                                                                                     |  | 2016                                     |        
|Long term loan from banks -
    linked:                                              |  |                                          |        
|Linked to the Israeli CPI - 3.5% (weighted
    average rate as of December 31, 2015) |  |                                          | 158,084
|Long term loan from others –
    linked:                                             |  |                                          |        
|From parent company – without interest                                               |  |                                          | -      
|Long term loans from bank -
    unlinked:                                            |  |                                          |        
|Fixed annual interest rate of 6.23%                                                  |  |                                          | 10,778 
|Variable interest (average annual rate as of December
    31, 2014 of 2.61%)         |  |                                          | 22,134 
|                                                                                     |  |                                          | 190,996
|Debentures- Linked to the Israeli
    CPI:                                           |  |                                          |        
|Issued by the Company - fixed rate 2.5%                                              |  |                                          | 359,974
|Issued by BSRE - fixed rate 4.7%                                                     |  |                                          | 149,549
|Issued by BSRE - fixed rate 4.2%                                                     |  |                                          | 24,201 
|Issued by BSRE - fixed rate 4.5%                                                     |  |                                          | -      
|Issued by BSRE - fixed rate 3.3%                                                     |  |                                          | -      
|Convertible Debentures Linked
    to the Israeli CPI: (1)                            |  |                                          |        
|Issued by BSRE - fixed rate
    6.25%                                                |  |                                          | 29,420 
|                                                                                     |  |                                          | 563,144
|Marketable Securities - Linked to the Israeli CPI                                    |  |                                          | 56,820 
|Marketable Securities – unlinked in NIS                                              |  |                                          | 57,455 
|Marketable Securities –
    in other currencies                                      |  |                                          | 21,041 
|                                                                                     |  |                                          | 135,317








(1) See also “Item
5. Operating and Financial Review and Prospects – Liquidity and Capital Resources – Debentures.”



201







For CPI-linked financial
instruments as stipulated in the table above, a one percent increase (decrease) in the CPI would cause an approximately NIS
21.1 million decrease (increase) in net income for the next year.



Inflation Risks



The Company has an
excess of Israeli CPI-linked liabilities over Israeli CPI-linked assets (mainly in respect of outstanding debentures). As a result,
an increase in inflation would have the effect of increasing our financial expenses without any offsetting increase in our assets
and revenues in our consolidated financial statements, leading to lower reported earnings and shareholders’ equity. The extent
of this effect on our consolidated financial statements would be dependent on the rate of inflation in Israel.



The table below
provides information about the changes of the CPI and the “known” CPI index:



|     |  | CPI(1) |        |   | The “known”
    CPI index (2) | 
|---- |  | ------ | ------ | - | ----------------------------- | 
|     |  |        |        |   |                               | 
|2013 |  |        | 1.8    | % |                               | 
|2014 |  |        | (0.02) | % |                               | 
|2015 |  |        | 1.01   | % |                               | 



| | (1) | Calculated based on actual CPI
                                         date (through December of end year).
| | --- | ------------------------------------------------------------------------------------------------------------

| | (2) | Calculated based on published
                                         CPI date (through November of end year).
| | --- | ---------------------------------------------------------------------------------------------------------------



202







The table below provides
an analysis of monetary assets and liabilities by currency and linkage as of December 31, 2015:



|                                            |  | December 31, 2015                                                                                   |          
|------------------------------------------- |  | --------------------------------------------------------------------------------------------------- | ---------
|                                            |  | NIS
                                         linked to
                                         CPI |          
|                                            |  | NIS in thousands                                                                                    |          
|Assets:                                     |  |                                                                                                     |          
|Cash and cash equivalents                   |  |                                                                                                     | -        
|Investment in securities                    |  |                                                                                                     | 56,820   
|Trade receivables                           |  |                                                                                                     | -        
|Other accounts receivables                  |  |                                                                                                     | -        
|Loan Receivable                             |  |                                                                                                     | -        
|Other long-term receivables                 |  |                                                                                                     | 84,463   
|Total assets                                |  |                                                                                                     | 141,283  
|                                            |  |                                                                                                     |          
|Liabilities:                                |  |                                                                                                     |          
|Credit and loans from banks and others      |  |                                                                                                     | 181,113  
|Trade payables                              |  |                                                                                                     | -        
|Other accounts payable and accrued expenses |  |                                                                                                     | 8,196    
|Income tax payables                         |  |                                                                                                     | 2,582    
|Provisions                                  |  |                                                                                                     | 15,510   
|Loans                                       |  |                                                                                                     | 295,947  
|Debentures                                  |  |                                                                                                     | 1,820,305
|Convertible debentures                      |  |                                                                                                     | 30,067   
|Other long-term liabilities                 |  |                                                                                                     | 3,083    
|Derivative financial instruments            |  |                                                                                                     | 1,593    
|Total liabilities                           |  |                                                                                                     | 2,358,396



For further information
regarding market risks, see note 3 to our consolidated financial statements.



|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------



| | A. | Debt Securities
| | -- | ---------------



Not
applicable.



| | B. | Warrants and Rights
| | -- | -------------------



Not applicable



| | C. | Other Securities
| | -- | ----------------



Not applicable



| | D. | American
                                         Depositary Shares
| | -- | -------------------------------------------------------------------



Each of our American
Depositary Shares, or ADSs, represents one of our ordinary shares. Our ADSs trade on the New York Stock Exchange.



203







Fees and Expenses



|Persons depositing or withdrawing shares or American Depositary Shares must
    pay:                                                                                                                                                           |   | For:                                                                                                                                                                                                      
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|$5.00 (or less) per 100 American Depositary Shares (or portion of 100 American Depositary Shares)                                                                                                                                              | · | Execution and delivery of American Depositary Shares, including issuances resulting from a distribution
    of shares or rights or other property                                                         
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|                                                                                                                                                                                                                                               | · | Surrender of American Depositary Shares for the purpose of withdrawal, including if the deposit
    agreement terminates                                                                                  
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|$.02 (or less) per American Depositary Share                                                                                                                                                                                                   | · | Any cash distribution to American Depositary Share holders                                                                                                                                                
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|A fee equal to the fee that would be payable if securities distributed to you had been shares
    and the shares had been deposited for issuance of American Depositary Shares                                                                 | · | Distribution of securities or property (other than cash, shares or rights) distributed to holders
    of deposited securities which are distributed by the depositary to American Depositary Share holders
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|$.02 (or less) per American Depositary Shares per annum (unless a fee was paid for that calendar
    year for cash distributions)                                                                                                              | · | Depositary services                                                                                                                                                                                       
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|Registration or transfer fees                                                                                                                                                                                                                  | · | Transfer and registration of shares on our share register to or from the name of the depositary
    or its nominee when you deposit or withdraw shares                                                    
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|Expenses of the depositary                                                                                                                                                                                                                     | · | Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)                                                                                                               
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|                                                                                                                                                                                                                                               | · | converting foreign currency to U.S. dollars                                                                                                                                                               
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|Taxes and other governmental charges the depositary or the custodian have to pay on any American
    Depositary Share or share underlying an American Depositary Share, for example, stock transfer taxes, stamp duty or withholding
    taxes | · | As necessary                                                                                                                                                                                              
|                                                                                                                                                                                                                                               |   |                                                                                                                                                                                                           
|Any charges incurred by the depositary or its agents for servicing the shares or deposited securities                                                                                                                                          | · | As necessary                                                                                                                                                                                              



204









The depositary collects
its fees for delivery and surrender of American Depositary Shares directly from investors depositing shares or surrendering American
Depositary Shares for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making
distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property
to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by
directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally
refuse to provide fee-attracting services until its fees for those services are paid.



PART
II



|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------



Not applicable.



|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|-------- | ----------------------------------------------------------------------------



A. to E.Not
applicable.



|ITEM 15. | CONTROLS
        AND PROCEDURES
|-------- | -------------------------------



(a) Disclosure
Controls and Procedures. We performed an evaluation of the effectiveness of our disclosure controls and procedures that are
designed to ensure that information required to be disclosed and filed with the Securities and Exchange Commission is recorded,
processed, summarized and reported timely within the time period specified in the SEC’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to the issuer’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There can be no assurance
that our disclosure controls and procedures will detect or uncover all failures of persons within Alon Blue Square to disclose
information otherwise required to be set forth in our reports. Nevertheless, our disclosure controls and procedures are designed
to provide reasonable assurance of achieving the desired control objectives. Based on our evaluation, our management, including
our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15(d) - 15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by
this report are effective at such reasonable assurance level.



205







(b) Management’s
Annual Report on Internal Control over Financial Reporting. Our management, under the supervision of our Chief Executive Officer
and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over our financial reporting,
as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act of 1934, as amended. The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal
control over financial reporting includes policies and procedures that:



| | · | pertain
                                         to the maintenance of records that in reasonable detail accurately and fairly reflect
                                         our transactions and asset dispositions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide
                                         reasonable assurance that transactions are recorded as necessary to permit the preparation
                                         of our financial statements in accordance with generally accepted accounting principles;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide
                                         reasonable assurance that receipts and expenditures are made only in accordance with
                                         authorizations of our management and board of directors (as appropriate); and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | provide
                                         reasonable assurance regarding the prevention or timely detection of unauthorized acquisition,
                                         use or disposition of assets that could have a material effect on our financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Due to its inherent
limitations, internal controls over financial reporting may not prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Under the supervision
and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we assessed the
effectiveness of our internal control over financial reporting as of December 31, 2015 based onthe framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway
Commission (COSO 2013). Based on our assessment and this framework, our management concluded that the Company’s internal
control over financial reporting was effective as of December 31, 2015.



(c)This Annual Report does not include an attestation report from our independent registered public accounting firm regarding
our effectiveness of internal control over financial reporting. Management’s report was not subject to an attestation report
by our independent registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit
us to only provide management’s report in this Annual Report as we are a non-accelerated filer.



(d)	Changes
in internal controls over financial reporting. There were no changes in our internal control over financial reporting that
occurred during the year ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



206







|ITEM 16. | [RESERVED]
|-------- | ----------



|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- | --------------------------------



The board of directors
has determined that Avraham Meron is an “audit committee financial expert” as defined in Item 16A of Form 20-F and
is independent in accordance with the NYSE listing standards for audit committees applicable to Alon Blue Square.



|ITEM 16B. | CODE OF ETHICS
|--------- | --------------



As of the date of this
Annual Report, we have adopted a code of ethics that applies to our Chief Executive Officer, President, Chief Financial Officer,
Corporate Controller and employees. This code of ethics is posted on our website, http://www.bsi.co.il/bsi/en/?page_id=119.



|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- | --------------------------------------



Kesselman & Kesselman,
a member of PricewaterhouseCoopers International Limited, served as our independent public accountants for the fiscal years ended
December 31, 2014 and 2015, for which audited consolidated financial statements appear in this Annual Report on Form 20-F.



The following table
presents the aggregate fees for professional services rendered by such accountants to us during their respective term as our principal
accountants in 2014 and 2015.



|                   |  | 2015               |       |  | 2014 | 
|------------------ |  | ------------------ | ----- |  | ---- | 
|                   |  | (NIS in thousands) |      
|Audit Fees (1)     |  |                    | 4,029 |  |      | 
|Tax Fees (2)       |  |                    | 214   |  |      | 
|All Other Fees (3) |  |                    | 468   |  |      | 
|TOTAL              |  |                    | 4,711 |  |      | 



| | (1) | Audit Fees consist
                                         of fees billed for the annual audit services engagement and other audit services, which
                                         are those services that only the external auditor can reasonably provide, and include
                                         the group audit; statutory audits; comfort letters and consents; attest services; assistance
                                         with and review of documents filed with the SEC and Sarbanes-Oxley Act compliance.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Tax fees were
                                         for services related to tax compliance, including the preparation of tax returns and
                                         claims for refund, and tax planning and tax advice, including assistance with tax audits
                                         and appeals, advice related to mergers, acquisitions, transfer pricing, and assistance
                                         with respect to requests for rulings from tax authorities.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



207







| | (3) | Other Fees were
                                         for general guidance related to accounting issues and due diligence in connection with
                                         potential acquisitions.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Audit Committee Pre-Approval
Policies and Procedures



One of our audit committee’s
main roles is to assist the board of directors in fulfilling its responsibility for oversight of the quality and integrity of
the accounting, auditing and reporting practices of the Company. The Audit Committee oversees the appointment, compensation, and
oversight of the public accounting firm engaged to prepare or issue an audit report on the consolidated financial statements of
the Company. Our audit committee has adopted a pre-approval policy for audit and non-audit services.



|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.
|--------- | -----------------------------------------------------------



Not applicable.



|ITEM 16E. | PURCHASES OF
        EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.
|--------- | -------------------------------------------------------------------------------



Not
Applicable



|ITEM 16F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.
|--------- | ---------------------------------------------



Not applicable.



|ITEM 16G. | CORPORATE GOVERNANCE
|--------- | --------------------



Below is a summary
of the significant differences between our corporate governance practices as a foreign private issuer and those required
of U.S. domestic companies under New York Stock Exchange (“NYSE”) listing standards.



Our corporate governance
practices are derived from (i) the Israeli Companies Law, 1999 and the regulations promulgated thereunder, (ii) our Articles of
Association and (iii) the rules of the NYSE applicable to foreign private issuers. As a foreign private issuer we are permitted
to follow home country practice in lieu of certain provisions of Section 303A of the NYSE Corporate Governance Rules.



Majority of Independent
Directors: Under NYSE Rule 303A.01, domestic listed companies must have a majority of independent directors. We do not have
a majority of independent directors serving on our board of directors, although all of our audit committee members are independent
directors.



Separate meetings
of non-management directors: Under NYSE Rule 303A.03, the non-management directors of each domestic listed company must meet
at regularly scheduled executive sessions without management. Our independent directors do not meet separately from directors
who are not independent, other than in the context of audit committee meetings.



208







Nominating/corporate
governance committee: Under NYSE Rule 303A.04, a domestic listed company must have a nominating/corporate governance committee
composed entirely of independent directors. We do not have such a committee.



Compensation
Committee Composition:Our compensation committee meets independence requirements under Israeli law but not those required
under NYSE Rule 303A.02.



Compensation
Committee Charter: Under NYSE Rule 303A.05, a domestic listed company must have a compensation committee charter that addresses
the committees' purposes and responsibilities, including with respect to appointment and independence of compensation consultant,
legal counsel or other advisor to the Compensation Committee. We do not have a compensation committee charter.



Audit Committee:Under NYSE Rule 303A.06, listed companies are required to have an audit committee that complies with the requirements of Rule
10A-3 of the Securities and Exchange Act of 1934. Rule 10A-3 requires the audit committee of a U.S. company to be directly responsible
for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged for the
purpose of preparing or issuing an audit report or performing other audit, review, or attest services, and that each such firm
must report directly to the audit committee.



Pursuant to the
Israeli Companies Law, our auditors are appointed by the shareholders at the annual meeting of shareholders. Our shareholders
have delegated to the board of directors and audit committee the authority to determine the amount to be paid to our auditors.
Our audit committee is responsible for recommending to the shareholders the appointment of our auditors and for assisting the
board of directors in overseeing the work of our auditors. In addition, pursuant to the Israeli Companies Law, our financial statements
must be approved by our board of directors.



Equity Compensation
Plans: Under NYSE Rule 303A.08, shareholders must be given the opportunity to vote on all equity-compensation plans and material
revisions thereto, with certain limited exemptions as described in the Rule.



We do not obtain
shareholder approval of all our equity-compensation plans. Pursuant to the Israeli Companies Law, transactions with officers,
directors, and controlling shareholders regarding the terms of their office and employment, including any compensation in securities,
require special approval (including approval of the audit committee, the board of directors in the case of officers, and including
approval of the board of directors and shareholders in the case of directors and controlling shareholders).



209







Corporate governance
guidelines: Under NYSE Rule 303A.09, domestic listed companies must adopt and disclose their corporate governance guidelines.
We have adopted a written Policy Regarding the Usage of Insider Information as well as Code of Ethics, although these do not satisfy
the corporate governance guidelines referred to in Rule 303A.09.



Shareholder
Approvals: Under NYSE Rule 312.03, subject to certain exceptions, shareholder approval is required prior to the issuance of
common stock in the following situations: (a) equity compensation plans (described above); (b) prior to the issuance of common
stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions,
to: (i) a director, officer or substantial security holder of the company (each a "Related Party"), (ii) a subsidiary,
affiliate or other closely-related person of a Related Party, or (iii) any company or entity in which a Related Party has a substantial
direct or indirect interest, in each case if the number of shares of common stock to be issued, or if the number of shares of common
stock into which the securities may be convertible or exercisable, exceeds either one percent of the number of shares of common
stock or one percent of the voting power outstanding before the issuance; (c) prior to the issuance of common stock, or of securities
convertible into or exercisable for common stock, in any transaction or series of related transactions if (1) the common stock
has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance
of such stock or of securities convertible into or exercisable for common stock; or(2)
the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number
of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable
for common stock; and (d) prior to an issuance that will result in a change of control of the issuer.



We
seek shareholder approval for all corporate actions requiring such approval in accordance with the requirements of the Israeli
Companies Law, which are different from the shareholder approval requirements under the NYSE Rules.Under the Companies
Law, in addition to the matters described above under "- Equity Compensation Plans", shareholder approval is also required
for among, things, (i) "extraordinary transactions" with a controlling shareholder of a publicly held company
or in which the controlling shareholder has a personal interest and (ii) private placements that are deemed as “extraordinary
private placements”. A “extraordinary private placement” is a private placement (i) in which a company issues
securities representing 20% or more of its voting rights prior to the issuance and the consideration received pursuant to such
issuance is not comprised, in whole or in part, solely of cash or securities registered for trade on an exchange or which is not
made pursuant to market conditions, and as a result of which the shareholdings of a 5% holder of the shares or voting rights of
the company increases or as a result of which a person will become a holder of 5% of the shares or voting rights of the company
or (ii) as a result of which a person or entity becomes a controlling shareholder after the issuance.





210







Part
III



|ITEM 17. | FINANCIAL STATEMENTS
|-------- | --------------------



The financial statements
required by this item are found at the end of this Annual Report, beginning on page F-1.



|ITEM 18. | FINANCIAL STATEMENTS
|-------- | --------------------



We have responded
to Item 17 in lieu of this item.



|ITEM 19. | EXHIBITS
|-------- | --------



The exhibits filed
with or incorporated into this Annual Report are listed in the index of exhibits below.



|Exhibit
    No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|1.1             |  | Memorandum of Association of the Registrant
    (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form F-1 (File No. 333-05024)).                                                                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|1.2             |  | Articles of Association of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.1             |  | Form of Amended and Restated Deposit Agreement
    among Alon Blue Square, The Bank of New York as Depositary, and all Owners and Holders from time to time of American Depositary
    Shares issued thereunder (incorporated by reference to Exhibit (a) to the Registration Statement on Form F-6 (File No. 333-05158)).                                                                                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.3             |  | Form of Letter of Exemption and Indemnity
    adopted in February 2001 (incorporated by reference to Exhibit 4.13 to Alon Blue Square’s Annual Report on Form 20-F
    for the year ended December 31, 2000).                                                                                                                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.4             |  | Form of Letter of Exemption and Indemnity
    (English translation accompanied by the Hebrew original) (incorporated by reference to Exhibit 4.14 to Alon Blue Square’s
    Annual Report on Form 20-F for the year ended December 31, 2001).                                                                                                                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.5             |  | Form of Letter of Indemnity adopted in June
    2008 (English translation) (incorporated by reference to Exhibit 4.11 to Alon Blue Square’s Annual Report on Form 20-F
    for the year ended December 31, 2008).                                                                                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.6             |  | Special Collective Agreement made on the 28th
    day of May 1996 between Co-Op Blue Square Consumers Cooperative Society Ltd., the Registrant and The New Federation of
    Labor in Israel/The Federation of Clerical, Administrative and Services Employees and Consumers Cooperative Union-Central
    Cooperative Society Ltd. (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form F-1 (File No. 333-05024)).                                                     
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.7             |  | Special Collective Agreement made on the 3rd
    day of September 2000 between Alon Blue Square and The New Federation of Labor in Israel. The Federation of Clerical,
    Administrative and Services Employees / the Commercial Section Employees and the committee of Alon Blue Square employees.
    (English summary accompanied by the Hebrew original) (incorporated by reference to Exhibit 4.16 to Alon Blue Square’s
    Annual Report on Form 20-F for the year ended December 31, 2001).



211







|Exhibit
    No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.8             |  | Collective Agreement, made on August 13, 2003,
    by and among Alon Blue Square and The New Federation of Labor in Israel/The Federation of Clerical, Administrative and Services
    Employees and the National Committee of the Blue Square Co-Op Employees (English translation) (incorporated by reference to
    Exhibit 4.15 to Alon Blue Square Annual Report on Form 20-F for the year ended December 31, 2003).
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.9             |  | Collective Agreement, made on October 15,
    2003, by and among Alon Blue Square and The New Federation of Labor in Israel/The Federation of Clerical, Administrative and
    Services Employees and the National Workers Committee of Alon Blue Square (English translation) (incorporated by reference
    to Exhibit 4.16 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2003).    
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.10            |  | Special Collective Bargaining Agreement made
    on the 21st day of January 2005 among Alon Blue Square, the Histadrut and the National Committee of Alon Blue Square.
    (English translation) (incorporated by reference to Exhibit 4.15 to Alon Blue Square’s Annual Report on Form 20-F for
    the year ended December 31, 2004).                                                                                  
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.11            |  | Special Collective Bargaining Agreement made
    on April 26, 2006 among Alon Blue Square, the MAOF Histadrut and Blue Square -Israel Employees’ Union (English translation)
    (incorporated by reference to Exhibit 4.16 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December
    31, 2006).                                                                                                  
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.12            |  | Special Collective Bargaining Agreement made
    on May 29, 2006 among Alon Blue Square, the MAOF Histadrut and Blue Square -Israel Employees’ Union (English translation)
    (incorporated by reference to Exhibit 4.17 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December
    31, 2006).                                                                                                    
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.13            |  | Special Collective Bargaining Agreement made
    on July 16, 2007 among Alon Blue Square, the MAOF Histadrut and Blue Square -Israel Employees’ Union (English translation)
    (incorporated by reference to Exhibit 4.19 to Alon Blue Square’s Annual Report on Form 20-F for the year ended December
    31, 2007).                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.14            |  | Special Collective Bargaining Agreement made
    on April 5, 2009 among Alon Blue Square, Blue Square Chain Investments & Properties Ltd., the MAOF Histadrut and Blue
    Square-Israel Employees’ Union (English translation) (incorporated by reference to Exhibit 4.20 to Alon Blue Square’s
    Annual Report on Form 20-F for the year ended December 31, 2008).                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.15            |  | Transfer Agreement, dated June 21, 2006, between
    Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.23 to Alon
    Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                      
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.16            |  | Split Agreement, dated April 2, 2006, between
    Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.24 to Alon
    Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.17            |  | Lease Agreement, dated August 13, 2006, between
    Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.25 to Alon
    Blue Square’s Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                                                       
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                          
|4.18            |  | Lease Agreement, dated June 23, 2006, between
    Alon Blue Square and Blue Square Chain Investments & Properties Ltd Blue Square Real Estate Ltd (assigned to BSRE) (English
    translation) (incorporated by reference to Exhibit 4.26 to Alon Blue Square’s Annual Report on Form 20-F for the year
    ended December 31, 2006).                                                                                    



212







|Exhibit
    No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.19            |  | Transfer Agreement, dated March 31, 2009,
    between Blue Square Real Estate Ltd. and Blue Square Chain Properties & Investments Ltd., together with Addendum No. 1,
    dated September 13, 2009 (English translation) (incorporated by reference to Exhibit 4.30 to Alon Blue Square’s Annual
    Report on Form 20-F for the year ended December 31, 2009).                                                                                                                           
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.20            |  | Deed of Trust (for Series B Debenture) made
    on August 14, 2006, by and between Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together with second schedule
    (English translation) (incorporated by reference to Exhibit 4.31 to Alon Blue Square’s Annual Report on Form 20-F for
    the year ended December 31, 2006).                                                                                                                                            
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.21            |  | First Schedule to Deed of Trust - Debenture
    Certificate for Registered Debentures (Series B) of NIS 1 par value each (out of series of NIS 650,000,000 par value Debentures
    (Series B)) (English translation) (incorporated by reference to Exhibit 4.32 to Alon Blue Square’s Annual Report on
    Form 20-F for the year ended December 31, 2006).                                                                                                                              
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.22            |  | Deed of Trust (for Series C to H Debentures)
    dated May 19, 2009, by and between Blue Square Real Estate Ltd. and Hermetic Trust (1975) Ltd., together with Addendum to
    Deed of Trust dated October 18, 2009 (English translation) (incorporated by reference to Exhibit 4.37 to Alon Blue Square’s
    Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                                          
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.23            |  | Deed of Trust (for Series C to G Debentures
    and Series H to J Debentures) dated February 18, 2010, between Alon Blue Square and Hermetic Trust (1975) Ltd., together with
    First Schedule - Debenture Certificate for Series C to G, First Schedule - Debenture Certificate for Series H to J, and second
    schedule (English translation) (incorporated by reference to Exhibit 4.38 to Alon Blue Square’s Annual Report on Form
    20-F for the year ended December 31, 2009).
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.24            |  | Protocol, dated April 11, 2010, between Tel
    Aviv Wholesale Agricultural Produce Market Company Ltd., Tel Aviv Municipality, Lev Tel Aviv Towers Ltd. and Tel Aviv City
    Mall Ltd. (English translation) (incorporated by reference to Exhibit 4.42 to Alon Blue Square’s Annual Report on Form
    20-F for the year ended December 31, 2009).                                                                                                                                     
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.25            |  | Agreement, dated June 3, 2010, between Tel
    Aviv Wholesale Agricultural Produce Market Company Ltd., Lev Tel Aviv Towers Ltd. and Tel Aviv City Mall Ltd., together with
    Deed of Undertaking by the Interested Parties (English translation) (incorporated by reference to Exhibit 4.43 to Alon Blue
    Square’s Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                                
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.26            |  | Agreement, dated June 3, 2010, between Tel
    Aviv Municipality, Lev Tel Aviv Towers Ltd., and Tel Aviv City Mall Ltd., together with Deed of Undertaking by the Interested
    Parties (English translation) (incorporated by reference to Exhibit 4.44 to Alon Blue Square’s Annual Report on Form
    20-F for the year ended December 31, 2009).                                                                                                                                     
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.27            |  | Document of Principles, dated April 15, 2010,
    between Blue Square Real Estate Tel Aviv Market Commercial Ltd., Blue Square Real Estate Tel Aviv Market Housing Ltd., Gindi
    Commercial Tel Aviv Ltd. and Gindi Housing Tel Aviv Ltd. (English translation) (incorporated by reference to Exhibit 4.45
    to Alon Blue Square’s’ Annual Report on Form 20-F for the year ended December 31, 2009).                                                                                 
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.28            |  | Share Purchase Agreement, dated May 17, 2010,
    between Alon Israel Oil Company Ltd. and Alon Blue Square (English translation) (incorporated by reference to Annex A to Alon
    Blue Square’s report on Form 6-K, filed on May 27, 2010).                                                                                                                                                                                                                                             
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|8.1             |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12.(a).1        |  | Certification by CEO pursuant to Rule 13a-14(a)
    or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
    2002.                                                                                                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12.(a).2        |  | Certification by Chairman of the Board pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.                                                                                                                                                                                                                                                                                         
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|12.(a).3        |  | Certification by CFO pursuant to Rule 13a-14(a)
    or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of
    2002.                                                                                                                                                                                                                                                                                                   
|                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|13.(a).1        |  | Certification of CEO and CFO pursuant to 18
    U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                



213







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF
DECEMBER 31, 2015



TABLE
OF CONTENTS



|                                                                                           | Page        
|------------------------------------------------------------------------------------------ | ------------
|                                                                                           |             
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                    | F-2         
|                                                                                           |             
|REPORT OF INDEPENDENT ACCOUNTANT for subsidiary of the Company, Eden Teva Market           | F-3         
|                                                                                           |             
|REPORT OF INDEPENDENT ACCOUNTANT for associate of the Company, Diners Club Israel Ltd.     | F-4         
|                                                                                           |             
|CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF NEW ISRAELI SHEKELS - NIS):             | F-5         
|                                                                                           |             
|Consolidated statements of financial position                                              | F-5 - F-6   
|                                                                                           |             
|Consolidated income statements                                                             | F-7 - F-8   
|                                                                                           |             
|Consolidated statements of comprehensive income (loss)                                     | F-9         
|                                                                                           |             
|Consolidated statements of changes in equity                                               | F-10        
|                                                                                           |             
|Consolidated statements of cash flows                                                      | F-11 - F-13 
|                                                                                           |             
|Notes to consolidated financial statements                                                 | F-14 - F-128
|                                                                                           |             
|APPENDIX A - DETAILS OF PRINCIPAL SUBSIDIARIES, JOINTLY CONTROLLED ENTITIES AND ASSOCIATES | F-129       



- - - - - - - - - - - - - - - - - -
-



F-1









REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

To the shareholders of

ALON BLUE SQUARE ISRAEL
LTD.







We have audited the accompanying
consolidated statements of financial position of Alon Blue Square Israel Ltd. and its subsidiaries (collectively - the "Company")
as of December 31, 2015 and 2014 and the related consolidated income statements, comprehensive income (loss), changes in equity
and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the
responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We did not audit
the financial statements of an equity method investee as of December 31, 2014 and for each of the years ended December 31, 2014
and 2013. The Company's interest in such investee, as reflected in the consolidated statements of financial position as of December
31, 2014, is NIS 41.9 million, and the Company's share in its profit is NIS 16.7 million and NIS 20.1 million for the years ended
December 31, 2014, and 2013, respectively. In addition, we did not audit the financial statements of a consolidated subsidiary
as of December 31, 2014 and for the years ended December 31, 2014 and 2013, which is presented as a discontinued operation, whose
assets constitute approximately 1.6% of total consolidated assets of December 31, 2014, and whose results were loss of NIS 53.5
million and NIS 8.8 million for the years ended December 31, 2014 and 2013 respectively. Those financial statements were audited
by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for the
consolidated subsidiary and the equity method investee, is based solely on the reports of the other auditors.



We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s
Board of Directors and management, as well as evaluating the overall financial statement presentation. We believe that our audits
and the reports of the other auditors provide a reasonable basis for our opinion.



In our opinion, based on our
audits and the reports of the other auditors the consolidated financial statements referred to above, present fairly, in all material
respects, the financial position of the Company as of December 31, 2015 and 2014 and the results of its operations, changes in
equity and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with International Financial
Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").



As discussed in Note 1b to
the financial statements the Company has undertaken significant various obligations, which are currently due in 2016. The Company
has formulated a plan with its financial creditors to reschedule the Company's debts, however, it is currently non-binding. Based
on this and other matters as discussed in Note 1b, there are substantial doubts about the Company's ability to continue as a going
concern. The Company's consolidated financial statements have been prepared assuming that the Company will continue as a going
concern and do not include any adjustments that might result from the outcome of these uncertainties.



|Tel Aviv, Israel | Kesselman
    & Kesselman                                        
|---------------- | -----------------------------------------------------------------
|May 10, 2016     | Certified Public
    Accountants (lsr.)                          
|                 | A member firm of
    PricewaterhouseCoopers International Limited



Kesselman & Kesselman, Trade Tower,
25 Hamered Street, Tel-Aviv 6812508, Israel,

P.O Box 50005 Tel-Aviv
6150001 Telephone: +972 -3- 7954555, Fax:+972 -3- 7954556, www.pwc.com/il



F-2



















Tel Aviv, 30 April, 2015



Report of independent registered public
accounting firm



to the shareholders of



Eden Teva Market Ltd



We have
audited the balance sheet of Eden Teva Market Ltd. (“Eden”) as of December 31,
2014 and 2013 and the related statements of operations,
changes in shareholders' deficit and cash flows for each of the three years ended December 31, 2014. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements
based on our audits.



We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of a material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by the Company's Board of Directors and
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.



In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of Eden as of December 31, 2014 and 2013 and
the results of its operations, changes in shareholders' deficit and cash flows for each of the three years ended December 31 2014,
in conformity with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards
Board ("IASB").



Without qualifying our opinion, we call
your attention to what is stated in Note 1 of the consolidated financial statements in regard to the deficit in equity and in
working capital of the Company, the Company's ability to meet its obligations, plans of the Company's management and board of
directors and the related uncertainties. The Company board of directors and management are of the opinion that, in view of the
projected cash flows that includes, inter alia, a projected exercise of assets, consolidation of frameworks and prevention of
duplication with the parent company, other efficiency measures, and cash inflows by others, the Company will have sufficient resources
for paying its obligations and continuing its operations.



Barzily & Co.

Certified Public Accountants

A Member of MSI Worldwide



F-3











|Somekh
    Chaikin                  | Telephone | +972
    3 684 8000
|----------------------------------- | --------- | -------------------
|KPMG Millennium
    Tower           | Fax       | +972 3 684
    8444
|17 Ha'arba'a
    Street, PO Box 609 | Internet  | www.kpmg.co.il     
|Tel Aviv  61006  Israel             |           |                    



Report of Independent Registered Public
Accounting Firm



The Board of Directors and Shareholders

Diners Club Israel Ltd.



We have audited the accompanying consolidated
balance sheets of Diners ClubIsrael Ltd. and subsidiary as of December 31, 2014 and
2013, and the related consolidated statements of profit and loss, changes in equity and cash flows for each of the years in the
three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Diners Club Israel Ltd. and subsidiary
as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2014, in conformity with generally accepted accounting principles in Israel (Israeli GAAP). Furthermore,
in our opinion, the abovementioned financial statements were prepared in accordance with the directives and guidelines of the
Supervisor of Banks.



As described in Note 2 to the consolidated
financial statements, a reconciliation of the Company’s financial statements from the prepared basis described above to
International Financial Reporting Standards as issued by the International Accounting Standards Board appears in Note 22 to the
consolidated financial statements.



Somekh Chaikin



Certified Public Accountants (Isr.)



A Member Firm of KPMG International



April 20, 2015



F-4







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



|                                                         |  |      |  | December 31  |           |  | Convenience translation
    (note 2b) December 31, | 
|-------------------------------------------------------- |  | ---- |  | ------------ | --------- |  | -------------------------------------------------- | 
|                                                         |  |      |  | 2014         |           |  | 2015                                               | 
|                                                         |  | Note |  | NIS          |           |  | U.S. dollars                                       | 
|                                                         |  |      |  | In thousands |          
|                                                         |  |      |  |              |           |  |                                                    | 
|Assets                                                   |  |      |  |              |           |  |                                                    | 
|CURRENT ASSETS:                                          |  |      |  |              |           |  |                                                    | 
|Cash and cash equivalents                                |  | 9a   |  |              | 290,102   |  |                                                    | 
|Investment in securities                                 |  | 10   |  |              | 362,827   |  |                                                    | 
|Short-term deposits                                      |  | 9b   |  |              | 94,307    |  |                                                    | 
|Trade receivables                                        |  | 12   |  |              | 1,030,367 |  |                                                    | 
|Income taxes receivable                                  |  |      |  |              | 16,020    |  |                                                    | 
|Other accounts  receivable                               |  | 13   |  |              | 430,707   |  |                                                    | 
|Derivative financial instruments                         |  | 11   |  |              | 395       |  |                                                    | 
|Inventories                                              |  | 14a  |  |              | 511,661   |  |                                                    | 
|Assets of disposal group classified
    as held for sale |  | 7    |  |              | -         |  |                                                    | 
|                                                         |  |      |  |              | 2,736,386 |  |                                                    | 
|                                                         |  |      |  |              |           |  |                                                    | 
|NON-CURRENT ASSETS:                                      |  |      |  |              |           |  |                                                    | 
|Investments accounted for using equity method            |  | 6    |  |              | 977,028   |  |                                                    | 
|Derivative financial instruments                         |  | 11   |  |              | 4,698     |  |                                                    | 
|Real estate inventories                                  |  | 14b  |  |              | 126,012   |  |                                                    | 
|Investment in securities                                 |  | 10   |  |              | 59,283    |  |                                                    | 
|Loans receivable, net of current maturities              |  | 18   |  |              | 135,171   |  |                                                    | 
|Property and equipment, net                              |  | 15   |  |              | 2,322,036 |  |                                                    | 
|Investment property                                      |  | 16   |  |              | 982,619   |  |                                                    | 
|Intangible assets, net                                   |  | 17   |  |              | 1,140,343 |  |                                                    | 
|Other long-term receivables                              |  | 19   |  |              | 52,740    |  |                                                    | 
|Deferred taxes                                           |  | 31h  |  |              | 27,844    |  |                                                    | 
|                                                         |  |      |  |              | 5,827,774 |  |                                                    | 
|Total assets                                             |  |      |  |              | 8,564,160 |  |                                                    | 



|May
                                  10, 2016 |  |                                   |  |                        |  |                                
|---------------------------------------------- |  | --------------------------------- |  | ---------------------- |  | -------------------------------
|Date of approval of the                        |  | Avigdor Kaplan                    |  | Israel Yaniv           |  | Yehuda van der Walde           
|financial statements                           |  | Chairman of the boardof Directors |  | Chief ExecutiveOfficer |  | Chief Financial
        Officer



The accompanying notes
are an integral part of the consolidated financial statements.



F-5







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



|                                                                       |  |      |  | December 31  |           |   | Convenience  translation (note
    2b) December 31, | 
|---------------------------------------------------------------------- |  | ---- |  | ------------ | --------- | - | --------------------------------------------------- | 
|                                                                       |  |      |  | 2014         |           |   | 2015                                                | 
|                                                                       |  | Note |  | NIS          |           |   | U.S. dollars                                        | 
|                                                                       |  |      |  | In thousands |          
|Liabilities
    and equity                                             |  |      |  |              |           |   |                                                     | 
|CURRENT LIABILITIES:                                                   |  |      |  |              |           |   |                                                     | 
|Credit and loans from banks and others                                 |  | 21   |  |              | 774,626   |   |                                                     | 
|Credit from Parent Company                                             |  | 36d  |  |              | -         |   |                                                     | 
|Current maturities of debentures and convertible debentures            |  | 21   |  |              | 466,935   |   |                                                     | 
|Current maturities of long-term loans from banks                       |  | 21   |  |              | 283,342   |   |                                                     | 
|Trade payables                                                         |  |      |  |              | 1,195,822 |   |                                                     | 
|Income taxes payable                                                   |  |      |  |              | 24,393    |   |                                                     | 
|Other accounts payable and accrued expenses                            |  | 20   |  |              | 723,274   |   |                                                     | 
|Customers' deposits                                                    |  |      |  |              | 28,212    |   |                                                     | 
|Derivative financial instruments                                       |  | 11   |  |              | 1,060     |   |                                                     | 
|Provisions for other liabilities                                       |  | 24   |  |              | 67,697    |   |                                                     | 
|Liabilities of disposal group
    classified as held for sale          |  | 7    |  |              | -         |   |                                                     | 
|                                                                       |  |      |  |              | 3,565,361 |   |                                                     | 
|NON CURRENT
    LIABILITIES:                                           |  |      |  |              |           |   |                                                     | 
|Long-term loans from banks and others, net of current
    maturities   |  | 21   |  |              | 1,414,607 |   |                                                     | 
|Convertible debentures, net of current maturities                      |  | 21   |  |              | 30,738    |   |                                                     | 
|Debentures, net of current maturities                                  |  | 21   |  |              | 2,011,999 |   |                                                     | 
|Loan from parent company                                               |  | 36d  |  |              | -         |   |                                                     | 
|Other liabilities                                                      |  | 22   |  |              | 106,267   |   |                                                     | 
|Derivative financial instruments                                       |  | 11   |  |              | 1,931     |   |                                                     | 
|Liabilities in respect of employee benefits, net of
    amounts funded |  | 23   |  |              | 58,716    |   |                                                     | 
|Deferred taxes                                                         |  | 31h  |  |              | 232,752   |   |                                                     | 
|                                                                       |  |      |  |              | 3,857,010 |   |                                                     | 
|Total liabilities                                                      |  |      |  |              | 7,422,371 |   |                                                     | 
|EQUITY:                                                                |  |      |  |              |           |   |                                                     | 
|Equity attributed to equity holders of the Company:                    |  |      |  |              |           |   |                                                     | 
|Ordinary shares of NIS 1 par value                                     |  | 25   |  |              | 79,881    |   |                                                     | 
|Additional paid-in capital                                             |  | 25   |  |              | 1,219,279 |   |                                                     | 
|Other reserves                                                         |  | 26   |  |              | 76,661    |   |                                                     | 
|Accumulated deficit                                                    |  |      |  |              | (711,122  | ) |                                                     | 
|                                                                       |  |      |  |              | 664,699   |   |                                                     | 
|Non-controlling interests                                              |  |      |  |              | 477,090   |   |                                                     | 
|Total equity                                                           |  |      |  |              | 1,141,789 |   |                                                     | 
|Total liabilities and equity                                           |  |      |  |              | 8,564,160 |   |                                                     | 



The accompanying notes
are an integral part of the consolidated financial statements



F-6







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED INCOME STATEMENTS





|                                                                      |  |      |  |                                      |          |   |                     |  |          |      |  |  | Convenience translation
 (note 2b) for the year |  
|--------------------------------------------------------------------- |  | ---- |  | ------------------------------------ | -------- | - | ------------------- |  | -------- | ---- |  |  | ----------------------------------------------- | -
|                                                                      |  |      |  | Year ended December 31               |          |   | ended  December 31, | 
|                                                                      |  |      |  | *2013                                |          |   | *2014               |  |          | 2015 |  |  | 2015                                            |  
|                                                                      |  | Note |  | NIS                                  |          |   | U.S. dollars        | 
|                                                                      |  |      |  | In thousands (except per share data) |         
|Continuing Operations:                                                |  |      |  |                                      |          |   |                     |  |          |      |  |  |                                                 |  
|Revenues                                                              |  |      |  |                                      | 102,666  |   |                     |  | 96,548   |      |  |  | 205,529                                         |  
|Cost of revenues                                                      |  | 27   |  |                                      | 74,388   |   |                     |  | 73,553   |      |  |  | 57,634                                          |  
|Gross profit                                                          |  |      |  |                                      | 28,278   |   |                     |  | 22,995   |      |  |  | 147,895                                         |  
|Selling, general and administrative expenses                          |  | 27   |  |                                      | 92,004   |   |                     |  | 87,242   |      |  |  | 104,890                                         |  
|Other gains                                                           |  | 28   |  |                                      | 3,131    |   |                     |  | 60,899   |      |  |  | 6,113                                           |  
|Other losses                                                          |  | 28   |  |                                      | (3,003   | ) |                     |  | (35,575  | )    |  |  | (57,983                                         | )
|Increase in fair value of investment property, net                    |  | 16   |  |                                      | 45,521   |   |                     |  | 49,894   |      |  |  | 57,464                                          |  
|Share in profit of investment accounted for using the equity method   |  | 6    |  |                                      | 17,253   |   |                     |  | 20,034   |      |  |  | 2,646                                           |  
|Operating  profit (loss) before loss in respect of guarantees to Mega |  |      |  |                                      | (824     | ) |                     |  | 31,005   |      |  |  | 51,245                                          |  
|Loss in respect of guarantees to Mega                                 |  |      |  |                                      | -        |   |                     |  | -        |      |  |  | (137,553                                        | )
|Operating profit (loss)                                               |  |      |  |                                      | (824     | ) |                     |  | 31,005   |      |  |  | (86,308                                         | )
|Finance income                                                        |  | 30   |  |                                      | 21,021   |   |                     |  | 20,626   |      |  |  | 34,647                                          |  
|Finance expenses                                                      |  | 30   |  |                                      | (188,406 | ) |                     |  | (134,434 | )    |  |  | (95,022                                         | )
|Finance expenses, net                                                 |  |      |  |                                      | (167,385 | ) |                     |  | (113,808 | )    |  |  | (60,375                                         | )
|Loss  before taxes on income                                          |  |      |  |                                      | (168,209 | ) |                     |  | (82,803  | )    |  |  | (146,683                                        | )
|Taxes on income                                                       |  | 31   |  |                                      | 23,658   |   |                     |  | 69,676   |      |  |  | 5,071                                           |  
|Loss from continuing operations                                       |  |      |  |                                      | (191,867 | ) |                     |  | (152,479 | )    |  |  | (151,754                                        | )
|Profit (loss) from discontinued operations                            |  | 7    |  |                                      | 74,459   |   |                     |  | (225,482 | )    |  |  | (1,198,173                                      | )
|Net loss                                                              |  |      |  |                                      | (117,408 | ) |                     |  | (377,961 | )    |  |  | (1,349,927                                      | )





| | * | Adjusted retrospectively for discontinued
                                         operations, see Note 7.
| | - | ----------------------------------------------------------------------------------------------------------



The accompanying notes
are an integral part of the consolidated financial statements.



F-7







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED INCOME STATEMENTS





|                                                                                                         |  |      |  |                                          |          |   | Convenience           | 
|-------------------------------------------------------------------------------------------------------- |  | ---- |  | ---------------------------------------- | -------- | - | --------------------- | 
|                                                                                                         |  |      |  |                                          |          |   | translation (note 2b) | 
|                                                                                                         |  |      |  |                                          |          |   | for the year          | 
|                                                                                                         |  |      |  | Year ended December
    31               |          |   | ended December 31,    | 
|                                                                                                         |  |      |  | *2013                                    |          |   | *2014                 | 
|                                                                                                         |  | Note |  | NIS                                      |          |   | U.S. dollars          | 
|                                                                                                         |  |      |  | In thousands (except
    per share data) |         
|Attributable to:                                                                                         |  |      |  |                                          |          |   |                       | 
|Equity holders of the Company                                                                            |  |      |  |                                          |          |   |                       | 
|Continuing operations                                                                                    |  |      |  |                                          | (212,834 | ) |                       | 
|Discontinued operations                                                                                  |  |      |  |                                          | 67,139   |   |                       | 
|                                                                                                         |  |      |  |                                          | (145,695 | ) |                       | 
|Non-controlling interests                                                                                |  |      |  |                                          |          |   |                       | 
|Continuing operations                                                                                    |  |      |  |                                          | 20,967   |   |                       | 
|Discontinued operations                                                                                  |  |      |  |                                          | 7,320    |   |                       | 
|                                                                                                         |  |      |  |                                          | 28,287   |   |                       | 
|                                                                                                         |  |      |  |                                          |          |   |                       | 
|Earnings (loss) per ordinary share or
    ADS attributable to equity  holders of the Company             |  | 32   |  |                                          |          |   |                       | 
|                                                                                                         |  |      |  |                                          |          |   |                       | 
|Basic and diluted                                                                                        |  |      |  |                                          |          |   |                       | 
|Continuing operations                                                                                    |  |      |  |                                          | (3.23    | ) |                       | 
|Discontinued operation                                                                                   |  |      |  |                                          | 1.02     |   |                       | 
|                                                                                                         |  |      |  |                                          | (2.21    | ) |                       | 
|Weighted average number of shares or
    ADSs used for computation of earnings per share (in thousands): |  |      |  |                                          |          |   |                       | 
|Basic and diluted                                                                                        |  |      |  |                                          | 65,954   |   |                       | 





| | * | Adjusted retrospectively for discontinued
                                         operations, see Note 7.
| | - | ----------------------------------------------------------------------------------------------------------



The accompanying notes are an integral part
of the consolidated financial statements.



F-8







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)



|                                                                                          |  |      |  | Year ended December 31 |          |   | Convenience translation
    (note 2b) year ended December 31 | 
|----------------------------------------------------------------------------------------- |  | ---- |  | ---------------------- | -------- | - | ------------------------------------------------------------ | 
|                                                                                          |  |      |  | *2013                  |          |   | *2014                                                        | 
|                                                                                          |  | Note |  | NIS                    |          |   | U.S. dollars                                                 | 
|                                                                                          |  |      |  | In thousands           |         
|Net
    income (loss) for the year                                                        |  |      |  |                        | (117,408 | ) |                                                              | 
|                                                                                          |  |      |  |                        |          |   |                                                              | 
|Other comprehensive income (loss)
    items, net of tax:                                  |  |      |  |                        |          |   |                                                              | 
|                                                                                          |  |      |  |                        |          |   |                                                              | 
|Items that may be reclassified subsequently
    to profit or loss:                        |  |      |  |                        |          |   |                                                              | 
|Continued operations:                                                                     |  |      |  |                        |          |   |                                                              | 
|Available-for-sale financial assets:                                                      |  | 10   |  |                        |          |   |                                                              | 
|Revaluation                                                                               |  |      |  |                        | 1,051    |   |                                                              | 
|Gain from sales transferred to income  statement                                          |  |      |  |                        | (2,076   | ) |                                                              | 
|Currency translation differences                                                          |  |      |  |                        | (6,286   | ) |                                                              | 
|Discontinued
    operations                                                               |  |      |  |                        | 12,226   |   |                                                              | 
|Total items
    that may be reclassified subsequently to profit or loss                   |  |      |  |                        | 4,915    |   |                                                              | 
|                                                                                          |  |      |  |                        |          |   |                                                              | 
|Items that will not be reclassified
    to profit or loss:                                |  |      |  |                        |          |   |                                                              | 
|Continued operations:                                                                     |  |      |  |                        |          |   |                                                              | 
|Revaluation reserve of
    fixed assets reclassified as investment property(note 16b)     |  |      |  |                        | -        |   |                                                              | 
|Re-measurements of post-employment
    benefit obligations                                |  | 23   |  |                        | 189      |   |                                                              | 
|Discontinued
    operations                                                               |  |      |  |                        | (3,047   | ) |                                                              | 
|Total items
    that will not be reclassified to profit or loss                           |  |      |  |                        | (2,858   | ) |                                                              | 
|                                                                                          |  |      |  |                        |          |   |                                                              | 
|Total –
    other comprehensive income                                                    |  |      |  |                        | 2,057    |   |                                                              | 
|Total comprehensive income (loss)
    for the year                                        |  |      |  |                        | (115,351 | ) |                                                              | 
|                                                                                          |  |      |  |                        |          |   |                                                              | 
|Attributable to:                                                                          |  |      |  |                        |          |   |                                                              | 
|Equity holders of the Company                                                             |  |      |  |                        | (144,889 | ) |                                                              | 
|Non-controlling interests                                                                 |  |      |  |                        | 29,538   |   |                                                              | 
|                                                                                          |  |      |  |                        | (115,351 | ) |                                                              | 
|                                                                                          |  |      |  |                        |          |   |                                                              | 
|Total comprehensive income (loss)
     attributable to equity shareholders  arises  from: |  |      |  |                        |          |   |                                                              | 
|Continuing operations                                                                     |  |      |  |                        | (219,214 | ) |                                                              | 
|Discontinued operations                                                                   |  |      |  |                        | 74,325   |   |                                                              | 
|                                                                                          |  |      |  |                        | (144,889 | ) |                                                              | 



| | * | Adjusted retrospectively for discontinued
                                         operations, see Note 7.
| | - | ----------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part
of the consolidated financial statements.



F-9







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



|                                                                       |  | Equity attributable to equity holders of the Company |        |  |                            | 
|---------------------------------------------------------------------- |  | ---------------------------------------------------- | ------ |  | -------------------------- | 
|                                                                       |  | Ordinary shares                                      |        |  | Additional paid-in capital | 
|                                                                       |  | NIS in thousands                                     |       
|                                                                       |  |                                                      |        |  |                            | 
|BALANCE
    AT JANUARY 1 ,2013                                         |  |                                                      | 79,881 |  |                            | 
|Income (loss) for the period                                           |  |                                                      | -      |  |                            | 
|Other comprehensive income (loss)                                      |  |                                                      | -      |  |                            | 
|Total comprehensive income (loss)                                      |  |                                                      | -      |  |                            | 
|Employee share-based payment                                           |  |                                                      | -      |  |                            | 
|Transactions with non-controlling interests                            |  |                                                      | -      |  |                            | 
|Dividends distributed to non-controlling
    interests of subsidiaries |  |                                                      | -      |  |                            | 
|                                                                       |  |                                                      |        |  |                            | 
|BALANCE AT
    DECEMBER 31, 2013                                       |  |                                                      | 79,881 |  |                            | 
|Income (loss) for the period                                           |  |                                                      | -      |  |                            | 
|Other comprehensive income                                             |  |                                                      | -      |  |                            | 
|Total comprehensive income (loss)                                      |  |                                                      | -      |  |                            | 
|Transactions with non-controlling interests                            |  |                                                      | -      |  |                            | 
|Dividends distributed to non-controlling
    interests of subsidiaries |  |                                                      | -      |  |                            | 
|                                                                       |  |                                                      |        |  |                            | 
|BALANCE AT
    DECEMBER 31, 2014                                       |  |                                                      | 79,881 |  |                            | 
|Income (loss) for the period                                           |  |                                                      | -      |  |                            | 
|Other comprehensive income                                             |  |                                                      | -      |  |                            | 
|Total comprehensive income (loss)                                      |  |                                                      | -      |  |                            | 
|Transaction with parent company (note 36d)                             |  |                                                      | -      |  |                            | 
|Transactions with non-controlling interests (notes
    5f, 36d)        |  |                                                      | -      |  |                            | 
|Dividends distributed to non-controlling
    interests of subsidiaries |  |                                                      | -      |  |                            | 
|                                                                       |  |                                                      |        |  |                            | 
|BALANCE AT
    DECEMBER 31, 2015                                       |  |                                                      | 79,881 |  |                            | 



|                                                                       |  | Convenience translation into U.S. dollars in thousands (note 2b) |       
|---------------------------------------------------------------------- |  | ---------------------------------------------------------------- | ------
|BALANCE AT JANUARY 1,
    2015                                         |  |                                                                  | 20,472
|CHANGES DURING 2015:                                                   |  |                                                                  |       
|Income (loss) for the period                                           |  |                                                                  | -     
|Other comprehensive income                                             |  |                                                                  | -     
|Total comprehensive income (loss)                                      |  |                                                                  | -     
|Transaction with parent company (note 36d)                             |  |                                                                  | -     
|Transactions with non-controlling interests (notes
    5f, 36d)        |  |                                                                  | -     
|Dividends distributed to non-controlling
    interests of subsidiaries |  |                                                                  | -     
|BALANCE AT
    DECEMBER 31, 2015                                       |  |                                                                  | 20,472



The accompanying notes are an integral
part of the consolidated financial statements.



F-10







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                 |  |                        |          |   | Convenience | 
|------------------------------------------------------------------------------------------------ |  | ---------------------- | -------- | - | ----------- | 
|                                                                                                 |  |                        |          |   | translation | 
|                                                                                                 |  |                        |          |   | (note 2b)   | 
|                                                                                                 |  |                        |          |   | year ended  | 
|                                                                                                 |  | Year ended December 31 |          |   | December 31 | 
|                                                                                                 |  | (c)2013                |          |   | (c)2014     | 
|                                                                                                 |  | NIS                    |          |   | U.S dollars | 
|                                                                                                 |  | In thousands           |         
|CASH  FLOWS FROM OPERATING
    ACTIVITIES:                                                       |  |                        |          |   |             | 
|Loss before  taxes  on  income
    from continuing operations                                    |  |                        | (168,209 | ) |             | 
|Profit (Loss) before taxes from discontinued operation                                           |  |                        | 38,134   |   |             | 
|Income tax (paid) received, net                                                                  |  |                        | 44,258   |   |             | 
|Adjustments to net cash provided
    by operating activities (a)                                 |  |                        | 690,511  |   |             | 
|Net cash provided by operating
    activities                                                    |  |                        | 604,694  |   |             | 
|                                                                                                 |  |                        |          |   |             | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                            |  |                        |          |   |             | 
|Purchase of property and equipment                                                               |  |                        | (140,007 | ) |             | 
|Purchase of investment property                                                                  |  |                        | (91,041  | ) |             | 
|Purchase of intangible assets                                                                    |  |                        | (12,556  | ) |             | 
|Proceeds (investments) from collection of short-term
    bank deposits and other receivable, net |  |                        | 2,343    |   |             | 
|Proceeds from sale of property and equipment                                                     |  |                        | 21,186   |   |             | 
|Proceeds from sale of investment property                                                        |  |                        | 51,279   |   |             | 
|Proceeds from sale of  marketable securities                                                     |  |                        | 220,264  |   |             | 
|Investment in marketable securities                                                              |  |                        | (379,150 | ) |             | 
|Investment and loans to associates                                                               |  |                        | (36,685  | ) |             | 
|Procceds from sale of associates                                                                 |  |                        | -        |   |             | 
|Investments and grant of loans to former subsidiaries                                            |  |                        | -        |   |             | 
|Grant of long term loans                                                                         |  |                        | (24,258  | ) |             | 
|Collection of long-term loans receivable                                                         |  |                        | 99,435   |   |             | 
|Discontinuance of consolidation (see note 7)                                                     |  |                        | -        |   |             | 
|Interest received                                                                                |  |                        | 18,923   |   |             | 
|Net cash provided by (used in)
    investing activities                                          |  |                        | (270,267 | ) |             | 



The accompanying notes are an integral
part of the consolidated financial statements.



F-11







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS





|                                                                                            |  | Year ended December 31, |          |   | Convenience translation
                                                                                                                                                                                                              (note 2b) for the year Ended December 31, | 
|------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                            |  | 2013                    |          |   | 2014                                                                                                                                                                                                                                                                            | 
|                                                                                            |  | NIS                     |          |   | U.S dollars                                                                                                                                                                                                                                                                     | 
|                                                                                            |  | In thousands            |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                       |  |                         |          |   |                                                                                                                                                                                                                                                                                 | 
|                                                                                            |  |                         |          |   |                                                                                                                                                                                                                                                                                 | 
|Dividend paid to non-controlling interests                                                  |  |                         | (30,723  | ) |                                                                                                                                                                                                                                                                                 | 
|Issuance of debentures                                                                      |  |                         | 732,185  |   |                                                                                                                                                                                                                                                                                 | 
|Repayment of debentures                                                                     |  |                         | (601,147 | ) |                                                                                                                                                                                                                                                                                 | 
|Receipt of long-term loans                                                                  |  |                         | 392,000  |   |                                                                                                                                                                                                                                                                                 | 
|Repayment of long-term loans                                                                |  |                         | (263,151 | ) |                                                                                                                                                                                                                                                                                 | 
|Repayment of commercial papers                                                              |  |                         | -        |   |                                                                                                                                                                                                                                                                                 | 
|Short-term credit from banks and others, net                                                |  |                         | (301,789 | ) |                                                                                                                                                                                                                                                                                 | 
|Loans from parent company (note 36d)                                                        |  |                         | -        |   |                                                                                                                                                                                                                                                                                 | 
|Transactions with non-controlling interests in subsidiaries   without loss of control       |  |                         | 50,338   |   |                                                                                                                                                                                                                                                                                 | 
|Settlement of forward contracts                                                             |  |                         | (9,768   | ) |                                                                                                                                                                                                                                                                                 | 
|Interest paid                                                                               |  |                         | (250,417 | ) |                                                                                                                                                                                                                                                                                 | 
|Net cash used in financing activities                                                       |  |                         | (282,472 | ) |                                                                                                                                                                                                                                                                                 | 
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS                        |  |                         | 51,955   |   |                                                                                                                                                                                                                                                                                 | 
|Translation differences on cash and cash equivalents                                        |  |                         | (9       | ) |                                                                                                                                                                                                                                                                                 | 
|BALANCE OF CASH AND CASH
    EQUIVALENTS AND BANK OVERDRAFTS AT BEGINNING OF YEAR (note 9a) |  |                         | 259,045  |   |                                                                                                                                                                                                                                                                                 | 
|BALANCE
    OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR (note
    9a)   |  |                         | 310,991  |   |                                                                                                                                                                                                                                                                                 | 





The accompanying notes are an integral
part of the consolidated financial statements.



F-12







ALON BLUE SQUARE ISRAEL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS





|    |  |                                                                                           |  |                         |          |   | Convenience  | 
|--- |  | ----------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ------------ | 
|    |  |                                                                                           |  |                         |          |   |              | 
|    |  |                                                                                           |  |                         |          |   |              | 
|    |  |                                                                                           |  |                         |          |   |              | 
|    |  |                                                                                           |  | Year ended December 31, |          |   | December 31, | 
|    |  |                                                                                           |  | 2013                    |          |   | 2014         | 
|    |  |                                                                                           |  | NIS                     |          |   | U.S dollars  | 
|    |  |                                                                                           |  | In thousands            |          |   |              | 
|(a) |  | Adjustments to net cash provided by operating activities:                                 |  |                         |          |   |              | 
|    |  | Adjustments for:                                                                          |  |                         |          |   |              | 
|    |  | Depreciation and amortization                                                             |  |                         | 269,141  |   |              | 
|    |  | Increase in fair value of investment property, net                                        |  |                         | (47,589  | ) |              | 
|    |  | Gain from sale of an associate                                                            |  |                         | -        |   |              | 
|    |  | Share in profit of associates                                                             |  |                         | (27,211  | ) |              | 
|    |  | Dividend received                                                                         |  |                         | 10,030   |   |              | 
|    |  | Share based payment                                                                       |  |                         | (151     | ) |              | 
|    |  | Gain from sale and disposal of property  and equipment, net                               |  |                         | (2,631   | ) |              | 
|    |  | Provision for impairment of property  and equipment and intangible assets, net            |  |                         | 20,912   |   |              | 
|    |  | Changes in fair value of  derivative financial instruments, net                           |  |                         | (8,675   | ) |              | 
|    |  | Linkage differences on monetary assets, debentures, loans and other long term liabilities |  |                         | 59,929   |   |              | 
|    |  | Employee benefit liability, net                                                           |  |                         | (7,631   | ) |              | 
|    |  | Increase in value of investment in securities, deposits and long-term receivables, net    |  |                         | (11,265  | ) |              | 
|    |  | Loss in respect of guarantees to Mega                                                     |  |                         | -        |   |              | 
|    |  | Interest paid, net                                                                        |  |                         | 224,462  |   |              | 
|    |  | Adjustments to fair value, less costs to sell of disposal groups (note 7)                 |  |                         | -        |   |              | 
|    |  | Loss from discontinuance of consolidation (note 7)                                        |  |                         | -        |   |              | 
|    |  | Changes in operating assets and liabilities:                                              |  |                         |          |   |              | 
|    |  | Investment in real estate inventories                                                     |  |                         | (2,717   | ) |              | 
|    |  | Decrease in trade receivables and other accounts receivable                               |  |                         | 169,936  |   |              | 
|    |  | Increase (decrease) in trade payables  and other accounts payable                         |  |                         | (9,850   | ) |              | 
|    |  | Decrease in inventories                                                                   |  |                         | 53,821   |   |              | 
|    |  |                                                                                           |  |                         |          |   |              | 
|    |  | Total                                                                                     |  |                         | 690,511  |   |              | 
|    |  |                                                                                           |  |                         |          |   |              | 
|(b) |  | Supplementary information on investing and financing activities not involving cash flows: |  |                         |          |   |              | 
|    |  | Purchase of property and equipment and investment properties on credit                    |  |                         | 48,249   |   |              | 
|    |  | Proceeds from sale of property and equipment on credit                                    |  |                         | -        |   |              | 
|    |  | Proceeds from saleofan associate on credit                                                |  |                         | -        |   |              | 
|    |  |                                                                                           |  |                         |          |   |              | 
|(c) |  | Discontinued operations  :                                                                |  |                         |          |   |              | 
|    |  | Net cash provided by operating activities                                                 |  |                         | 612,093  |   |              | 
|    |  | Net cash provided (used in) investing activities                                          |  |                         | (101,075 | ) |              | 
|    |  | Net cash used in financing  activities                                                    |  |                         | (341,181 | ) |              | 
|    |  |                                                                                           |  |                         | 169,837  |   |              | 









The accompanying notes are an integral part
of the consolidated financial statements.



F-13







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 – GENERAL:



| | a. | Activity
| | -- | --------



Alon Blue Square Israel Ltd.
("Blue Square") is an Israeli corporation, which, directly and through its subsidiaries and jointly controlled entities
(together - the Company) mainly operates in Israel. The Company is controlled by Alon Israel Oil Company Ltd ("Alon").
All references to the Company include, unless the context otherwise indicates, Blue Square and its subsidiaries. ADSs and shares
of the Company are listed for trading on the New-York Stock Exchange (the "NYSE") and on the Tel-Aviv Stock Exchange
(the "TASE").



As to the possible change of
control of the Company, subsequent to December 31, 2015 – see note 37.



As of December 31, 2015, the
Company’s main continuing operations consist of the Real Estate segment (through Blue Square Real Estate Ltd.; hereafter-BSRE).
Two other reportable segments have been classified and are presented in these financial statements as discontinued operations:
(1) Fueling and Commercial sites through Dor Alon Energy In Israel (1988) Ltd. (hereafter-Dor Alon; held for sale) and (2) Houseware
and Textile (Retail and Wholesale) through Naaman Group (NV) Ltd. (hereafter- Naaman; held for sale). During 2015, the Company
lost control over its former Supermarkets segment operated under Mega Retail Ltd (hereafter-Mega, see also note 5a). Dor Alon
and Naaman are public companies whose securities are traded in the Tel Aviv Stock Exchange.



| | b. | The Company's liquidity
                                         position
| | -- | -------------------------------------------------------------------------





As described in Note 5a, in
July 2015, Mega entered into certain debt arrangements in connection which the Company undertook various further obligations to
support Mega. Since July 2015, the following has occurred.



In November 2015, and prior to the proposals of the Potential Buyer (also referred to as "Ben Moshe";
see Note 37b and Note 37c for a description of the proposals), the Company formulated an outline with its financial creditors (banks
and bondholders) for rescheduling the Company's debts to them (Note 21d(1)(a)). These agreements have not yet materialized into
a binding agreement.









In January 2016, Mega filed
with the court a motion for stay of proceedings, and trustees were appointed by the court for Mega. In view of the stay of proceedings,
the trustees and various creditors filed claims and demands against the Company, including the exercise of guarantees.









In February 2016, the
parent company of the Company received a proposal by the Potential Buyer to purchase the entire holding of the parent company
in the Company following which a motion was filed on May 8, 2016 with the District Court of Lod in Israel to convene meetings
of the Company's financial creditors and shareholders in order to approve a proposed debt reorganization and arrangement
under Section 350 of the Israeli Companies Law (see note 37b and 37c for more details regarding such proposal and
arrangement).







On May 5, 2016, the trustees
of Mega received a proposal from the Potential Buyer to purchase Mega.





The proposal to acquire the
Company is contingent on the approval by the court and satisfaction of the conditions to the closing of the Potential Buyer's offer
to acquire Mega, as well as the creditors arrangement based on that offer. In connection with such proposals, the Company terminated
negotiations to sell its holdings in its two main subsidiaries.















ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS







NOTE 1 – GENERAL (continued)



| | b. | The Company's liquidity position (continued)
| | -- | --------------------------------------------



There is uncertainty regarding:



a) The
completion of the purchase of the control of the Company by the Potential Buyer

b) The
approval of the proposed debt reorganization and arrangement by the Company creditors and shareholders

c) The
approval of the Potential Buyer to acquire Mega

d) Negotiations
for the sale of the Company's holdings in subsidiaries and any other assets



In case the proposal to acquire
the Company does not occur, the financing resources available to the Company for its continued operations are limited to a very
restricted timeframe. The Company will be forced to immediately realize its holdings and assets, at terms that may not necessarily
be market terms in order to repay its liabilities to creditors.



The Company's motion to the
court requested also to grant it several court orders to assist it in carrying out the Arrangement to completion, inter alia, a
grace period was requested so that the Company 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.



In light of the above, there
is substantial doubt about the Company's ability to continue as a going concern. The Company's consolidated financial statements
do not include adjustments, as to the values of assets and liabilities or their classification that may be required should the
Company be unable to continue its operations as a going concern.





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.  Following the
trustees' request, Ben Moshe and a company under his control filed a motion with the Court requesting the setting of a date for
an urgent hearing during which, according to Ben Moshe, the Court would be able to hear each party's arguments in a manner which
would be beneficial towards Mega Retail's creditors, or alternatively, determine that Ben Moshe can respond to the trustees' notice
within a time frame determined by the court. As part of the request 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 NIS 40 million. In addition, Ben Moshe detailed in his motion alleged inconsistencies
in the notice filed by the trustees.



As of the date of this Annual
Report, the Company does not know if and how the court will respond to the request of the trustees and/or if the offer of Bitan
Wines will be included as part of a final binding Mega Retail arrangement.  In addition, the Company 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 it may be feasible that Ben Moshe's Proposal will include Mega Retail, as in the proposed debt reorganization and arrangement
for the Company submitted to court on May 8, 2016), or alternatively, that the Company 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 certaintythat 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, the Company cannot estimate the ramifications of such notice of the trustees of Mega Retail.









F-14







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:







| | a. | Basis of presentation
| | -- | ---------------------



The consolidated financial
statements of the Company have been prepared in accordance with International Financial Reporting Standards (hereafter –
"IFRS") as issued by the International Accounting Standard Board (hereafter – "IASB").



The consolidated financial
statements have been prepared under the historical cost convention, unless otherwise indicated.



The Company presents its share
of profits in jointly controlled entities and associates which are integral to the Company's activity as part of operating profit.



The preparation of financial
statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise
its judgment in the process of applying the Company's accounting policies. The areas involving a higher degree of judgment or
complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in
note 4. Actual results may differ materially from estimates and assumptions used by the Company's management.



| | b. | Functional
                                         currency and convenience translation
| | -- | ----------------------------------------------------------------------------------------



The financial statements are
presented in New Israeli Shekel (NIS), which is the functional currency of the Company and most of its subsidiaries.



For the convenience of the
reader, the reported NIS amounts as of December 31, 2015 have been translated into U.S. dollars, at the representative rate of
exchange on December 31, 2015 (U.S. $1 = NIS 3.902). The U.S. dollar amounts presented in these financial statements should not
be construed as representing amounts that are receivable or payable in dollars or convertible into dollars, unless otherwise indicated.



The results and financial
position of all the group entities whose functional currency is different from the NIS are translated into NIS as follows:



Assets and liabilities for
each statement of financial position presented are translated at the closing rate of that statement. However, where the exchange
difference arises on an intragroup balance that, in substance, forms part of an entity's net investment in a foreign operation
then the exchange difference is not recognized in the statement of income but is recognized in other comprehensive income and
accumulated in a separate component of equity until the disposal of the foreign operation.



Income and expenses for each
statement of income are generally translated at average exchange rates.



All resulting exchange differences
are recognized in other comprehensive income.



F-15







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)



| | c. | Consolidated financial
                                         statements
| | -- | --------------------------------------------------------------------------



The consolidated financial
statements include the accounts of the Company and its subsidiaries. Subsidiaries are all entities over which the Company has
control. Subsidiaries are fully consolidated from the date on which control is transferred to the company. They are deconsolidated
from the date that control ceases.



Inter-company transactions,
balances and unrealized gains on transactions between group companies are eliminated. Accounting policies of subsidiaries have
been changed where necessary to ensure consistency with the policies adopted by the Company.



After initial recognition,
goodwill in subsidiaries is measured at cost less any accumulated impairment losses. For the purposes of impairment testing, goodwill
acquired in a business combination is, from the acquisition date, allocated to each of the Company's cash generating units that
are expected to benefit from the combination.



As to the presentation of
subsidiaries that are presented as discontinued operation – see ae. Below.



Transactionswith non-controlling
interests



The Company treats transactions
with non-controlling interests as transactions with equity owners of the Company. For purchases from non-controlling interests,
the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary
is recorded in equity. Gains and losses on disposals to non-controlling interests without loss of control are also recorded in
equity.



Joint Arrangement



The Company applies IFRS 11
to all joint arrangements. Under IFRS 11, investments in joint arrangements are classified as either joint operations or joint
ventures depending on the contractual rights and obligations of each investor. The Company has assessed the



nature of its joint arrangements.
Those arrangements that are structured through separate vehicles in which the Company does not have rights to the assets or obligations
to the liabilities, are considered to be joint ventures. Certain jointly owned properties, which are not structured through separate
vehicles are considered to be joint operations. Joint ventures are accounted for using the equity method. The joint operation
is included in the Company's financial statements based on the Company's share in the assets, liabilities, income and expenses,
as determined in the joint arrangement between the parties.



Under the equity method of
accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Company’s
share of the post-acquisition profits or losses and movements in other comprehensive income.



Unrealised gains and losses
on transactions between the Company and its joint ventures are eliminated to the extent of the Company’s interest in the
joint ventures. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies
adopted by the company.



Associates



Associates are companies in
which the Company has significant influence over the financial and operating policies without having control.





The investment in associates
is accounted for using the equity method.





F-16









ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)



| | c. | Consolidated
                                         financial statements(continued)
| | -- | -------------------------------------------------------------------------------------



Goodwill relating to the acquisition
of an associate is initially measured as the difference between the acquisition cost and the company's share in the fair value
of the associate's net identifiable assets, liabilities and contingent liabilities. After initial recognition, goodwill is measured
at cost and is not systematically amortized.



After application of the equity
method, the Company determines whether it is necessary to recognize any additional impairment loss with respect to the investment
in associates. The Company determines at the end of each reporting period whether there is objective evidence that the carrying
amount of the investment in the associate is impaired. If there is objective evidence, as above, the amount of the loss is calculated
as the difference between the recoverable amount of the investment in the associate and its carrying amount.



The recoverable amount is
the higher of value in use and fair value less costs to sell based on the estimated net cash flows to be generated by the associate.



Impairment loss, as above,
is not allocated specifically to goodwill that forms part of the investment and, accordingly, any reversal of that impairment
loss is recognized to the extent that the recoverable amount of the investment subsequently increases.



Profits and losses resulting
from transactions between the Company and the associate are eliminated to the extent of the interest in the associate.



| | d. | Segment reporting
| | -- | -----------------



Segment information is reported
in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision
maker is the function responsible for allocating resources and assessing performance of the operating segments. The chief operating
decision maker does not review information regarding segment assets and segment liabilities in his performance measurement.



| | e. | Foreign currency transactions
| | -- | -----------------------------



Transactions in foreign currency
are translated into NIS using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and
liabilities denominated in foreign currencies are recognized in the statements of income.



Foreign exchange gains and
losses are presented in the income statement within finance income or expenses.



Translation differences on
non-monetary financial assets, such as securities classified as available for sale, are included in other comprehensive income.



F-17







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)



| | f. | Property and equipment
| | -- | ----------------------



Property and equipment are
initially recognized at acquisition or construction cost. Cost includes expenditure that is directly attributable to the acquisition,
construction or installation of the items, capitalization of borrowing costs during the construction period of qualified assets
and expected costs for dismantling and restoring the site on which it is located. Property and equipment included as part of the
acquisition of a subsidiary is included at the fair value as at the date of acquisition. Repairs and maintenance are charged to
the income statement during the financial period in which they are incurred.



Purchased land is not depreciated.
Depreciation of other assets is calculated using the straight-line method to allocate their cost to their residual values over
their estimated useful lives, as follows:



|                                       |  | Years           
|-------------------------------------- |  | ----------------
|Leased lands                           |  | 50-100          
|Buildings                              |  | 50              
|Leasehold improvements                 |  | 12              
|Motor vehicles                         |  | 5-7             
|Furniture, equipment and installations |  | 5-16 (mainly 16)



Leased assets and leasehold
improvements are depreciated using the straight-line method to allocate their cost over their estimated useful lives.



An asset carrying amount is
written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.



Gains and losses on disposals
are determined by comparing the proceeds with the carrying amount and are recognized within "Other gains (losses)" in
the income statement.



| | g. | Investment
                                         property
| | -- | ------------------------------------------------------------



| | 1) | Investment property is
                                         held for long-term rental yields or value appreciation and is not occupied by the Company.
                                         Investment property is initially measured at cost, including transaction costs. Subsequent
                                         to initial recognition, investment property is stated at fair value, reflecting market
                                         conditions, determined at least annually by one of the following independent appraisers,
                                         "Haushner Civil Eng. & Real Estate Appraisal Ltd.", "Greenberg Olpiner
                                         & co." and "Barak Friedman Cohen & Co. Economic & Real Estate Appraisal."
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Fair value of investments property
                                         is based on current prices in an active market-to the extent these are available, adjusted,
                                         if necessary, for any differences in the nature, location or condition of the specific
                                         asset. If such information is not available, the Company uses alternative sources such
                                         as recent prices on less active markets or discounted cash flow projections.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Gains and losses arising from
changes in fair value are recorded in the income statement under "Changes in fair value of investment property, net"
in the period in which they arise.



When the use of a property
changes from owner-occupied to investment property, which is measured at fair value, the property is remeasured to fair value
and reclassified as investment property. Any gain arising on remeasurement is recognized in other comprehensive income and presented
within equity in a revaluation reserve, unless the gain reverses a previous impairment loss on the specific property, in which
case the gain is first recognized in profit or loss. Any loss is recognized directly in profit or loss.



F-18







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | g. | Investment
                                         property(continued)
| | -- | -----------------------------------------------------------------------



Land that is held under an
operating lease with The Israel Lands Authority or local authorities that is classified and accounted for as an investment property,
is initially recognized as an asset and the lease obligation as a liability, in a manner similar to a finance lease.



Revenue from the sale of investment
property, is recognized when the significant risks and rewards of ownership of the property have been transferred to the buyer;
such revenue is not recognized where there are significant uncertainties as to the collection of the consideration of the transaction,
the costs related thereto, or when the Company has significant continuing involvement in the property that was sold.



| | h. | Intangible assets:
| | -- | ------------------



Goodwill



Goodwill arises on the acquisition
of subsidiaries, associates and joint ventures and represents the excess of the consideration transferred over the interest in
net fair value of the net identifiable assets, liabilities and contingent liabilities of the acquiree.



For the purpose of impairment
testing, goodwill acquired in a business combination is allocated to each of the cash generating units ("CGUs"), or
group of CGUs, that is expected to benefit from the synergies of the combination.



When exiting an activity,
a proportional amount of goodwill is attributed to the carrying amount of the sold activity.



Goodwill impairment reviews
are undertaken at least annually. The carrying value of goodwill is compared to the recoverable amount, which is the higher of
value in use and the fair value less costs to sell. Any impairment is recognized immediately as an expense and is not subsequently
reversed. Due to the events in 2015, goodwill attributed to the retail activities of the company (Food and Houseware & Textile)
was tested for impairment and was written off entirely (see note 17 and 8b). The impairment loss was classified within discontinued
operations.



Brand names, trademarks
and customer relationships



The cost of brand names, trademarks
and customer relationships acquired in a business combination is their fair value at the date of acquisition. Trade marks that
have indefinite lives are not amortized, but are reviewed for impairment at least annually. After initial recognition, those intangible
assets, that have finite useful lives, are carried at cost less accumulated amortization and any accumulated impairment losses.
Amortization is calculated using the straight-line method to allocate the cost over their estimated useful lives (brand names
and trademarks - eight to fifteen years and customer relationships – seven to fifteen years).



Computer software



The costs of separately acquired
computer software licenses are capitalized and amortized over their estimated useful lives (mainly four years).



Computer software development
costs recognized as assets are amortized over their estimated useful lives (not exceeding five years).



F-19







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | h. | Intangible assets(continued):
| | -- | -----------------------------



Evacuation fees



Amounts paid to assume existing
operating lease agreements are presented at cost net of accumulated amortization and impairments. These costs are amortized over
the remaining term of the lease.



Fees paid on the establishment
of loan facilities



Fees paid on the establishment
of loan facilities are deferred until the draw-down occurs. To the extent that there is no evidence that it is probable that some
or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the
period of the facility to which it relates.



Favorable and unfavorable
operating lease contracts



The Company determines for
each operating lease acquired whether the terms are favorable or unfavorable. The Company recognizes an intangible asset if the
terms of an operating lease are favorable relative to market terms and a liability if the terms are unfavorable relative to market
terms. The favorable and unfavorable lease contracts are amortized over their contractual terms.



| | i. | Impairment of definite
                                         life non-financial assets
| | -- | -----------------------------------------------------------------------------------------



Assets that are subject to
depreciation and amortization are reviewed for impairment at each statement of financial position date whenever any events have
occurred or changes in circumstances have taken place, which might indicate that there has been impairment of the non-financial
assets. When such indicators of impairment are present, the Company evaluates whether the carrying value of the asset can be recovered,
and if necessary, records an impairment provision for the amount needed to write down the carrying amount to the recoverable amount.



The recoverable amount
of an asset is the higher of the asset’s fair value less costs to sell and its value in use. Value in use is based on
estimated future cash flows from the continued use of the asset, including those expected at the time of its future
retirement and disposal discounted to their present value using a discount rate that reflects the time value of money and the
risks specific to the asset. In determining the value in use of an asset, the Company uses best available estimates as to the
conditions that are expected to prevail during the remaining useful life of the asset and as to the current condition of the
asset. In computing the fair value less costs to sell of real estate, including land and lease rights, the Company makes use
of valuations prepared by appraisers.



An impairment loss is recognized
in the income statement under "other losses". Definite life non-financial assets that suffered impairment are reviewed
for possible reversal of the impairment at each reporting date.



For a cash-generating unit
to which goodwill has been allocated, any impairment loss relating to that unit is initially applied to the goodwill and the balance
to the carrying amount of the other assets.



F-20







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | j. | Borrowing costs
| | -- | ---------------



General and specific borrowing
costs directly attributable to the acquisition or construction of any qualifying asset (including investment property, real estate
inventories and land and buildings) are capitalized during the period of time that is required to complete and prepare the asset
for its intended use. Other borrowing costs are expensed in the period they occur.



| | k. | Financial assets
| | -- | ----------------



Classification



The Company classifies its
financial assets in the following categories: at fair value through profit or loss, loans and receivables and available for sale.
The classification depends on the purpose for which the financial assets were acquired. Management determines the classification
of financial assets at initial recognition. Financial assets are classified as current assets if expected to be settled or disposed
of within one year from the date of the statement of financial position; otherwise they are classified as non-current.



Financial assets
at fair value through profit or loss



This category includes financial
assets held for trading and those designated at fair value through profit or loss, because they are managed and their performance
is evaluated on a fair-value basis. Derivative financial instruments are also classified in this category.



Loans and receivables



Loans and receivables are
non-derivative financial assets with fixed or determinable payments that are not quoted in an active market.



Available-for-sale financial
assets



Available-for-sale financial
assets are non-derivatives that are either designated in this category or not classified to any of the other categories.



Recognition and measurement



Investments are initially
recognized at fair value with transaction costs added to the carrying value for financial assets not carried at fair value through
profit or loss are expensed in the statement of income for all other financial assets. Available-for-sale financial assets and
financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently
carried at amortized cost using the effective interest method.



Gains or losses arising from
changes in the fair value of the "financial assets at fair value through profit or loss" category are presented in the
income statements within finance income or expenses in the period in which they arise.



F-21







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | k. | Financial assets
                                         (continued):
| | -- | ----------------------------------------------------------------------



Changes in the fair value
of monetary and non-monetary available-for-sale securities are recognized in other comprehensive income (hereafter – OCI).
Interest on securities that are available for sale calculated using the effective interest method is recognized in the statement
of income as part of "finance income or expenses".



When securities classified
as available-for-sale are sold or impaired, the accumulated fair value adjustments recognized in OCI are reclassified and included
in the income statements as part of finance income or expenses.



Assets carried at amortized
cost





The Company assesses at the
end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired.
The reversal of the previously recognized impairments loss is recognized in the consolidated income statements.





Assets classified as available
for sale



The Company assesses at the
end of each reporting period whether there is objective evidence that a financial asset or a group of financial assets is impaired.
Impairment losses recognized in the consolidated income statements on equity instrument are not reversed through the consolidated
income statements. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases
and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss,
the impairment loss is reversed through the consolidated income statements.



| | l. | Customers' deposits
| | -- | -------------------



The amounts presented as at
December 31, 2014 reflect the amounts that can be demanded by customers upon the return of containers and other loaned equipment
and presented among current liabilities. As of December 31, 2015, these are presented as part of a disposal group held for sale.



| | m. | Derivative financial
                                         instruments
| | -- | -------------------------------------------------------------------------



Derivative financial instruments
and separable embedded derivatives are initially recognized at fair value on the date a derivative contract is entered into and
are subsequently re-measured at their fair value, with changes recognized as "finance income or expenses", since they
do not meet hedge accounting criteria.



F-22







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | n. | Inventories
| | -- | -----------



Inventories are stated at
the lower of cost and net realizable value. Cost, except for real estate inventories, is determined mainly by the “first-in,
first-out” (FIFO) method, and is presented net of provisions for slow moving inventories and for shrinkage of consumer products.



Cost of real estate inventories
is specific and includes capitalization of borrowing costs for long term projects. Real estate inventories are stated at the lower
of cost and net realizable value. Cost includes the directly identifiable expenses of the acquisition of the inventories and capitalized
borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less an estimated cost
to complete and applicable selling expenses.



| | o. | Trade receivables
| | -- | -----------------



Trade receivables are recognized
initially at fair value and subsequently measured at amortized cost using the effective interest method, less allowance for doubtful
accounts. If collection is expected in one year or less, they are classified as current assets, if not, they are presented as
non-current assets.



| | p. | Cash and cash equivalents
| | -- | -------------------------



Cash and cash equivalents
include cash in hand, short-term bank deposits and other short-term highly liquid investments with original maturities of three
months or less.



Bank overdrafts are presented
within credit and loans from banks and others in current liabilities in the statement of financial position. For the purposes
of the consolidated statement of cash flows, cash and cash equivalents are presented net of bank overdrafts.



| | q. | Share capital
| | -- | -------------



Ordinary shares are classified
as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from issuance
proceeds. Where the Company purchases the Company's equity share capital (treasury shares), the consideration paid, including
any directly attributable incremental costs is deducted from equity attributable to the Company's equity holders.



| | r. | Trade payables
| | -- | --------------



Trade payables are recognized
initially at fair value and subsequently measured at amortized cost using the effective interest method.



F-23







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | s. | Borrowings
| | -- | ----------



Borrowings (including loans,
debentures and convertible debentures) are recognized initially at fair value, net of transaction costs incurred. The difference,
if any, between the proceeds (net of transaction costs) and the maturity amount is recognized in the income statements over the
period of the borrowings using the effective interest method.



For convertible debentures,
in which the conversion component constitutes an embedded derivative (and not equity) whose economic characteristics and risks
are not closely related to the debentures, the debentures are initially recognized as the difference between the total proceeds
from issuance and the fair value of the bifurcated embedded derivative at the date of issuance. Subsequent to initial recognition,
the embedded derivative is measured at each statement of financial position date at fair value with changes recognized in financial
income or expenses in the income statements, while the debentures are measured at amortized cost.



| | t. | Current and deferred
                                         income taxes
| | -- | --------------------------------------------------------------------------



Current taxes



Current tax is the expected
tax payable (or receivable) on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting
date. Current taxes also include taxes in respect of prior years.



Uncertain tax positions



A provision for uncertain
tax positions, including additional tax and interest expenses, is recognized when it is more probable than not that the Company
will have to use its economic resources to pay the obligation.



Deferred taxes



Deferred tax is recognized
in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax is not recognized for the initial recognition of goodwill and for differences
relating to investments in subsidiaries, jointly controlled entities and associates, to the extent that the Company is able to
control the timing of the reversal of the temporary difference and it is probable that they will not reverse in the foreseeable
future, either by way of selling the investment or by way of distributing dividends in respect of the investment.



Deferred tax is measured at
the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted
or substantively enacted by the reporting date.



F-24







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | t. | Current and deferred
                                         income taxes (continued):
| | -- | ---------------------------------------------------------------------------------------



A deferred tax asset is recognized
for unused tax losses, tax benefits and deductible temporary differences, to the extent that it is probable that future taxable
profits will be available against which they can be utilized. Deferred tax assets are written down to the extent that their utilization
is no- more probable.



Offset of deferred tax
assets and liabilities



Deferred tax assets and liabilities
are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes
levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax
liabilities and assets on a net basis or their tax assets and liabilities will be realized simultaneously.



| | u. | Employee benefits
| | -- | -----------------



Retirement benefit obligations



The Company's pension liabilities
are generally funded through payments to insurance companies or trustee-administered funds. The Company has both defined benefit
and defined contribution pension plans.



The Company's defined benefit
obligation is based on the amount of benefits that the relevant employees are entitled to receive upon retirement, which is based
on the number of years of employment and the employee’s last monthly salary.



The retirement benefit obligation
recognized in the statement of financial position is the present value of the defined benefit obligation at the statement of financial
position date less the fair value of plan assets. The defined benefit obligation is calculated annually by Ernst & Young Israel,
an independent qualified actuary (hereafter – the independent qualified actuary) using the projected unit credit method.



According to IAS 19 employee
benefits, the present value of the defined benefit obligation is determined by discounting the estimated future cash outflows
using interest rates of "deep market" for high-quality corporate bonds.



The net interest cost is calculated
by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets.



Actuarial gains and losses
arising from experience adjustments and changes in actuarial assumptions, including the effect of the change in estimate as above,
are charged or credited to equity in other comprehensive income, in the period in which they arise.



F-25







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued):



| | u. | Employee
                                         benefits (continued)
| | -- | ----------------------------------------------------------------------





The Company purchases insurance
policies and regularly contributes to retirement benefit funds to meet retirement obligations. For defined contribution plans in
which the Company has no further payment obligations once the contributions have been paid, the contributions are recognized as
employee benefit expenses when they are paid.





Vacation and recreation
benefits



Every employee is legally
entitled to vacation and recreation benefits, both computed on an annual basis. This entitlement is based on the terms of employment.
The Company records a liability and expense for vacation and recreation pay, based on the benefits that have been accumulated
for each employee.



Share-based payments



The Company operates an equity-settled,
share-based compensation plan. Under this plan, the Company grants its employees stock options at its discretion. The fair value
of the employee services received in exchange for the grant of the options is recognized as an expense in the statement of income
with a corresponding credit to accumulated deficit in equity. The total amount to be expensed over the vesting period is determined
by reference to the fair value of the options on the date on which they are granted.



Profit sharing and bonus
plans



The Company accrues for bonuses
and profit-sharing for certain employees. The Company recognizes a provision where contractually obligated or where there is a
past practice that has created a constructive obligation.



Termination benefits



Termination benefits are payable
when employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy
in exchange for these benefits. The Company recognizes termination benefits when it is demonstrably committed according to a detailed
formal plan without possibility of withdrawal to either: terminating the employment of current employees; or providing termination
benefits as a result of an offer made to encourage voluntary redundancy.



Benefits falling due more than
12 months after the statement of financial position date are discounted to their present value.



| | v. | Provisions
| | -- | ----------



Provisions for environmental
restoration and legal claims are recognized when the Company has a present legal or constructive obligation as a result of a past
event; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated.



Provisions are measured at
present value according to management's best estimate of the expenditure required to settle the obligation at the statement of
financial position date. The increase in the provision due to passage of time is recognized as interest expense.



F-26







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued):



| | w. | Comprehensive income
| | -- | --------------------



Comprehensive income is comprised
of net income for the year and other income and expense items that are not taken into account in determining net income and which
are considered components of other comprehensive income; The Company's other comprehensive income or loss items are in respect
of fair value adjustments of available for sale financial assets, exchange differences on translation of foreign operations, remeasurement
and losses of employee defined benefit plans and revaluation reserve for fixed assets.



Other comprehensive income
for discontinued operations is presented separately (comparative figures have been adjusted retrospectively to conform with such
presentation). See also ae. below.



| | x. | Revenue recognition
| | -- | -------------------



Revenue comprises the fair
value of the consideration received or receivable for the sale of goods in the ordinary course of the Company’s activities.



When the Company acts as an
agent or an intermediary without bearing the risks and rewards resulting from the transaction, revenues are presented on a net
basis. However, when the Company bears the risks and rewards resulting from the transaction, revenues are presented on a gross
basis, distinguishing the revenue from the related expenses.



The Company recognizes revenue
when the amount can be reliably measured, it is probable that future economic benefits will flow to the Company and when specific
criteria have been met for each of the Company’s activities as described below. The Company bases its estimates on past
experience, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.



Sales of goods –
retail (mainly discontinued operations)



Sales of goods and oil products
are recognized when a product is sold to the customer. Retail sales are usually paid for by credit card, by checks or in cash.



Discounts are recognized as
a reduction of sales upon recognition of the related sales.



Revenue from the sale of gift
certificates is deferred and is recognized as income when the gift certificate is redeemed for the purchase of goods, or when
the likelihood that the customer will redeem the certificate, based on the Company's experience, becomes remote.



Liquefied Petroleum Gas (hereafter
– LPG) for domestic use – the sales of LPG are recognized as revenues in accordance with the quantities consumed in
the reported periods.



Sales of goods –
wholesale (mainly discontinued operations)



The Company sells a range
of products (apparel, housewares, infant products and toys) in the wholesale market.



Sales of goods are recognized
when the products are delivered to the wholesaler. The criteria for delivery are satisfied when the products have been shipped
to the specified location, the risks of obsolescence and loss have been transferred to the wholesaler, and either the wholesaler
has accepted the products in accordance with the sales contract, the acceptance provisions have lapsed, or the Company has objective
evidence that all criteria for acceptance have been satisfied.



F-27







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued):



| | x. | Revenue recognition(continued)
| | -- | ------------------------------



Sales are recorded based on
the price specified in the sales contract, net of estimated volume discounts returns at the time of sale. No element of financing
is deemed present as the sales are made under normal credit terms, which are consistent with market conditions.



Sales of oil products, lubricants
and gas are recognized at the date of supply to the customer.



Rental revenue



The Company’s lease
agreements are “net” lease agreements, which require the tenants to pay all property related expenses. The rental
revenue is recognized on a straight-line basis over the rent period. Contingent rentals (such as revenue based rentals), are recognized
when their payment is probable.



Revenue from sales of real
estate assets



Revenue from the sale of real
estate assets are recognized when the significant risks and rewards of ownership have passed to the buyer. Revenue is not recognized
if there are significant uncertainties with respect to the collection of the consideration from the transaction, or the costs
associated with it, or if there is a continuing involvement of the Company with respect to the sold property.



Revenue from sale of residential
units (associated company) are recognized, in general, when the unit is delivered to the customer.



Revenue and costs of construction
contracts (associated company) are recognized in accordance with the stage of completion at the end of the reporting period, provided
the outcome of the contract can be reliably measured. Loss is recognized immediately, if expected total costs exceed contract
revenue.



Revenue from cellular operation



Revenues from services is
recognized and recorded when the services are provided. Revenues derived from sale of handsets are recognized upon delivery of
the handset to the customer.



| | y. | Finance income and
                                         expenses
| | -- | --------------------------------------------------------------------



Finance income mainly comprises
interest income on funds invested, dividend income, net gains from changes in the fair value of financial assets measured at fair
value through profit or loss, net gains from marketable securities, foreign currency gains, and net gains from changes in the
fair value of derivative instruments that are recognized in the income statement.



Finance expense mainly comprises
interest expense on loans received and debentures issued, net losses from changes in the fair value of financial assets measured
at fair value through profit or loss, foreign currency losses, financing expenses paid under finance leases and net losses from
changes in the fair value of other derivative instruments.



F-28







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued):



| | z. | Leases
| | -- | ------



Leases in which a significant
portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under
operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis
over the period of the lease.



Leases of property where the
Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized
at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.



| | aa. | Dividend distribution
| | --- | ---------------------



A dividend distribution to
the Company's shareholders is recognized as a liability in the Company’s financial statements in the period in which the
dividends are approved by the Company’s Board of Directors.



| | ab. | Earnings per share
| | --- | ------------------



Basic earnings per share are
calculated by dividing the net income attributable to equity holders of the Company by the weighted-average number of Ordinary
shares outstanding during the period.



Diluted earnings per share
are calculated by adjusting the net income (loss) attributable to equity holders of the Company and the weighted-average number
of outstanding Ordinary shares for the effect of all potential Ordinary shares that are dilutive including share options granted
to employees.



| | ac. | Non-current assets
                                         and disposal group held for sale and discontinued operations
| | --- | ------------------------------------------------------------------------------------------------------------------------



Non-current assets (or group
of assets and liabilities for disposal) are classified as held for sale if it is highly probable that they will be recovered primarily
through a sale transaction and not through continuing use. These assets are presented at the lower of their carrying amount and
fair value less cost to sell.



In subsequent periods, depreciable
assets classified as held for sale or distribution are not periodically depreciated, and investments in associates classified
as held for sale are not accounted for by the equity method.



A component of an entity that
has been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area
of operations that is a part of a single co- ordinated plan of sale, is classifiedas discontinued
operations.



Income and expenses relating
to discontinued operation are presented net in the statement of income and comprehensive income, as a separate line item, net
of related taxes; the gain or loss from disposition, or from the adjustment of the disposal group carrying amounts to its fair
value less cost to sell, is presented as part of this line items.



Comparative figures in the statements of income and comprehensive
income are retrospectively restated in order to present the discontinued operation, separately from the continuing operations
of the Company. Intercompany transactions between the continuing and discontinued operations are eliminated.



F-29







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES(continued):



| | ad. | New and Amended IFRS
                                         and Interpretations
| | --- | ---------------------------------------------------------------------------------



New
International Financial Reporting Standards, Amendments to Standards and New interpretations



Standards, amendments and
interpretations which are effective for the financial year beginning on 1 January 2015 are not material to the group.



A number of new standards
and amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2016, and have
not been applied in preparing these consolidated financial statements. None of these is expected to have a significant effect
on the consolidated financial statements of the Company, except the following set out below:



IFRS 9, ‘Financial instruments,
addresses the classification, measurement and recognition of financial assets and financial liabilities. The complete version
of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classification and measurement of financial
instruments. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for
financial assets: amortized cost, fair value through OCI and fair value through P&L.



The basis of classification
depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments
in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception
to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred
loss impairment model used in IAS 39. For financial liabilities there were no changes to classification and measurement except
for the recognition of changes in own credit risk in other comprehensive income, for liabilities designated at fair value through
profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests.
It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to
be the same as the one management actually use for risk management purposes. Contemporaneous documentation is still required but
is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1
January 2018. Early adoption is permitted. The Company is yet to assess IFRS 9’s full impact.



IFRS 15, ‘Revenue from
contracts with customers’ deals with revenue recognition and establishes principles for reporting useful information to
users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s
contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability
to direct the use and obtain the benefits from the good or service.

The standard replaces IAS
18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective
for annual periods beginning on or after 1 January 2018 and early adoption is permitted. The Company is assessing the impact of
IFRS 15.



There are no other IFRSs or
IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Company.



F-30







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS:



| | a. | Financial
                                         risk factors
| | -- | ---------------------------------------------------------------



The Company’s activities
expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest
rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the
unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s result of operations.
The Company uses derivative financial instruments in order to partially hedge certain risk exposures, which are not designated
as hedge for accounting purposes.



The board of directors and
senior management of each company in the group is responsible for determining and supervising the financial risk management fundamentals
of each entity in accordance with each entity's business activities, financial structure and the relevant market conditions.



Risk management is carried
out by the chief financial officer and treasury department of each entity based on policies approved by the board of directors.
Treasury identifies evaluates and hedges financial risks in close cooperation with the Company’s operating units. The board
of

directors provides principles
for overall risk management, covering specific areas, such as interest rate risk, credit risk, foreign exchange risk, use of derivative
financial instruments and non-derivative financial instruments, raising long- term debt and investment of excess liquidity.



The following analysis, and
the details relating to financial instruments as of December 31, 2015, apply to the continuing operations of the company, and
are not necessarily comparable to the information for December 31, 2014, presented herein, which include also the discontinued
operations.



| | (1) | Market risk
| | --- | -----------



| | (a) | Price risk
| | --- | ----------



The Company is exposed to
price risk in respect of its investments in debt securities and equity securities that are classified as available for sale or
at fair value through profit or loss. To manage its price risk arising from investments in debt securities and equity securities,
the Company diversifies its portfolio in accordance with pre-defined limits.



The Company invests in Israeli
Government debt securities and debt securities of entities that are publicly traded on the Tel Aviv stock exchange that have a
minimum rating of A at the date of investment, which comprise most of its investments and in debt securities that are traded in
the US market that have a minimum rating of B at the date of investment. The Company manages the equity price risk through diversification
and by placing limits on individual and total equity instruments. Reports on the equity portfolio are submitted to the Company’s
senior management on a regular basis.



F-31







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | a. | Financial risk factors(continued)
| | -- | ---------------------------------



| | (1) | Market risk (continued)
| | --- | -----------------------



| | (a) | Price risk (continued)
| | --- | ----------------------





Also, because of their designation
as held for sale, the Company's holdings in Dor Alon and Naaman are exposed to changes in their market price, or realization value.
The shares of these subsidiaries are quoted in the Tel Aviv Stock Exchange.



An increase/decrease of 1%
in the market price of Dor Alon would decrease/increase post tax loss from discontinued operations in the amount of NIS 4.3 million.



The investment in Naaman is
presented at its book value, due to the lack of trading in Naaman's shares, management is in the opinion that market value of Naaman
does not represent fair value.





The table below summarizes
the impact on the Company’s post-tax profit for the year and on Comprehensive income of an increase/decrease of 5% in the
market price of the investments (excluding the holdings in Dor Alon and Naaman). The analysis is based on the assumption that all
other variables are held constant.







|                  |  | Year ended December 31    |    
|----------------- |  | ------------------------- | ---
|                  |  | 2013                      |    
|                  |  | NIS in millions           |    
|                  |  | Impact on post-tax profit |    
|Government bonds  |  |                           | 1.1
|Corporate bonds   |  |                           | 1.7
|Equity securities |  |                           | 3.7
|                  |  |                           | 6.5





Post-tax profit for the year
would increase/decrease as a result of gains/losses on debt or equity securities classified as at fair value through profit or
loss. Comprehensive income would increase/decrease, in addition to gains/losses from securities classified as fair value through
profit or loss, as a result of gains/losses on debt or equity securities classified as available for sale (unless impaired, in
which case the decline in fair value will be recognized directly in income or loss).



F-32







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | (1) | Market risk (continued)
| | --- | -----------------------



| | (b) | Index linkage
                                         risk
| | --- | -----------------------------------------------------------



As at December 31, 2015, the
excess of financial liabilities over financial assets linked to the CPI was NIS 2,217 million (2014: NIS 2,685 million).



At December 31, 2015 if the
CPI had increased/decreased by 1% with all other variables held constant, post-tax profit for the year would have decreased/increased
by NIS 16.3 million (2014: NIS 19.7 million).

During 2015, the CPI decreased
by 0.9% (2014 – decreased by 0.1%).



BSRE has also
commitments that are linked to the Israeli Inputs Building Index (hereafter- the Building Index), resulting from engagements
with building contractors. Changes in the Building Index affect the costs of construction of investment properties; as of
December 31, 2015, BSRE has NIS 302 million under construction agreements including commitments of an associate company
(Residence Company) which has engagements with contractors to build the apartments that are linked to the Building Index. The
Company mitigates its exposure to this risk, by linking the apartment purchasing agreements to the Building Index.



During 2015, the Building
index increased by 0.9% (2014 – 0.8%).



As to the Company's commitments
for future minimum payments under non-cancelable operating leases, most of which are linked to the CPI for the years subsequent
to the statement of position dates, see note 34a.



| | (c) | Cash flow and fair value interest
                                         rate risk
| | --- | ------------------------------------------------------------------------------------



Borrowings issued at variable
rates expose the Company to cash flow interest rate risk. Borrowings issued at fixed rates expose the Company to fair value interest
rate risk. At December 31, 2015 if interest rates on borrowings had been 1% (100 basis points) higher/lower with all other variables
held constant, pre-tax profit for the year would have been NIS 6.6 million ( 2014: NIS 17.5 million, 2013: NIS 17.1 million) lower/higher,
mainly as a result of higher/lower interest expense on floating rate borrowings.



Most of the fixed interest
assets and liabilities of the Company (such as deposits, loans and issued debentures) are not measured at fair value through profit
or loss. Therefore, any change in the interest rate as at the reporting date would not have a material effect on the income statement.



The Company’s investments
in debt securities earning fixed rates of interest and short-term deposits expose the Company to fair value interest rate risk.
At December 31, 2015 if interest rates had been 5% higher/lower with all the other variables held constant other components of
equity would have been NIS 5.0 million ( 2014: NIS 7.2 million, 2013: NIS 7.1 million), lower/higher mainly as result of the decrease/increase
in the fair value of these debt securities classified as available for sale.



F-33







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | (1) | Market risk (continued)
| | --- | -----------------------



| | (c) | Cash flow and fair value interest
                                         rate risk (continued)
| | --- | ------------------------------------------------------------------------------------------------



| | (2) | Credit risk
| | --- | -----------



Credit risk is managed separately
by each of the Company's operating units. Credit risk arises from cash and cash equivalents, securities, short term deposits with
banks as well as credit exposure to retail and wholesale customers.



Cash and cash equivalents,
deposits and securities are maintained with major banking institutions in Israel.



The Company's investments
include Israeli Government debt securities and debt securities of entities that are publicly traded on the Tel Aviv Stock Exchange
and the U.S. market, and that have a minimum rating – see 1(a) above. According to the Company's investment policy, there
are no significant concentrations of credit risk in respect of investments in debt securities.



Sales of gift certificates
are made on terms of credit of up to 120 days to a large number of different entities.



Approximately 60% of BSRE
rental income is derived from the Company's former subsidiary – Mega (see also Note 5b.) for which no collateral have been
received; collaterals exist for other third party lease agreements of investment property.



Balances owed to BSRE by the
residence company and the mall company amount to NIS 84.5 million and NIS 80.9 million, as of December 31 2015 and 2014, respectively;
BSRE expects that profits from the wholesale market project will serve to repay this debt. In addition, the other shareholders
of these companies provided guarantee in favor of BSRE in respect of these loans, and therefore the credit risk of these loans
is considered by BSRE as low. The residence company (associated company) receives advances from residence customers, and in no
case transfers the possession to the customer before full payment is made.



F-34







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | (1) | Market risk (continued)
| | --- | -----------------------



| | (c) | Cash flow and
                                         fair value interest rate risk (continued)
| | --- | ------------------------------------------------------------------------------------------------



| | (3) | Liquidity risk
| | --- | --------------



As of December 31, 2015, the deterioration in the Company's debt rating has caused a breach in financial
covenants of certain debt instruments; as explained also in Note 5a the Company has undertaken certain Mega Retail's obligations
and has committed to provide certain funding to Mega (see also Note 5a). As of the issuance of these financial statements, there
are preliminary understandings between the Company and its creditors on certain debt restructuring and settlement, while negotiations
are still in progress with respect to the finalization of the sale of the Company shares to Ben Moshe (see Note 37), which, if
successful, will provide funding to the Company's operations and enable the full repayment of creditors debt (see note 1b –
the company liquidity position).



The table below analyses the
Company’s financial liabilities into relevant maturity groupings based on the remaining period at the date of the statement
of financial position to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash
flows. Therefore, these amounts will not reconcile to the amounts disclosed in the statement of financial position except for
balances due within 12 months which equal their carrying amounts as the impact of discounting is not material.



The table is presented on
the basis of the contractual obligations. Hence the Company's liabilities that are classified as current as a result of default,
are assumed to be paid in the first period. Guarantees that have been provided for (see note 5a), are included in the first period.
As to the possible debt arrangement between the Company and its creditors and its terms – see Note 37.





Most of the BSRE's financing
agreements, include a continuation of control clause, and may default in case of a change in control over BSRE. However, management
of BSRE has proclaimed that it estimates that, due to its financial well standing, the small leverage, and the existence of NIS
2 billion in value of assets that are not pledged, it will be able to obtain additional financing as it may require and that the
liquidity risk in this case is low. Such defaults have not been taken into account in the table below.





The table does not include
the following:



| | - | liabilities for operating leases,
                                         and the related embedded derivatives. Contractual cash flows for operating leases are
                                         presented in note 34a. Cash flows relating to the conversion component of convertible
                                         debentures are included in the maturities of the debentures above.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-35







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | (c) | Cash flow and fair value interest
                                         rate risk (continued)
| | --- | ------------------------------------------------------------------------------------------------



| | (3) | Liquidity risk
                                         (continued)
| | --- | -------------------------------------------------------------------



| | - | Liabilities of disposal groups
                                         (these are assumed to be extinguished concurrently with the realization of the assets
                                         of such disposal groups);
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Between BSRE and Blue Square
there is a deposit / borrow agreement under which it can deposit / borrow monies on on-call terms of up to NIS 50 million (see
note 36f) that may affect Blue Square liquidity.



|                                       |  | December 31, 2015 |          
|-------------------------------------- |  | ----------------- | ---------
|                                       |  | Less than 1 Year  |          
|                                       |  | NIS in thousands  |          
|Credit and loans from banks and others |  |                   | 384,960  
|Loans from controlling shareholders    |  |                   | 110,000  
|Trade payables                         |  |                   | 17,999   
|Other payables                         |  |                   | 403,366  
|Mega's suppliers option                |  |                   | 61,000   
|Bank loans and other                   |  |                   | 206,573  
|Debentures and convertible debentures  |  |                   | 631,687  
|Foreign exchange contracts             |  |                   | 1,593    
|Total                                  |  |                   | 1,817,178



|                                        |  | December 31, 2014 |          
|--------------------------------------- |  | ----------------- | ---------
|                                        |  | Less than 1 Year  |          
|                                        |  | NIS in thousands  |          
|Credit and loans from banks and  others |  |                   | 782,621  
|Trade payables                          |  |                   | 1,195,822
|Other payables                          |  |                   | 433,809  
|Bank loans and other                    |  |                   | 339,324  
|Debentures and convertible debentures   |  |                   | 570,596  
|Other long-term payables                |  |                   | 1,060    
|Total                                   |  |                   | 3,323,232



F-36







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 - FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



| | b. | Capital risk management
| | -- | -----------------------



The company has capital deficiency
that results from accumulated losses and the recognition of considerable impairments of its assets during 2015 and 2014.





In 2015, the company received
financial support from its controlling shareholder - see also note 36d. In addition, as more detailed in note 37b, the parent company
has approved, subsequent to December 31, 2015, a third party's offer to acquire its holding and rights in the Company. If the transaction
with the potential buyer is not completed, the company will need to continue the process of selling any of its assets in order
to create value, and settle its liabilities.





As of December 31, 2015, the
Company has no retained earnings available for distribution under the Israeli Company's Law, see also Note 1b.



As to the rating of Blue Square
debentures, see note 21(d).



| | c. | Fair value estimation
| | -- | ---------------------



The table below analyzes financial
instruments carried at fair value, by valuation method. The different levels have been defined as follows:

| | § | Quoted
                                         prices (unadjusted) in active markets for identical assets or liabilities (level 1).
| | - | ------------------------------------------------------------------------------------------------------------------------------------

| | § | Inputs
                                         other than quoted prices included within level 1 that are observable for the asset or
                                         liability, either directly (that is, as prices) or indirectly (that is, derived from
                                         prices) (level 2).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | Inputs
                                         for the asset or liability that are not based on observable market data (that is, unobservable
                                         inputs) (level 3).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-37







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



The following tables present
the Company’s financial assets and liabilities that are measured at fair value at December 31, 2015 and 2014:

|December 31, 2015                                            |  | Level 1          |         |  | Level 2 |  |     | Level 3 |  |  | Total balance | 
|------------------------------------------------------------ |  | ---------------- | ------- |  | ------- |  | --- | ------- |  |  | ------------- | 
|                                                             |  | NIS in thousands |        
|Assets:                                                      |  |                  |         |  |         |  |     |         |  |  |               | 
|Financial assets at fair value through profit or
    loss:   |  |                  |         |  |         |  |     |         |  |  |               | 
|Investment in equity securities – property company           |  |                  | -       |  |         |  | -   |         |  |  | 38,207        | 
|Available  for sale financial assets:                        |  |                  |         |  |         |  |     |         |  |  |               | 
|Government Bonds                                             |  |                  | 79,561  |  |         |  | -   |         |  |  | -             | 
|Corporate bonds                                              |  |                  | 55,833  |  |         |  | -   |         |  |  | -             | 
|Investment in equity securities                              |  |                  | 14,187  |  |         |  | -   |         |  |  | -             | 
|Total assets                                                 |  |                  | 149,581 |  |         |  | -   |         |  |  | 38,207        | 
|Liabilities:                                                 |  |                  |         |  |         |  |     |         |  |  |               | 
|Derivatives:                                                 |  |                  |         |  |         |  |     |         |  |  |               | 
|Conversion component  embedded in convertible
    debentures |  |                  | -       |  |         |  | 121 |         |  |  | -             | 
|Mega's suppliers option                                      |  |                  | -       |  |         |  | -   |         |  |  | 61,000        | 
|Total liabilities                                            |  |                  | -       |  |         |  | 121 |         |  |  | 61,000        | 



|December 31, 2014                                               |  | Level 1          |         |  | Level 2 |  |        | Level 3 |  |  | Total balance | 
|--------------------------------------------------------------- |  | ---------------- | ------- |  | ------- |  | ------ | ------- |  |  | ------------- | 
|                                                                |  | NIS in thousands |        
|Assets:                                                         |  |                  |         |  |         |  |        |         |  |  |               | 
|Financial assets at fair value through profit or
    loss:      |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                                |  |                  | 17,388  |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                                 |  |                  | 35,078  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                                 |  |                  | 11,825  |  |         |  | -      |         |  |  | -             | 
|Money market fund                                               |  |                  | 13,978  |  |         |  | -      |         |  |  | -             | 
|Embedded derivatives in rent agreements                         |  |                  | -       |  |         |  | 4,504  |         |  |  | -             | 
|Forwards contracts over foreign currency                        |  |                  | -       |  |         |  | 589    |         |  |  | -             | 
|Investment in equity securities – property company              |  |                  | -       |  |         |  | -      |         |  |  | 22,454        | 
|Available-for-sale financial assets:                            |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                                |  |                  | 134,778 |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                                 |  |                  | 61,826  |  |         |  | -      |         |  |  | -             | 
|Money market fund                                               |  |                  | 45,195  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                                 |  |                  | 20,305  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities
    – gas exploration companies |  |                  | 9,906   |  |         |  | 49,377 |         |  |  | -             | 
|Total assets                                                    |  |                  | 350,279 |  |         |  | 54,470 |         |  |  | 22,454        | 
|Liabilities:                                                    |  |                  |         |  |         |  |        |         |  |  |               | 
|Derivatives:                                                    |  |                  |         |  |         |  |        |         |  |  |               | 
|Conversion component  embedded in convertible
    debentures    |  |                  | -       |  |         |  | 121    |         |  |  | -             | 
|Forwards contracts over foreign currency                        |  |                  | -       |  |         |  | -      |         |  |  | -             | 
|Forwards contracts over Israeli CPI                             |  |                  | -       |  |         |  | 1,060  |         |  |  | -             | 
|Rent agreements                                                 |  |                  | -       |  |         |  | 1,931  |         |  |  | -             | 
|Total liabilities                                               |  |                  | -       |  |         |  | 3,112  |         |  |  | -             | 



F-38







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS(continued):



The fair value of financial
instruments traded in active markets is based on quoted market prices at the statement of position date. A market is regarded
as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service,
or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
The quoted market price used for financial assets held by the Company is the closing market price. These instruments are included
in level 1. Instruments included in level 1 comprise primarily investments in Israeli Government debt securities and debt and
equity securities of entities that are publicly traded on the Tel Aviv Stock Exchange. These instruments are classified as available-for-sale
or fair value through profit or loss. The fair value of financial instruments that are not traded in an active market is determined
by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and
rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable,
the instrument is included in level 2.



If one or more of the significant
inputs is not based on observable market data, the instrument is included in level 3.



Specific valuation techniques
used to value financial instruments include:



| | § | Quoted
                                         market prices or dealer quotes for similar instruments.
| | - | -------------------------------------------------------------------------------------------------------

| | § | The
                                         fair value of forward contracts over the Israeli CPI are calculated as the present value
                                         of the estimated future cash flows based on observable yield curves.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | The
                                         fair value of forward foreign exchange contracts is determined using forward exchange
                                         rates at the statement of financial position date, with the resulting value discounted
                                         back to present value.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | § | For
                                         the equity securities which includes an investment in a property company and an investment
                                         in gas exploration companies:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The valuation of the property
company is presented in level 3 and based on the following:

| | 1) | Current transaction values of
                                         nearby residential and commercial properties;
| | -- | --------------------------------------------------------------------------------------------------------------------

| | 2) | The assumption for variables such
                                         as the discount rate, the liquidity spread, occupancy rates of shopping centers and inflation
                                         rates of apartment prices we used to value other real estate properties as adapted for
                                         the specific nature of this real estate property as well as an estimate of the related
                                         expected cash flows such as the selling value of the asset and the date the sale is expected
                                         to occur; and
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The tax rates applicable to the
                                         income generated by the investee; and
| | -- | --------------------------------------------------------------------------------------------------------------

| | 4) | After deducting the property company's
                                         recorded liabilities.
| | -- | -----------------------------------------------------------------------------------------------------



| | § | For
                                         Mega's Supplier's options to covert debt to Company's
                                         shares (note 5a) - the valuation is presented in level 3 and is based on Monte Carlo
                                         model of valuation to predict the market price of the shares, using 5,000 future scenarios
                                         and recovery rate and priority in redemption, as evaluated by management under the following
                                         parameters: share price of NIS 1.73, standard deviation – 90.6%, risk free interest
                                         of 0.13%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





During 2015, the Company recorded
additions to level 3 category that included the liability to Mega's supplier's option recognized in the amount NIS 61 million;
changes in financial assets at level 3 category include only gain from changes in the fair value of equity securities, in the amount
of NIS 21.2 million.





F-39







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | d. | Financial
                                         Instruments by category
| | -- | --------------------------------------------------------------------------





|                                                  |  | December 31, 2015     |        
|------------------------------------------------- |  | --------------------- | -------
|                                                  |  | Loans and Receivables |        
|                                                  |  | NIS in thousands      |        
|Current:                                          |  |                       |        
|Cash and cash equivalents                         |  |                       | 243,283
|Investment in  securities                         |  |                       | -      
|Trade receivables                                 |  |                       | 3,765  
|Other receivables excluding prepayments and other |  |                       | 31,132 
|Non-Current:                                      |  |                       |        
|Loans to associates                               |  |                       | 144,837
|Other long-term receivables                       |  |                       | 88,201 
|Total                                             |  |                       | 511,218





|                                                               |  | December 31, 2015                              |          
|-------------------------------------------------------------- |  | ---------------------------------------------- | ---------
|                                                               |  | Other financial liabilities at amortized 
cost |          
|                                                               |  | NIS in thousands                               |          
|                                                               |  |                                                |          
|Credit and loans from banks and others                         |  |                                                | 491,428  
|Trade payables                                                 |  |                                                | 17,999   
|Other account payables and accrued expenses                    |  |                                                | 377,651  
|Loans from banks and others                                    |  |                                                | 655,204  
|Convertible debentures                                         |  |                                                | 30,067   
|Conversion component embedded  in       convertible debentures |  |                                                | -        
|Debentures                                                     |  |                                                | 1,820,305
|Derivatives financial instruments                              |  |                                                | -        
|Provisions                                                     |  |                                                | 32,291   
|Income tax payables                                            |  |                                                | 2,582    
|Other liabilities                                              |  |                                                | 6,120    
|Total                                                          |  |                                                | 3,433,647



F-40







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



|                                                  |  | December 31, 2014     |          
|------------------------------------------------- |  | --------------------- | ---------
|                                                  |  | Loans and Receivables |          
|                                                  |  | NIS in thousands      |          
|Current:                                          |  |                       |          
|Cash and cash equivalents                         |  |                       | 290,102  
|Short term bank deposits                          |  |                       | 94,307   
|Investment in  securities                         |  |                       | -        
|Trade receivables                                 |  |                       | 1,030,367
|Other receivables excluding prepayments and other |  |                       | 396,988  
|Non-Current:                                      |  |                       |          
|Loans to associates                               |  |                       | 150,371  
|Investment in equity securities                   |  |                       | -        
|Other long-term receivables                       |  |                       | 153,519  
|Non-current derivative financial
    instruments  |  |                       | -        
|Total                                             |  |                       | 2,115,654





|                                                             |  | December 31, 2014                                 |          
|------------------------------------------------------------ |  | ------------------------------------------------- | ---------
|                                                             |  | Other financial
    liabilities at amortized cost |          
|                                                             |  | NIS in thousands                                  |          
|                                                             |  |                                                   |          
|Credit and loans from banks and others                       |  |                                                   | 774,626  
|Trade payables                                               |  |                                                   | 1,195,822
|Other account payables and accrued expenses                  |  |                                                   | 557,925  
|Loans from banks and others                                  |  |                                                   | 1,697,949
|Convertible debentures                                       |  |                                                   | 60,424   
|Conversion component embedded  in convertible
    debentures |  |                                                   | -        
|Debentures                                                   |  |                                                   | 2,449,248
|Derivatives financial instruments                            |  |                                                   | -        
|Other liabilities                                            |  |                                                   | 13,416   
|Total                                                        |  |                                                   | 6,749,410



F-41







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
3 – FINANCIAL RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | e. | Credit quality of financial
                                         assets
| | -- | ---------------------------------------------------------------------------



The credit quality of financial
assets that are neither past due nor impaired can be assessed by reference to the internal composition based on historical information
that has been accumulated in the Company's entities over the years, as follows:



Cash and cash equivalents
and short term bank deposits



Most of the Company's Cash
and cash equivalents and short term deposit at December 31, 2014 and 2015 were deposited with major Israeli banks.



Available-for-sale debt securities



As described above, most of
the Company's investments are publicly traded on the Tel-Aviv Stock Exchange and the us market and are independently rated with
a minimum A at the date of investment.



F-42







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL RISK MANAGEMENT
AND FINANCIAL INSTRUMENTS (continued):



| | f. | Composition of financial
                                         instrument balances:
| | -- | --------------------------------------------------------------------------------------



| | 5) | The currency exposure of the
                                         Company's monetary assets and liabilities and equity instruments and their fair values
                                         are as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|                                                |  | December 31, 2015 |          
|----------------------------------------------- |  | ----------------- | ---------
|                                                |  | NIS linkedto CPI  |          
|                                                |  | NIS in thousands  |          
|Assets:                                         |  |                   |          
|Cash and
    cash equivalents                   |  |                   | -        
|Investment in securities                        |  |                   | 56,820   
|Trade receivables                               |  |                   | -        
|Other  accounts
    receivables                 |  |                   | -        
|Loans receivable                                |  |                   | -        
|Other
    long-term receivables                 |  |                   | 84,463   
|Total
    assets                                |  |                   | 141,283  
|                                                |  |                   |          
|Liabilities:                                    |  |                   |          
|Credit and loans from
    banks and others      |  |                   | 181,113  
|Trade payables                                  |  |                   | -        
|Other accounts payable
    and accrued expenses |  |                   | 8,196    
|Income tax payables                             |  |                   | 2,582    
|Provisions                                      |  |                   | 15,510   
|Loans                                           |  |                   | 295,947  
|Debentures                                      |  |                   | 1,820,305
|Convertible debentures                          |  |                   | 30,067   
|Other long-term liabilities                     |  |                   | 3,083    
|Derivative
    financial instruments            |  |                   | 1,593    
|Total
    liabilities                           |  |                   | 2,358,396





| | (*) | Financial instrument that are not monetary
                                         assets
| | --- | ------------------------------------------------------------------------------------------

| | (**) | The fair value of these monetary balances
                                         is usually identical or close to their carrying value.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------



F-43







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3 – FINANCIAL
RISK MANAGEMENT AND FINANCIAL INSTRUMENTS(continued):



| | f. | Composition
                                         of financial instrument balances(continued):
| | -- | -------------------------------------------------------------------------------------------------



| | 6) | Changes in the exchange rates
                                         of the US dollar and the Israeli CPI, in the reported periods are as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------



|Year |  | Exchange rate of
    the US dollar |      |   | Israel known
    CPI * | 
|---- |  | ---------------------------------- | ---- | - | ---------------------- | 
|     |  | %                                  |      |   | %                      | 
|     |  |                                    |      |   |                        | 
|2015 |  |                                    | 0.3  |   |                        | 
|2014 |  |                                    | 12.0 |   |                        | 
|2013 |  |                                    | (7.0 | ) |                        | 



| | * | Calculated based
                                         on published CPI date (through November of each year)
| | - | ---------------------------------------------------------------------------------------------------------------



NOTE
4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS:



Estimates and judgments are
continually evaluated, and are based on historical experience and other factors, including expectations of future events that
are believed to be reasonably possible under the circumstances.



The Company makes estimates
and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom identical the related actual
results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of
assets and liabilities within the next financial year are addressed below.



| | 1) | Provisions with respect to guarantees
                                         and funding commitments in respect of Mega Retail.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------



As detailed in Note 5b, the
Company's provision with respect to its 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 legal interpretation of the Company and its legal
advisors. Should the outcome and realization of such guarantees and commitments be different from the assumptions and interpretations
used for measurement, the Company may be required to recognize additional expenses.



| | 2) | Provisions for claims
| | -- | ---------------------



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



The Company's assessments
are based on the Company's history in these cases, on the stage these claims are at and on the experience of the Company's legal
advisers.



The outcome of the legal cases
in court could be different from the Company's assessments.



See also note 33.



F-44







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 4 – CRITICAL
ACCOUNTING ESTIMATES AND JUDGEMENTS(continued):



| | 3) | Goodwill and indefinite life
                                         intangible assets
| | -- | ---------------------------------------------------------------------------------------



The Company tests 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 Naaman and Mega respectively, see also
note 7.



| | 4) | Fair value of disposal groups:
| | -- | ------------------------------



Following the classification during 2015 as disposal groups that are held for sale, the holdings in Dor
Alon and Naaman (see also Note 7), are stated at the lower of their book value, or 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, was written down to the market value of its shares (level
1).



| | 5) | Change in fair value of investment
                                         property
| | -- | ------------------------------------------------------------------------------------



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.



When the rate used for discounting
cash flows is different by 0.5% from management estimate the fair value of investment property will be NIS 191 million higher
or NIS 167 million lower. When the discount rate used for the valuation of the property of the mall company (50% joint venture,
presented under the equity method of accounting – see also Note 6), is different by 0.5% from its management estimate, the
carrying amount of the investment in the mall company will be NIS 77.4 million higher, or NIS 69.2 million lower.



| | 6) | Income taxes and deferred taxes
| | -- | -------------------------------



The Company recognizes 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 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, the Company recognizes
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. The Company continually assesses 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 (including actions taken with respect to tax saving and utilization of tax losses), taking into account
market expectations, the duration of successive tax losses and their magnitude (see also note 31j). When the Company, as a result
of these assessments, reduces deferred tax assets (or increase deferred tax liabilities), the Company's effective tax rate will
increase and negatively affect its results.



F-45







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES



| | a. | Recovery plan and loss
                                         of control over Mega Retail Ltd, ("Mega")
| | -- | ---------------------------------------------------------------------------------------------------------



General





Until the
middle of 2015, Mega was wholly owned and controlled subsidiary of the Company. In June 2015, under an agreement signed by the
Company, Mega and the employees union of Mega (as detailed below), Mega's employees received a right for the allocation of 33%
of Mega's shares, to a private Israeli corporation to be formed by the employees' representatives. In July 2015, under Mega's reorganization
arrangement, it was determined that Mega's Board will be composed of seven members, only three of whom would be appointed by the
Company and by that, the Company actually lost control of Mega (see below). On January 18, 2016 Mega entered into a stay of proceedings
and trustees were appointed for Mega; as from that date the Company has no influence over the management of Mega.





Mega has
accumulated significant losses in recent years. The losses of Mega and its subsidiaries in the years 2014 and 2013 amounted to:
NIS 423 million and NIS 124 million, respectively. In addition, the Company recorded in the income statement for 2015 a loss of NIS 562 million in respect of Mega.



Agreement
with the employees and recovery plan from July 2015



After giving
consideration to Mega's deterioration, on June 21, 2015, a collective agreement and understanding letter were signed between Mega's
management, BSI, Mega's employee committee and the Histadrut (General Federation of Labor in Israel) ("the employees' agreement"),
effective from April 1, 2015. The following are the principles of the employee agreement:



| | 1) | Closing of 32 losing branches of
                                         Mega and discontinuing the employment of employees in the branches to be closed and reduction
                                         of personnel in the headquarters.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | The employees waived part of their
                                         wage cost and certain retirement term of the employees whose employment will be discontinued.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The allocation of 33% of Mega's
                                         share capital (by way of issuing new shares or by transferring Mega's shares held by
                                         the Company) to a legal corporation to be established by the employees' representatives
                                         for the active and permanent employees. The established corporation will be entitled
                                         to appoint one-third of the Mega's Board members, who are not external directors, and
                                         in any event not less than two members, where one is the chairman of the employees committee
                                         and the other is a professional party ("The professional party"). As of the
                                         date of these financial statements date, the shares were not yet allocated.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | The Company undertook under the
                                         employees' 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 the Company agreed under Mega's recovery plan (see below).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Mega's
recovery plan





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



F-46







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



Mega's
recovery plan(continued):



On July
12, 2015, the creditors' meetings of the Company convened for the purpose of voting on the arrangements being presented to them.



On July
14 and 15, 2015, the Court approved the creditors' arrangement ("the arrangement approval date"). Under the arrangement,
the Company assumed various liabilities as follows:



| | 1) | Supporting Mega - the Company
                                         committed to extend to Mega, effective June 1, 2015, NIS 320 million, as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

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

NIS 80 million
as a credit line for working capital, based on the current needs of Mega and at its request when necessary.



| | 2) | Liabilities regarding guaranteed
                                         and shared bank debts - the debts of Mega and Eden Teva Market Ltd. to banks that were
                                         secured by the Company's guarantee or debts that are shared by Mega and the Company (the
                                         guaranteed debt) would be paid by the Company without derogating from the Company's right
                                         to stand in the creditors' shoes in respect of the paid debt under the conditions set
                                         forth in the arrangement. The total guaranteed debt as of December 31, 2015 is NIS 301
                                         million on account of Mega and NIS 29 million as on account of Eden.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Arrangement with suppliers - under
                                         the arrangement with Mega's suppliers it was agreed that 30% of past debts to Mega's
                                         large suppliers (namely suppliers to whom Mega's debt is higher than NIS 800,000 on the
                                         effective date) ("the deferred debt") shall be deferred for two years ("grace
                                         period") and shall be repaid, effective from July 15, 2017, in 36 equal monthly
                                         installments (the repayment period). The deferred debt shall bear in the grace period,
                                         interest (unlinked) at 2% per annum (grace interest) and shall bear in the repayment
                                         period, interest (unlinked) at 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 its respective share of the deferred
                                         debt (in whole or in part) into the Company's 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 the Company's share
in the rights issuance date (base price).



Upon the
elapse of two months from the allocation of the option, the exercise price of the option shall be the higher of: the closing price
of the Company's share during 30 trading days that preceded the conversion or 120% of the base price. According to the debt arrangement,
the deadline for issuing the options shall be January 15, 2016. Due to regulatory limitations, such options were not issued until
such deadline and on January 12, 2016 the Company filed a motion to adjourn the date of the options issuance. Due to Mega's entry
into stay of proceedings, the Company filed the court with a new motion requiring the court to instruct that since Mega has entered
into a stay of proceedings the commitment of the Company to issue of the suppliers' options is no longer valid. In addition, it
was emphasized to the court that the Company still has regulatory limitations to issue the option, should it be instructed by court
to do so. A decision has not yet been rendered in the above motion.





F-47







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



Mega's
recovery plan(continued):



| | 4) | Waiver of control in Mega's Board
                                         – under the above reorganization arrangement, the Company agreed that Mega's Board
                                         will be composed of seven members, only three of whom shall be appointed by the Company,
                                         two members shall be appointed by the employees, one director shall be appointed by Mega
                                         out of a list of five candidates to be recommended by the President of the Manufacturers
                                         Association and one director shall be appointed by the court based on the bank's recommendation.
                                         Following this ruling, the Company lost the majority in Mega's Board and as a result
                                         lost the control of Mega. Following the loss of control, the investment in Mega is presented
                                         on an equity basis.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On July
20, 2015, the Company's Board approved the provisions of the creditors' arrangement that relate to the Company, subject to the
approval of the arrangement with Discount Bank regarding a deferral until September 30, 2015 of the repayment of on call loans
made by Discount Bank to the Company.



On July
27, 2015, the Company reached an agreement with Discount Bank under which the bank shall not require an immediate repayment of
on call loans until September 30, 2015, and by that the condition precedent for approving the arrangement of Mega was met by the
Company.



After the
approval of the recovery plan, Mega closed 32 branches and two other losing branches were closed (in addition to the initial agreement),
and 1,200 employees were dismissed; Mega negotiated with its main lessor, BSRE, from which it received a discount of 9% in rental
fees as from November 1, 2015 for 24 months. (See below). 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.



In
November 2015, Mega has reached a decision to sell all 22 branches in the sub chain, YOU. The sub chain, YOU, constituted
Mega's discount chain which employed more than one thousand 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 one thousand employees.



According
to the information reported by Mega, after the sale of these discount stores, Mega planned to be left with 120 stores of its branches
"Mega in Town" located in the city centers, in the best locations – a chain that for years operated well with
good profitability having a great potential to return to a reasonable profitability. Simultaneously, BSI and Mega negotiated with
various potential investors to make an additional investment in Mega.



F-48







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



Mega's
recovery plan(continued)



In January,
2016, some of Mega's large suppliers notified Mega that they will not supply goods to Mega, but against cash payment only.



Under these
circumstances, Mega's board resolved on January 17, 2016 to file an urgent motion with the district court in Lod seeking a stay
of proceedings and the appointment of a trustee. On January 17, 2016, a temporary stay of proceedings order was rendered, and
on January 18, 2016, an order of stay of proceedings was rendered for 30 days and three trustees were appointed to Mega. The court
authorized the trustees to operate for the recovery and sale of Mega reaching a creditors' arrangement and examine the completion
of the recovery plan from July 2015. On February 14, 2016, the order was extended for an additional three months until May 17,
2016.



| | b. | Deconsolidation of
                                         Mega
| | -- | ----------------------------------------------------------------





As explained
in a. above, through June 30, 2015, the financial statements of Mega were consolidated with the Company's financial statements.
As a result of the loss of control over Mega, in the beginning of the third quarter of 2015, the Company deconsolidated Mega, and
recognized the liabilities in respect of its holding in Mega at their fair value on that date (equity holding in Mega was valued
at nil due to its capital deficiency); The fair value was determined based on the Company's guarantees in respect of Mega obligations,
as of that date (relocated employees, lessors and vendors' credit insurers), and the commitments and obligations that the Company
undertook under the debt settlement arrangement as approved by court (repayment of collateralized debt, funding obligation and
options granted to major Mega's vendors); consequently, the Company recognized on that date an obligation of NIS 654 million. The
difference between the fair value of the obligation, as above, and the carrying amount of the net negative investment in Mega in
the Company's books on deconsolidation, of NIS 78, was recognized as loss from the loss of control over Mega, and was included
among the results from Megas' discontinued operations. Comparative figures in the statement of income or loss and comprehensive
income and Mega results through June 30, 2015 (before loss of control), were restated so as to present Megas results under Discontinued
Operations.



F-49







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



| | b. | Deconsolidation of Mega(continued):
| | -- | -----------------------------------



Subsequent measurement of the
different obligations was made under the following accounting policy:



The obligation with respect
to the different guarantees provided to Mega – on the basis of the higher of the fair value of the different components,
and a provision based on management best estimate as to the timing and the amounts it will have to pay, per IAS 37:"Provisions,
Contingent Liabilities and Contingent Assets". As at December 31, 2015, the balance of the above obligation was determined
using the "best estimate" model, taking into account the expected outcome of the most likely scenarios. The possible
recovery from Mega of amounts that the Company will be required to pay under such obligations was not taken into account, as the
recognition of any contingent assets, in this case, does not meet the accounting threshold for recognition under the above standard
(IAS 37).



The balance of the Company's
NIS 320 million funding commitment presented within other accounts payable and accruals as of December 31,2015, is after taking
into account the timing and amounts of cash and cash in-like transfers that, in the opinion of management, based inter-alia on
its legal advisors, are considered as payments under or in the framework of this obligation.



The right granted to Mega's
major vendors to convert their debt to ordinary shares of the Company (Mega's Suppliers Options) is a derivative financial instrument,
and is presented at fair value through profit and loss; see note 3c.



These values are based on
updated estimates and assessments made by Company's management, with regard to the outcome of the above guarantees and funding
obligations (see also Note 4a). These assessments are based inter-alia on the Company's legal advisors assessment of the legal
state of affairs.



F-50







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



Mega's
recovery plan(continued)



| | b. | Deconsolidation of Mega(continued)
| | -- | ----------------------------------



Losses resulting from the
subsequent measurement as above, amounting NIS 138 million, were carried to separate line item in the income statement. As a result
of the above, commencing the third quarter of 2015, the Company does not include its share in Mega results, but only the differences
in the value of its obligations as above.



The Company books also include
provisions in respect of various matters that it may be obligated to pay in respect of Mega (i.e. National Insurance, VAT and
other), for which proper provisions were made; the Company has filed a claim to Mega's trustees (see below) that is contingent
on the realization of such matters.



In the opinion of the company
based on the opinion of its legal advisors, the funding commitments undertaken by the Company under Mega Retail's debt arrangement,
have expired once Mega Retail has applied to court in January requesting for Stay of Proceedings. There is no certainty, as well,
that the Company and its legal advisors' position with respect to such expiry, will be accepted by the court. Nevertheless, having
regard that this is a post December 31, 2015 date event, this position was not taken into account in the measurement of the Company's
provisions as at December 31, 2015.





| | c. | Nomination of trustees and Subsequent events:
| | -- | ---------------------------------------------



| | 1) | On January 18, 2016, the District Court in Lod granted, in furtherance of the filing by Mega Ltd.,
of a voluntary request for a stay of proceedings, an initial stay of legal proceedings against Mega for a period of 30 days. The
court also approved the appointment of Gabi Trabelsi, CPA, Adv. Ehud Gindes, and Adv. Amir Bartov as trustees for the operation
of Mega Retail Ltd ("the trustees"). Their role is to manage Mega in an attempt to restore and sell Mega, either as one
unit or as groups of supermarket branches, with a view towards retaining places of work for Mega employees, and to inquire whether
the recovery plan was executed in full, and principally whether the Company fully complied with its obligations under the plan
of recovery to support Mega.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The stay of
proceedings was extended by the District Court in Lod, and is currently standing until May 18, 2016.



| | 2) | As to actions taken by Mega trustees,
                                         and to claims and arguments presented by them – see note 33c.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Eden Teva Market (a
                                         company which was held at 51% by Mega) and Dr. Baby (a company which was wholly owned
                                         by Mega)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On July
9, 2015, Eden Teva Market (Eden) filed a motion 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 guaranteed 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.



F-51







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



Mega's recovery plan(continued)



| | d. | Eden Teva Market (a
                                         company which was held at 51% by Mega) and Dr. Baby (a company which was wholly owned
                                         by Mega) (continued)
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



On December
3, 2015, a settlement agreement between Mega 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.



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



| | e. | Information about principal
                                         subsidiaries with material non-controlling interests
| | -- | -------------------------------------------------------------------------------------------------------------------------



As of December 31, 2015, continuing
operation consists mainly of one principal subsidiary of the Company – BSRE, which is
also a reporting segment of the Company – see Note 8. BSRE is a listed Company that has share capital consisting solely
of ordinary shares, which are held directly by the Company and the proportion of ownership interests held equals to the voting
rights held by Company. The percentage of ownership and voting rights held by the group is 53.92% and 69.71% at December 31, 2015
and 2014, respectively.



As of December 31, 2014, Dor
Alon was also a principal subsidiary of the Company; During 2015, Dor Alon was classified as held for sale, and is presented as
a discontinued operation and a disposal group in these financial statements (see also Note 7). The percentage of ownership and
voting rights of Dor Alon held by the group at December 31, 2015 and 2014 is 63.13% and 78.43%, respectively.



For information about principal
subsidiaries of the Company, see appendix.



The total non-controlling
interest as of December 31, 2015 is NIS 921 million (December 31, 2014 - NIS 477.1 million), of which NIS 214.3 million is for
Dor Alon (presented separately as a disposal group) and NIS 691 million is attributed to BSRE.



F-52







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



Mega's recovery plan (continued)



| | e. | Information about principal
                                         subsidiaries with material non-controlling interests
| | -- | -------------------------------------------------------------------------------------------------------------------------



Set out
below are the summarized financial information for Blue Square Real Estate and Dor Alon, that have non- controlling interest that
is material to the Company. As for Dor Alon presentation as discontinued operation – see also note 7.



Summarized
balance sheet:



|                                         |  | Blue Square Real Estate* |           |   | Dor Alon         | 
|---------------------------------------- |  | ------------------------ | --------- | - | ---------------- | 
|                                         |  | December 31              |           |   | December 31      | 
|                                         |  | 2014                     |           |   | 2015             | 
|                                         |  | NIS in thousands         |           |   | NIS in thousands | 
|Current                                  |  |                          |           |   |                  | 
|Assets                                   |  |                          | 483,371   |   |                  | 
|Liabilities                              |  |                          | 316,780   |   |                  | 
|Total current net assets                 |  |                          | 166,591   |   |                  | 
|Non- current                             |  |                          |           |   |                  | 
|Assets                                   |  |                          | 3,582,867 |   |                  | 
|Liabilities                              |  |                          | 2,225,244 |   |                  | 
|Total non- current net assets            |  |                          | 1,357,623 |   |                  | 
|Net assets                               |  |                          | 1,524,214 |   |                  | 
|Non - controlling interest share %       |  |                          | 30.3      | % |                  | 
|Non - controlling interest share         |  |                          | 461,684   |   |                  | 
|Adjustments:                             |  |                          |           |   |                  | 
|Adjustments for consolidation*           |  |                          | (213,622  | ) |                  | 
|Fair value adjustments                   |  |                          | -         |   |                  | 
|Adjusted non- controlling interest share |  |                          | 248,062   |   |                  | 



| | * | Until June 30, 2015, a considerable
                                         part of BSRE's investment property, as classified and presented in their financial statements,
                                         were considered and classified as own-used real estate for the purpose of the consolidated
                                         financial statements of the Company, as they were leased by Mega - a former subsidiary
                                         of the Company – see also Notes 5b, and 16; hence, as at December 31, 2014  fair
                                         value step-up of such properties and their related deferred taxes, - in the amount of
                                         approximately NIS 1,050 million and NIS 245 million, respectively - were annulled for
                                         the purpose of consolidation. As a result of the loss of control over Mega, the group
                                         reclassified these properties at July 1, 2015, and presented them as investment property
                                         of the group. The fair value of these assets was carried to other comprehensive income,
                                         net of related deferred taxes, and presented as a revaluation reserve; The annulment
                                         of the fair value step-up in respect of such assets, and their related deferred taxed,
                                         amount to - NIS 945.7 million and NIS 354.5 million, respectively. As at December
31, 2015, only few of BSRE's investment property are still considered own-used by the group.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







F-53







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 – SUBSIDARIES (continued):



| | e. | Information about principal
                                         subsidiaries with material non-controlling interests (continued)
| | -- | -------------------------------------------------------------------------------------------------------------------------------------



Summarized
income statements:



|                                                                  |  | Blue Square Real Estate |         |   | Dor Alon               | 
|----------------------------------------------------------------- |  | ----------------------- | ------- | - | ---------------------- | 
|                                                                  |  | Year ended December 31  |         |   | Year ended December 31 | 
|                                                                  |  | 2013                    |         |   | 2014                   | 
|                                                                  |  | NIS in thousands        |         |   |                        | 
|                                                                  |  |                         |         |   |                        | 
|Revenues                                                          |  |                         | 214,460 |   |                        | 
|Net income                                                        |  |                         | 148,740 |   |                        | 
|Other comprehensive income                                        |  |                         | (5,347  | ) |                        | 
|Total comprehensive income                                        |  |                         | 143,393 |   |                        | 
|Non- controlling interest share-%                                 |  |                         | 25.2    | % |                        | 
|Non- controlling interest share                                   |  |                         | 36,192  |   |                        | 
|Adjustments:                                                      |  |                         |         |   |                        | 
|Adjustments for consolidation*                                    |  |                         | (16,175 | ) |                        | 
|Fair value adjustments                                            |  |                         | -       |   |                        | 
|Adjusted net income attributable to non- controlling
    interest |  |                         | 20,017  |   |                        | 
|Dividends paid to non- controlling interest**                     |  |                         | 20,986  |   |                        | 



| | * | Annulment of revenues and changes
                                         in fair value of investment property due to own-used property (see also above).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | See also (iii) below.
| | -- | ---------------------

| | *** | Represents NCI share during 2014.
                                         As of December 31, 2014 NCI share in BSRE is 30.3%
| | --- | -----------------------------------------------------------------------------------------------------------------------------



Summarized
cash flows:

|                                                                                  |  | Blue Square Real Estate |          |   | Dor Alon                | 
|--------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ----------------------- | 
|                                                                                  |  | Year ended December 31, |          |   | Year ended December 31, | 
|                                                                                  |  | 2014                    |          |   | 2015                    | 
|                                                                                  |  | NIS in thousands        |          |   |                         | 
|Cash flows from operating activities:                                             |  |                         |          |   |                         | 
|Income before taxes on income                                                     |  |                         | 261,322  |   |                         | 
|Income tax received (paid), net                                                   |  |                         | (17,312  | ) |                         | 
|Adjustments to net cash provided by operating activities                          |  |                         | (46,398  | ) |                         | 
|Net cash provided by operating activities                                         |  |                         | 197,612  |   |                         | 
|Net cash provided by (used in) investing activities                               |  |                         | 161,520  |   |                         | 
|Net cash used in financing activities                                             |  |                         | (525,902 | ) |                         | 
|Increase (decrease) in cash and cash equivalents and bank overdrafts              |  |                         | (166,770 | ) |                         | 
|Translation differences on cash and cash equivalents                              |  |                         | 53       |   |                         | 
|Balance of cash and cash equivalents and bank overdrafts at beginning of
    year |  |                         | 226,678  |   |                         | 
|Balance of cash and cash equivalents and bank overdrafts at end of year           |  |                         | 59,961   |   |                         | 



The
information above is the amount before inter- company eliminations.



F-54







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 - SUBSIDARIES (continued):



| | f. | Transactions with non-
                                         controlling interest
| | -- | ------------------------------------------------------------------------------------



On February 23, 2014, an ordinary
purchase offer of BSRE was completed for the purchase of 7.8% of its issued and outstanding share capital for NIS 160 million.
The purchase offer was responded by 99.2% of BSRE shareholders including the Company. The Company's share in the purchase offer's
consideration was NIS 120 million and the balance of NIS 40 million was paid to non-controlling interests and was included in
the statements of cash flows used in financing activities under the line item "dividend paid to non-controlling interests".
The holding rate of the Company in BSRE, after the purchase offer, decreased by 0.05%.



During 2014 and 2015 the Company
sold 5% and 15.77%, respectively, of its shareholding in BSRE.



The difference between the
consideration received and the carrying amount of the interest sold, net of the tax effect, was directly carried to equity, as
follows:



|                                                            |  | 2014             |        |   | 2015 | 
|----------------------------------------------------------- |  | ---------------- | ------ | - | ---- | 
|                                                            |  | NIS in thousands |       
|Consideration received from non- controlling interests      |  |                  | 69,695 |   |      | 
|Carrying amount of group's interest disposed of             |  |                  | 39,952 |   |      | 
|Gain on disposal recorded within parent's equity            |  |                  | 29,743 |   |      | 
|Taxes on income                                             |  |                  | (7,745 | ) |      | 
|Gain on disposal recorded within parent's equity net of tax |  |                  | 21,998 |   |      | 



In April 2015, BSRE distributed
NIS 30 million as dividend to its shareholders, of which NIS 10.9 million were paid to non-controlling interests. An additional
dividend of NIS 30 million was distributed in June 2015, of which NIS 10.9 million were paid to non-controlling shareholders.
Subsequent to December 31, 2015, BSRE Board of Directors resolved to distribute additional NIS 30 million (of which NIS 13.8 million
relate to non-controlling interests), which was paid on April 7, 2016.



On May 27, 2015, Dor Alon sold
1,468,854 of its ordinary shares, that were held as treasury shares, to capital market investors for approximately NIS 50.4 million.
The transaction was effected as the issuance of new shares to non-controlling interest, thereby diluting the Company's holding
by 7.2% (to 71.17%). As a result of the above, the Company recognized a loss of NIS 58 million on disposal of the said 7.2% interest
in Dor Alon, which was carried directly to equity.



In May 31, 2015, Dor Alon distributed
NIS 50 million as dividend to its shareholders, of which NIS 14.4 million were paid to non-controlling interests.



F-55







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5 - SUBSIDARIES (continued):



| | g. | Sale of Alon cellular's operations
| | -- | ----------------------------------



On July 6,
2015, the Company signed an agreement with Pelephone for the sale of Alon Cellular activity. Upon the completion of the agreement,
Alon Cellular shall be entitled to half the income from the transferred customers for 36 months. In addition, under the agreement,
the purchaser shall be entitled to market and sell SIM cards in Mega 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 for consummating said agreement, and
in November 2015 the transaction was consummated. According to the number of transferred customers, Alon Cellular shall be 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. A gain of NIS 3.5 million resulted to the Company based on the minimum consideration set forth in the agreement. In December
2015, after completing the sale of the commercial activity, the Board of Alon Cellular resolved to voluntarily dissolve Alon Cellular
after the Board of Alon Blue Square approved the debt forgiveness to Alon Cellular and the forgiveness of the debt balance upon
the completion of the dissolution process. The Company recognized capital losses for tax purposes for the debt forgiveness amounting
to NIS 85 million and took into account in the calculation of the deferred tax liabilities in 2015.



| | h. | Legal merger of Bee Group
| | -- | -------------------------



On December
27, 2015, a merger agreement was signed between Bee Retail Group, a wholly owned subsidiary of the Company and the Company under
which in view of broad economic considerations, the above companies agreed to cooperate by a merger the purposes of which are streamlining
the activities carried out by the two merged companies while utilizing the organizational and economic advantages deriving from
the merger. Under the merger, Bee Group will transfer to the Company upon the merger completion date and as of the effective date
that was set for December 29, 2015, the ownership and the basic right to use all of the assets of Bee Group and the Company will
absorb all of the rights and liabilities of Bee Group. The rights and liabilities of Bee Group are to be transferred to the Company
AS IS and at no consideration. The existence of the merger agreement is contingent upon the fulfillment of several conditions precedent
including the approval of the relevant organs approval of each of the companies, approvals of various authorities and government
parties. As of the report date, the approvals were not yet received. The Company expects to receive all approvals. The Company
expects that the merger will allow recognizing capital losses for tax purposes for its investments in Bee Group amounting to NIS
319 million and took into account in the calculation of the deferred tax liabilities in 2015.



F-56







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 – INVESTMENTS
ACCOUNTED FOR USING EQUITY METHOD



The amounts
recognized in the consolidated statement of financial position are as follows:



|                     |  | December 31      |        
|-------------------- |  | ---------------- | -------
|                     |  | 2014             |        
|                     |  | NIS in thousands |        
|Associates:          |  |                  |        
|Diners               |  |                  | 195,853
|Other associates     |  |                  | 94,578 
|                     |  |                  | 290,431
|Joint ventures:      |  |                  |        
|City Mall Tel Aviv   |  |                  | 226,049
|Other joint ventures |  |                  | 460,548
|                     |  |                  | 686,597
|                     |  |                  | 977,028



The amounts
recognized in the consolidated income statements are as follows:



|                     |  | Year ended December 31 |       
|-------------------- |  | ---------------------- | ------
|                     |  | 2014                   |       
|                     |  | NIS in thousands       |       
|Associates:          |  |                        |       
|Diners*              |  |                        | 7,889 
|Other associates     |  |                        | (8,280
|                     |  |                        | (391  
|Joint ventures:      |  |                        |       
|City Mall Tel Aviv   |  |                        | 12,716
|Other joint ventures |  |                        | 7,709 
|                     |  |                        | 20,425
|                     |  |                        | 20,034



* The amounts recognized in
the consolidated income statements include the amortization of the excess of cost arising at the time of acquisition.



As to investment in Mega, see
note 5b.



F-57







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD



| | a. | Investment in associates
| | -- | ------------------------



As of December
31, 2014 the Company had a significant associate, Diners Club Israel Ltd (hereinafter - Diners Israel), which was held directly
by the Company and by a subsidiary of the Company, Dor Alon. The Company held 36.75% of the issued share capital of Diners Israel
and Dor Alon holds 12.25% of the issued share capital of Diners Israel. Other associates include mainly BSRE's 49.5% shareholding
in a company that builds residential units for sale as part of the wholesale market complex (see also the City Mall company under
b. below).



Diners
club Israel Ltd ("Diners Israel")



On December 26, 2006, an agreement
was signed between the Company, and Cal - Israel Credit Cards Ltd. (hereinafter – CAL) and Diners Israel, a subsidiary of
CAL, according to which, the Company jointly with Dor Alon purchased from CAL 49% of the issued share capital of Diners Israel
and entered into a cooperation arrangement with CAL with respect to the customers loyalty club "YOU" operated by Dor
Alon and the Company.



CAL is engaged with the issuance
and clearance of VISA and Master-Card credit cards and is a principal member of the international organization of VISA and Master-card
which provides it the right to use these trademarks in Israel as well as the right to issue and clear credit cards in Israel.



Diners Israel has an exclusive
license to use the brand Diners in Israel by "Diners Club International Ltd" and to operate, issuance and clearance
services of Diners cards.



CAL and Diners are also engaged
with grant of loans to their credit card holders.



Allocation of the excess of
cost of acquisition over the share in net book value of equity acquired of Diners Israel, was determined as follows : NIS 71 million
to customer relationships and contractual arrangements which is amortized over 4.5 to 6.5 years and NIS 104 million to goodwill
which is not amortized (see also note 2c).



On November 29, 2015, the
Company entered into an agreement with Dor Alon for the sale of all of their holdings in Diners (36.75% and 12.25%, respectively,
a total of 49%) 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 were received in cash and the balance was received in January 2016. Due to the price
reflected in the  transaction, the Company recorded in the second quarter of 2015 a provision for impairment on its investment
in Diners of NIS 54.7 million in the statement of profit or loss under other expenses.



The sale agreement provides
also for an additional contingent consideration to be received in four equal installments of NIS 5 million (on March 31 and September
30 of each of the years 2016 and 2017); such consideration will be recognized in the future subject to the fulfillment of the
following conditions: (1) Continuation of the activities of the "YOU" customer club and the cooperation agreement with
CAL, (2) Mega and the filling stations of Dor Alon (including their attached convenience stores) will continue to provide benefits
to the YOU club members, (3) on the date of the first payment, the number of Mega stores will not be less than 115, and going
forward for the remaining payments, not less than 100 stores and additional conditions, including inter-alia that no request for
the liquidation, dissolution, receivership or stay of proceedings is filed with respect to Mega, that is not cancelled within
60 days. As more detailed in Note 5, on January 17 2016, stay of proceedings and the nomination of trustees were approved for
Mega, and are in effect until May 17, 2016.



F-58







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 – INVESTMENTS ACCOUNTED
FOR USING EQUITY METHOD(continued):



Diners club Israel Ltd
("Diners Israel")(continued)





The financial statements of
Diners Israel are prepared in accordance with Israeli Generally Accepted Accounting Principles (Israeli GAAP) and the directives
and guidelines of the Supervisor of Banks in Israel. These financial statements were reconciled to International Financial Reporting
Standards as issued by the International Accounting Standards Board, for the purpose of accounting for the investment in Diners
Israel under the equity method, until sold in 2015.



| |  | City Core Tel Aviv Ltd. ("City
                                         Core")
| |  | ------------------------------------------------------------------------------



City Core was established
by BSRE and Gindi Group under the construction project of the wholesale market complex and according to a Memorandum of Understandings
dated April 15, 2010 (the MOU) that regulates the relations between BSRE and Gindi group in all that concerns the wholesale market
in Tel Aviv (see note 34c). City Core is constructing 10 residential buildings with a total of 722 residential units for sale,
and 54 units that are designated for low cost rental for a period of 8 years. Under the above wholesale market agreements, City
Core is also obligated to build certain amenities for the municipality of Tel Aviv within the area of the residential buildings
..



As at December
31, 2015, City Core has sale agreements for 716 of the above units, in the total amount of NIS 1.9 billion (including VAT), and
have received advances from purchasers of approximately NIS 1.3 billion (including VAT).



| | b. | Investment in joint
                                         ventures
| | -- | ---------------------------------------------------------------------



The Company holds 50% of City
Mall Tel Aviv, a principal joint venture, through its subsidiary BSRE. The shares of City Mall Tel Aviv are unlisted and there
is no quoted market price available for its shares.



In addition BSRE has immaterial
joint ventures which operate real estate for internal use and third party use (see appendix to the financial statements).



City Mall Tel Aviv Ltd.



City Mall Tel Aviv Ltd. (the
Mall Company) was established as a jointly controlled entity by BSRE and Gindi Group under the construction project of the wholesale
market complex and according to a Memorandum of Understandings dated April 15, 2010 (the MOU) that regulates the relations between
BSRE and Gindi group in all that concerns the wholesale market in Tel Aviv (see note 34c).



Completion
of purchasing the leasehold rights in the real estate



In 2012, the purchase of the
leasehold rights in the real estate of the wholesale market project was completed. As of December 31, 2012, the Mall Company paid
the entire consideration for the leasehold rights in the real estate designated for establishing the commercial complex pursuant
to purchase agreements signed between the parties in a total amount of NIS 394 million (the Company's share 50%). The leasehold
rights are for the period ending August 31, 2099.



F-59







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 – INVESTMENTS
ACCOUNTED FOR USING EQUITY METHOD(continued):



Completion of purchasing the
leasehold rights in the real estate(continued)



The main commercial areas
under construction approximate 32,500 square meter, which are in advanced stages of construction (the mall is expected to open
in the third quarter of 2016); approximately 76% of such commercial areas are leased under signed agreements or memorandum of
understanding (as of December 31, 2015).



As of December 31 , 2014,
due to a breach in covenants, the Mall Company has classified its bank loans as current; in June 2015 an amendment to the agreement
was signed providing an expansion of the long-term credit line for the project to NIS 1 billion. The credit line is payable within
3 years from the opening of the mall and no later than September 30, 2019.



| | c. | Summarized financial
                                         information of City Mall Tel Aviv
| | -- | -----------------------------------------------------------------------------------------------



Financial position statement
data (100%):



|                        |  | December 31      |          
|----------------------- |  | ---------------- | ---------
|                        |  | 2014             |          
|                        |  | NIS in thousands |          
|Assets:                 |  |                  |          
|Current assets          |  |                  | 42,682   
|Non-current assets      |  |                  | 1,101,830
|                        |  |                  | 1,144,512
|Liabilities:            |  |                  |          
|Current liabilities     |  |                  | 573,739  
|Non-current liabilities |  |                  | 374,428  
|                        |  |                  | 948,167  
|Net Assets              |  |                  | 196,345  
|                        |  |                  |          



Summarized
statement of income (100%):



|                                                                                     |  | Year ended December 31 |       
|------------------------------------------------------------------------------------ |  | ---------------------- | ------
|                                                                                     |  | 2014                   |       
|                                                                                     |  | NIS in thousands       |       
|                                                                                     |  |                        |       
|Revenues-increase in fair value of investment
    property  under construction,  net |  |                        | 36,712
|Other income                                                                         |  |                        | 928   
|Taxes on income                                                                      |  |                        | 9,200 
|Net income                                                                           |  |                        | 25,431



Reconciliation
of summarized financial information:



Reconciliation of the summarized
financial information presented to the carrying amount of the Company's interest in City Mall Tel Aviv



|                            |  | Year ended December 31 |        
|--------------------------- |  | ---------------------- | -------
|                            |  | 2014                   |        
|                            |  | NIS in thousands       |        
|                            |  |                        |        
|Net assets                  |  |                        | 196,345
|Interest in joint venture-% |  |                        | 50     
|Interest in joint venture   |  |                        | 98,173 
|Loans granted by BSRE       |  |                        | 127,876
|Carrying value              |  |                        | 226,049



F-60







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
7 – DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALEand discontinued operations:



| | a. | Disposal groups classified as
                                         held for sale, as presented in the statement of financial position at December 31, 2015,
                                         are comprised mainly of Dor Alon and Naaman, These segments and Mega, are also classified
                                         as discontinued operations (see b. and c. hereafter). The breakdown of the amounts presented
                                         in the financial statements are as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 1) | Consolidated statements of financial
                                         position as at December 31, 2015:
| | -- | ---------------------------------------------------------------------------------------------------------------



|                                                                                    |  | Disposal groups held |           |    | Other assets |  |         |      | 
|----------------------------------------------------------------------------------- |  | -------------------- | --------- | -- | ------------ |  | ------- | ---- | 
|                                                                                    |  | for sale             |           |    | held for     |  |         |      | 
|                                                                                    |  | Dor Alon             |           |    | Naaman       |  |         | sale | 
|                                                                                    |  | NIS in thousands     |           |    |              | 
|Assets:                                                                             |  |                      |           |    |              |  |         |      | 
|Cash and cash equivalents                                                           |  |                      | 73,012    |    |              |  | 7,047   |      | 
|Other current assets                                                                |  |                      | 1,054,401 |    |              |  | 111,945 |      | 
|Non-current assets:                                                                 |  |                      |           |    |              |  |         |      | 
|Property, plant and equipment, net                                                  |  |                      | 781,345   |    |              |  | 22,158  |      | 
|Investment property                                                                 |  |                      | 19,000    |    |              |  |         |      | 
|Investments under the equity method                                                 |  |                      | 407,970   |    |              |  | -       |      | 
|Intangible assets                                                                   |  |                      | 801,675   |    |              |  | 97,670  |      | 
|Other                                                                               |  |                      | 136,050   |    |              |  | 7,340   |      | 
|Less- Provision for impairment of net assets                                        |  |                      | (714,413  | )* |              |  | (83,900 | )    | 
|                                                                                    |  |                      | 2,559,040 |    |              |  | 162,260 |      | 
|Liabilities:                                                                        |  |                      |           |    |              |  |         |      | 
|Current liabilities                                                                 |  |                      | 1,024,613 |    |              |  | 92,045  |      | 
|Long-term loans                                                                     |  |                      | 442,743   |    |              |  | 10,656  |      | 
|Debentures                                                                          |  |                      | 353,058   |    |              |  | -       |      | 
|Other                                                                               |  |                      | 150,351   |    |              |  | 4,465   |      | 
|                                                                                    |  |                      | 1,970,765 |    |              |  | 107,166 |      | 
|Non-controlling interest, net of provision for impairment                           |  |                      | 215,130   |    |              |  | 14,855  |      | 
|Other comprehensive income balance (relating
    to available for sale investments) |  |                      | 31,571    |    |              |  | (14,417 | )    | 



| |  | * Adjustment to fair value less
                                         cost to sell of these investments, based on their quoted prices on the Tel Aviv stock
                                         exchange as of December 31, 2015.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-61







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
7 – DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALEand discontinued operations:



| | 2) | Consolidated income statements
                                         data– discontinued operations - net income (loss):
| | -- | --------------------------------------------------------------------------------------------------------------------------



For the year ended December
31, 2015:



|                                                                   |  | Dor Alon         |           |   | Naaman |  |         | Total | 
|------------------------------------------------------------------ |  | ---------------- | --------- | - | ------ |  | ------- | ----- | 
|                                                                   |  | NIS in thousands |          
|Revenues                                                           |  |                  | 4,011,997 |   |        |  | 291,111 |       | 
|Expenses                                                           |  |                  | 3,912,286 |   |        |  | 305,309 |       | 
|Loss before taxes                                                  |  |                  | 99,711    |   |        |  | (14,198 | )     | 
|Tax benefit (taxes on income)                                      |  |                  | (17,558   | ) |        |  | (597    | )     | 
|Net loss for the period                                            |  |                  | 82,153    |   |        |  | (14,795 | )     | 
|Amortization of excess costs                                       |  |                  | (1,769    | ) |        |  | (3,434  | )     | 
|Adjustment to fair value, less costs to sell of
    disposal group |  |                  | (714,413  | ) |        |  | -       |       | 
|Impairment of intangible  assets                                   |  |                  | -         |   |        |  | (83,842 | )     | 
|Less - related tax                                                 |  |                  | 18,950    |   |        |  | 6,910   |       | 
|Net loss of Dor Alon and Naaman                                    |  |                  | (615,079  | ) |        |  | (95,161 | )     | 
|Net loss in respect of Mega                                        |  |                  | -         |   |        |  | -       |       | 
|Adjustments (a)                                                    |  |                  | -         |   |        |  | -       |       | 
|Net loss from discontinued
    operations                          |  |                  | (615,079  | ) |        |  | (95,161 | )     | 



(a) Mainly in respect of the elimination
of intercompany transactions.



For the year ended December
31, 2014:





|                                      |  | Dor Alon         |           |   | Naaman |  |         | Mega |  |  | Kfar      |   |  | Adjust.(a) |        |   | Total | 
|------------------------------------- |  | ---------------- | --------- | - | ------ |  | ------- | ---- |  |  | --------- | - |  | ---------- | ------ | - | ----- | 
|                                      |  | NIS in thousands |          
|Revenues                              |  |                  | 4,907,737 |   |        |  | 300,186 |      |  |  | 5,828,324 |   |  |            | 22,155 |   |       | 
|Expenses                              |  |                  | 4,856,203 |   |        |  | 293,191 |      |  |  | 6,108,253 |   |  |            | 25,220 |   |       | 
|Loss before taxes                     |  |                  | 51,534    |   |        |  | 6,995   |      |  |  | (279,929  | ) |  |            | (3,065 | ) |       | 
|Tax benefit (taxes on income)         |  |                  | (7,816    | ) |        |  | (1,779  | )    |  |  | (143,497  | ) |  |            | -      |   |       | 
|Net loss for the period               |  |                  | 43,718    |   |        |  | 5,216   |      |  |  | (423,426  | ) |  |            | (3,065 | ) |       | 
|Amortization of excess costs          |  |                  | (3,232    | ) |        |  | (3,434  | )    |  |  | (4,112    | ) |  |            | -      |   |       | 
|Impairment of intangible  assets      |  |                  | -         |   |        |  | (21,000 | )    |  |  | -         |   |  |            | -      |   |       | 
|Less - related tax                    |  |                  | 1,010     |   |        |  | 910     |      |  |  | 504       |   |  |            | -      |   |       | 
|Net loss from discontinued operations |  |                  | 41,496    |   |        |  | (18,308 | )    |  |  | (427,034  | ) |  |            | (3,065 | ) |       | 



(a) Mainly in respect of the elimination
of intercompany transactions.



F-62







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – DISPOSAL GROUPS CLASSIFIED
AS HELD FOR SALEand discontinued operations:



For the year ended December
31, 2013:



|                                          |  | Dor Alon         |           |   | Naaman |  |         | Mega |  |  | Kfar      |   |  | Adjust.(a) |         |   | Total | 
|----------------------------------------- |  | ---------------- | --------- | - | ------ |  | ------- | ---- |  |  | --------- | - |  | ---------- | ------- | - | ----- | 
|                                          |  | NIS in thousands |          
|Revenues                                  |  |                  | 5,179,871 |   |        |  | 300,551 |      |  |  | 6,373,352 |   |  |            | 114,837 |   |       | 
|Expenses                                  |  |                  | 5,121,623 |   |        |  | 309,282 |      |  |  | 6,545,901 |   |  |            | 130,731 |   |       | 
|Loss before taxes                         |  |                  | 58,248    |   |        |  | (8,731  | )    |  |  | (172,549  | ) |  |            | (15,894 | ) |       | 
|Tax benefit (taxes on income)             |  |                  | (12,566   | ) |        |  | 2,277   |      |  |  | 48,382    |   |  |            | -       |   |       | 
|Net loss for the period                   |  |                  | 45,682    |   |        |  | (6,454  | )    |  |  | (124,167  | ) |  |            | (15,894 | ) |       | 
|Impairment of intangibles  assets costs   |  |                  | -         |   |        |  | (4,500  | )    |  |  | -         |   |  |            | (14,100 | ) |       | 
|Amortization of excess costs              |  |                  | 3,502     |   |        |  | (3,434  | )    |  |  | -         |   |  |            | -       |   |       | 
|Less - related tax                        |  |                  | (2,972    | ) |        |  | 910     |      |  |  | -         |   |  |            | -       |   |       | 
|Net loss from discontinued
    operations |  |                  | 46,212    |   |        |  | (13,478 | )    |  |  | (124,167  | ) |  |            | (29,994 | ) |       | 



(a) Mainly in respect of the elimination
of intercompany transactions.



| | b. | Dor
                                         Alon – discontinued operation
| | -- | --------------------------------------------------------------------------



During July
2015, due to the financial difficulties and in order to meet its obligations, the Company's management has decided to put for
sale its entire shareholding in Dor Alon (63.13% of the outstanding shares of Dor Alon), following which it has been actively
engaged in negotiations with potential buyers. Consequently, commencing the third quarter of 2015, and in accordance with IFRS
5: "Non-Current Assets Held for Sale and Discontinued Operations", the Company has classified the assets and liabilities
of Dor Alon as disposal group held for sale, and ceased the depreciation and amortization of Dor Alon's non-current assets.



Upon classification
and as at December 31, 2015, the net asset carrying value of Dor Alon in the Company books exceeded the market value of Dor Alon
shares (level 1); consequently, a provision in the amount of NIS 714 million before taxes was made in order to write down the
value of disposal group of assets held for sale and non-controlling interests.



The above provisions
were carried to the income statement and presented under discontinued operations.



It should
be noted that in 2016 following the approval of the third party's offer to acquire the shareholding of the Company from its
parent, the Company ceased all active negotiations for the time being.



| | c. | Naaman
                                         – discontinued operation
| | -- | ------------------------------------------------------------------------



During December
2015, the Company's management has decided to put for sale its entire shareholding in Naaman (77.51% of the outstanding shares
of Naaman), following which it has been actively engaged in negotiations with potential buyers. Consequently, the Company classified
the assets and liabilities of Naaman as disposal group held for sale, as of December 31, 2015.





During 2015,
as a result of the events in Mega and their effect on the operations of Naaman, the Company has written off Goodwill and certain
intangible assets relating to Naaman, in the total amount of NIS 84 million (before taxes). This provision was carried to the income
statement and presented under discontinued operations.



It
should be noted that following the approval of the third party's offer to acquire the shareholding of the Company from its parent,
the Company ceased all active negotiations for the time being.



F-63







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
7 – DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALEand discontinued operations:



| | d. | Kfar
                                         Hasha'ashuim Marketing Ltd. ("Kfar")
| | -- | ----------------------------------------------------------------------------------



In December
2012, the Company resolved to realize its investment in Kfar which operated the leisure and toy activity of the Company under
the Other segment, and as of December 31, 2013, operated 83 stores, mostly through franchisees. As a result , Kfar was classified
as a disposal group held for sale and as a discontinued operation.



In February
2014, BEE Group completed the sale of 65% of its holdings in Kfar for NIS 13 million. This consideration is payable over
a period of up to 5 years, linked to the CPI and bears interest of 3%. BEE Group granted the acquirer (the CEO of Kfar; hereinafter
“the acquirer”) an option to purchase its remaining holdings in Kfar for NIS 7 million, within two years from closing
the transaction (the Call option) and the acquirer granted Bee Group an option to sell him the remaining investment for the same
amount at the end of the two years, for a period of six months. In February 2015, an amended agreement was signed.



The Company
also provided a guarantee of up to NIS 46 million in respect of credit lines of Kfar. The acquirer committed to provide an amount
which exceeds the debt withdrawn from the bank by NIS 5 million as collateral for the credit liens. In addition, the acquirer
committed to decrease the amount of debt to the bank every year. The acquire did not fulfill these obligations. In March 2015,
the bank has requested that the Company exercise part of the above guarantee. Consequently, a provision of NIS 35 million was
made by the Company as of December 31, 2014 in respect of the balance of the above receivable, the investment in Kfar and the
above guarantee.



On June 22,
2015, an agreement was signed between Bee Retail Group, the acquirer and Kfar Hashaashuim for sale of all of the holdings of Bee
Group in Kfar Hashaashuim. According to the agreement the share transfer will take place with the full repayment of the debt,
for which the Company granted guarantees of NIS 45 million and with the cancellation of the guarantee granted by the Company in
favor of Bank Hapoalim.



In return for
the transfer of the shares, the acquirer has undertaken to pay Bee Group every year for five years from the date of signing the
agreement five installments of NIS 1 million each (the first payment was fully paid), or 35% of the Company's net income in the
same year, whichever is higher.



Under the agreement,
the acquirer undertook to repay the entire debt to Bank Hapoalim, which is guaranteed by the Company, until December 30, 2015.



F-64







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – DISPOSAL GROUPS CLASSIFIED
AS HELD FOR SALE(continued):



| | d. | Kfar Hasha'ashuim Marketing
                                         Ltd. ("Kfar")(continued)
| | -- | ---------------------------------------------------------------------------------------------



As part of the
agreement, in 2015 the Company injected into Kfar Hashaashuim a total of NIS 19, million and the Company's 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 the acquirer.



The results of Kfar for the
years ended December 31, are as follows:



|                                               |  | *2013            |           |   | **2014 | 
|---------------------------------------------- |  | ---------------- | --------- | - | ------ | 
|                                               |  | NIS in thousands |          
|Revenues                                       |  |                  | 114,837   |   |        | 
|Expenses                                       |  |                  | 93,008    |   |        | 
|Gross profit                                   |  |                  | 21,829    |   |        | 
|Selling, general and administrative expenses   |  |                  | (32,205   | ) |        | 
|Other losses                                   |  |                  | *(16,471) |   |        | 
|Finance expenses                               |  |                  | (3,147    | ) |        | 
|Loss before taxes from discontinued operations |  |                  | (29,994   | ) |        | 
|Tax benefit (taxes on income)                  |  |                  | -         |   |        | 
|Loss from discontinued operations              |  |                  | (29,994   | ) |        | 



| | * | During 2013 the
                                         Company impaired goodwill in the amount of NIS 14.1 million in accordance with the fair
                                         value less cost to sell.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ** | For the period
                                         until the consummation of the transaction;
| | -- | --------------------------------------------------------------------------------------------------



Cash flows used in the sale
of Kfar in 2014:



|                                                          |  | NIS in thousands |        
|--------------------------------------------------------- |  | ---------------- | -------
|Investment accounted for using the equity method          |  |                  | (7,000 
|Other long-term receivables                               |  |                  | (9,000 
|Assets of disposal group classified as held for sale      |  |                  | 93,680 
|Liabilities of disposal group classified as held for sale |  |                  | (79,769
|Cash flows used in sale of Kfar                           |  |                  | (2,089 



F-65







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
8 – SEGMENT INFORMATION:



The Company
includes segment information according to IFRS 8. This information is based on the company's organizational structure, internal
reporting, resource allocation and decision making, as reviewed by its CEO who is also the Chief Operating Decision Maker (CODM).
Accordingly, the Company presents three reportable segments, that are based on the results of its investee companies, as follows:
continuing operations - BSRE, discontinued operations - Dor Alon and Naaman Group.The segment results as reviewed by the Chief Operating Decision Maker (CODM) includes operating income before financial
expenses, including the Company's share in earnings of affiliates and without amortizations of excess costs if not included in
the reports of the companies, segment results for prior periods have been adjusted to allow comparison of continuing activity
respectively to the results in the consolidated report.



The Company's operating
segments consist of the following:



| | a. | continuingoperations:
| | -- | ---------------------



BSRE
– Through its subsidiary BSRE the Company is engaged in generating yield from real estate leased out for supermarket branches,
commercial centers, logistics centers and offices, land for the purpose of capital appreciation and deriving long-term yield from
the development of the "Wholesale Market" residency project. As of December 31, 2015, approximately 60% of BSRE rental
income is derived from investment property that is leased to Mega, under long term leases (see also Note 5a).



| | b. | Discontinued operations:
| | -- | ------------------------



| | 1) | Dor
                                         Alon –Dor-Alon is engaged in the development, construction and operation of vehicle
                                         filling stations, adjacent commercial centers and independent convenience stores, marketing
                                         of fuel products and other products through the filling stations and direct marketing
                                         to customers of filling and commercial sites segment. The segment is presented according
                                         to the published financial statements of Dor-Alon. The consolidated financial statements
                                         include the results of operations of Dor Alon for the period and corresponding periods,
                                         presented separately as "discontinued operations" (see also Note 7b).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Naaman
                                         – Naaman is engaged as retailer and wholesaler in houseware and textile activities.
                                         As of December 31, 2015, Naaman operated 120 stores, some through franchisees.The
                                         segment's resultsare presented
                                         according to the published financial statements of Naaman. Amortization of excess costs
                                         and impairment of goodwill included in the reconciliation between the operating profit
                                         of the segment and the consolidated operating profit. The consolidated financial statements
                                         include the results of operations of the Naaman for the period and corresponding periods,
                                         presented separately as "discontinued operations" (see also Note 7c).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Other activities
| | -- | ----------------



The
Company operates a logistic center in Beer Tuvia (by Bee Group Ltd.) and has an activity of issuance and clearance of gift certificates
(which was terminated subsequent to December 31 2015). In addition, the following activities were sold during 2015: the operation
of an MVNO network in Israel (through Alon Cellular Ltd – a 100% subsidiary), and the issuance and clearance of YOU credit
cards to the customer club members of the group (through Diners Club Israel Ltd., an associate held at 36.75%, which was sold
towards the end of 2015). (see also note 6a).



F-66







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
8 – SEGMENT INFORMATION(continued):





|                                        |  | Continuing operations |         |  |              |  |          |                    |  |  | Discontinued operations |  
|--------------------------------------- |  | --------------------- | ------- |  | ------------ |  | -------- | ------------------ |  |  | ----------------------- | -
|                                        |  | BSRE                  |         |  | Adjustments* |  |          | Total consolidated |  |  | Dor Alon                |  
|                                        |  | NIS in thousands      |        
|Year ended December 31, 2015:           |  |                       |         |  |              |  |          |                    |  |  |                         |  
|Net segment revenues                    |  |                       | 145,886 |  |              |  | 59,643   |                    |  |  | 205,529                 |  
|Inter segment revenues                  |  |                       | 84,334  |  |              |  | (84,334  | )                  |  |  | -                       |  
|Net revenues                            |  |                       | 230,220 |  |              |  | (24,691  | )                  |  |  | 205,529                 |  
|Depreciation and amortization           |  |                       | -       |  |              |  | 9,325    |                    |  |  | 9,325                   |  
|Segment profit (loss)                   |  |                       | 189,178 |  |              |  | (97,875  | )                  |  |  | 91,303                  |  
|Measurement of guarantees given to Mega |  |                       |         |  |              |  | (137,553 | )                  |  |  | (137,553                | )
|Unallocated corporate expenses          |  |                       |         |  |              |  |          |                    |  |  | (40,058                 | )
|Financial expenses, net                 |  |                       |         |  |              |  |          |                    |  |  | (60,375                 | )
|Loss before taxes on income             |  |                       |         |  |              |  |          |                    |  |  | (146,683                | )
|                                        |  |                       |         |  |              |  |          |                    |  |  |                         |  
|Year ended December 31, 2014            |  |                       |         |  |              |  |          |                    |  |  |                         |  
|Net segment revenues                    |  |                       | 51,158  |  |              |  | 45,390   |                    |  |  | 96,548                  |  
|Inter segment revenues                  |  |                       | 173,370 |  |              |  | (173,370 | )                  |  |  | -                       |  
|Gross profit (loss)                     |  |                       | 224,528 |  |              |  | (127,980 | )                  |  |  | 96,548                  |  
|Depreciation and amortization           |  |                       | -       |  |              |  | 13,294   |                    |  |  | 13,294                  |  
|Segment profit                          |  |                       | 338,119 |  |              |  | (292,155 | )                  |  |  | 45,964                  |  
|Unallocated corporate expenses          |  |                       |         |  |              |  |          |                    |  |  | (14,959                 | )
|Financial expenses, net                 |  |                       |         |  |              |  |          |                    |  |  | (113,808                | )
|Loss before taxes on income             |  |                       |         |  |              |  |          |                    |  |  | (82,803                 | )
|Year ended December 31, 2013:           |  |                       |         |  |              |  |          |                    |  |  |                         |  
|Net segment revenues                    |  |                       | 38,369  |  |              |  | 64,297   |                    |  |  | 102,666                 |  
|Inter segment revenues                  |  |                       | 176,091 |  |              |  | 176,091  |                    |  |  | -                       |  
|Net revenues                            |  |                       | 214,460 |  |              |  | (111,794 | )                  |  |  | 102,666                 |  
|Depreciation and amortization           |  |                       | -       |  |              |  | 12,369   |                    |  |  | 12,369                  |  
|Segment profit(loss)                    |  |                       | 319,627 |  |              |  | (301,165 | )                  |  |  | 18,462                  |  
|Unallocated corporate expenses          |  |                       |         |  |              |  |          |                    |  |  | (19,286                 | )
|Financial expenses, net                 |  |                       |         |  |              |  |          |                    |  |  | (167,385                | )
|Loss before taxes on income             |  |                       |         |  |              |  |          |                    |  |  | (168,209                | )



*  The adjustments consist mainly of the elimination of intercompany transactions and other activities detailed in c above



The Company does not regularly report any
segment assets and liabilities measure to the chief operating decision maker, see also note 2d.



F-67







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 – CASH, CASH EQUIVALENTS
AND DEPOSITS:



| | a. | Cash
                                         and cash equivalents
| | -- | ------------------------------------------------------------------



|                                                               |  | December 31      |        
|-------------------------------------------------------------- |  | ---------------- | -------
|                                                               |  | 2014             |        
|                                                               |  | NIS in thousands |        
|Cash at bank and on hand                                       |  |                  | 54,681 
|Bank deposits with original maturities of three months or less |  |                  | 235,421
|                                                               |  |                  | 290,102



Cash, cash equivalents and bank
overdrafts include the following for the purposes of the statement of cash flows:



|                                                |  | December 31      |        
|----------------------------------------------- |  | ---------------- | -------
|                                                |  | 2014             |        
|                                                |  | NIS in thousands |        
|Cash and cash equivalents                       |  |                  | 290,102
|Cash at banks attributable to disposal groups   |  |                  | -      
|                                                |  |                  | 290,102
|Bank overdrafts, see note 21                    |  |                  | (5,487 
|Bank overdrafts attributable to disposal groups |  |                  | -      
|                                                |  |                  | 284,615



| | b. | Short-term deposits
| | -- | -------------------



Deposit amounts as at December 31,
2014, are comprised as follows (in respect of discontinued operation):



|                                                   |  | NIS in
    thousands |       
|-------------------------------------------------- |  | -------------------- | ------
|Deposits at suppliers, linked to the U.S. Dollar   |  |                      | 71,872
|Short term deposits used as security to debentures |  |                      | 19,299
|Bank deposits                                      |  |                      | 3,136 
|                                                   |  |                      | 94,307



NOTE 10 – INVESTMENT IN SECURITIES



| | a. | Comprised as follows:
| | -- | ---------------------



|                                                              |  | December 31      |        
|------------------------------------------------------------- |  | ---------------- | -------
|                                                              |  | 2014             |        
|                                                              |  | NIS in thousands |        
|                                                              |  |                  |        
|Available for sale financial assets – current                 |  |                  | 262,104
|Financial assets at fair value through profit or loss-current |  |                  | 100,723
|Available for sale financial assets – non-current             |  |                  | 59,283 
|                                                              |  |                  | 422,110



F-68







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 – INVESTMENT IN SECURITIES(continued):



| | b. | Composition
                                         per type of security:
| | -- | --------------------------------------------------------------------------



|                  |  | December 31      |        
|----------------- |  | ---------------- | -------
|                  |  | 2014             |        
|                  |  | NIS in thousands |        
|                  |  |                  |        
|Debt securities   |  |                  | 307,946
|Equity securities |  |                  | 114,164
|                  |  |                  | 422,110



| | c. | Available for sale financial
                                         assets
| | -- | ----------------------------------------------------------------------------





|                                                        |  | 2013             |          |   | 2014 |  |          | 2015 | 
|------------------------------------------------------- |  | ---------------- | -------- | - | ---- |  | -------- | ---- | 
|                                                        |  | NIS in thousands |         
|                                                        |  |                  |          |   |      |  |          |      | 
|At January 1                                            |  |                  | 283,352  |   |      |  | 380,892  |      | 
|Transfer to disposal group classified  as held for sale |  |                  | -        |   |      |  | -        |      | 
|Purchases                                               |  |                  | 207,526  |   |      |  | 164,286  |      | 
|Proceeds                                                |  |                  | (130,305 | ) |      |  | (223,748 | )    | 
|Transfers to or from other comprehensive income         |  |                  | 16,682   |   |      |  | (3,295   | )    | 
|Attributed to income statements                         |  |                  | 3,637    |   |      |  | 3,252    |      | 
|At December 31                                          |  |                  | 380,892  |   |      |  | 321,387  |      | 



In 2013, 2014 and 2015 the Company
recycled profits from equity into the income statements in the amount of NIS 3,298 thousand, NIS 6,510 thousands and NIS 2,627
thousands, respectively.



| | d. | Financial assets at fair value
                                         through profit or loss
| | -- | ----------------------------------------------------------------------------------------------



|                                |  | December 31      |        
|------------------------------- |  | ---------------- | -------
|                                |  | 2014             |        
|                                |  | NIS in thousands |        
|                                |  |                  |        
|Debt securities                 |  |                  | 66,444 
|Investment in equity securities |  |                  | 34,279 
|Total                           |  |                  | 100,723



F-69







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 – DERIVATIVE FINANCIAL
INSTRUMENTS:



|                                                                              |  |                                                                          |  | December
    31      |      
|----------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------------- | -----
|                                                                              |  |                                                                          |  | 2014                 |      
|Derivative
                                         financial                 |  | Statement
                                         of financial position |  | NIS
    in thousands |      
|instruments                                                                   |  | Item                                                                     |  | Assets               |      
|Forward contracts over the                                                    |  |                                                                          |  |                      |      
|Israeli CPI (a)                                                               |  | Derivative
    financial instruments                                     |  |                      | 589  
|Foreign exchange contracts (b)                                                |  | Derivative financial
    instruments                                     |  |                      | -    
|Embedded derivatives:                                                         |  |                                                                          |  |                      |      
|Rent agreements                                                               |  | Derivative financial instruments                                         |  |                      | 4,504
|Conversion component embedded in the convertible debentures (see
    note 21) |  | Convertible debentures                                                   |  |                      | -    
|Mega's suppliers' option (see note 5b)                                        |  | Derivative financial instruments                                         |  |                      | -    
|Total                                                                         |  |                                                                          |  |                      | 5,093



| | (a) | The notional principal
                                         amounts of the outstanding forward contracts over the Israeli CPI at December 31, 2015
                                         were approximately NIS 150 million.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The notional amount
                                         of open forward foreign exchange contracts (up to 3 months, mostly 2 months) as of December
                                         31, 2014 is $58.5 million.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 12 – TRADE RECEIVABLES:



|                                                    |  | December 31      |          
|--------------------------------------------------- |  | ---------------- | ---------
|                                                    |  | 2014             |          
|                                                    |  | NIS in thousands |          
|Trade receivables                                   |  |                  | 1,074,674
|Less: provision for impairment of trade receivables |  |                  | (44,307  
|                                                    |  |                  | 1,030,367



As of December 31, 2015, trade
receivables of NIS Nil thousands (2014: NIS 24,912 thousands) were past due but not impaired. These relate to a number of independent
customers for whom there is no recent history of default.



F-70







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 – TRADE RECEIVABLES(continued):



As of December 31, 2015, trade
receivables of NIS 3,989 thousands (2014: NIS 124,399 thousands) were impaired and provided for. The amount of the provision was
NIS 1,942 thousands as of December 31, 2015 (2014: NIS 44,307 thousands). It was assessed that a portion of the receivables is
expected to be recovered. The ageing of these receivables is over 12 months.



Movements in the Company's
provisions for impairment of trade receivables are as follows:



|                                                        |  | December 31      |       
|------------------------------------------------------- |  | ---------------- | ------
|                                                        |  | 2014             |       
|                                                        |  | NIS in thousands |       
|At January 1                                            |  |                  | 38,273
|Provisions made during the period                       |  |                  | 9,894 
|Unused amounts reversed                                 |  |                  | (6    
|Receivable written off during the year as uncollectible |  |                  | (3,854
|Deconsolidation of subsidiary                           |  |                  | -     
|Transfer to disposal group classified held for sale     |  |                  | -     
|At December 31                                          |  |                  | 44,307



The creation and release of
provisions for impaired receivables has been included in the income statement within "Selling, general and administrative
expenses." Amounts charged to the allowance account are generally written off when there is no expectation of recovering
additional cash.



The maximum exposure to credit
risk at the reporting date is the carrying value of each class of receivables mentioned above. See also note 3, credit risk, as
to collateral held as security.



The fair value of trade receivables
is usually identical or close to their carrying value.



NOTE 13 – OTHER RECEIVABLES:



|                                                         |  | December 31      |        
|-------------------------------------------------------- |  | ---------------- | -------
|                                                         |  | 2014             |        
|                                                         |  | NIS in thousands |        
|Prepayments                                              |  |                  | 21,055 
|Related parties , see note 36                            |  |                  | 191,707
|Government authorities                                   |  |                  | 4,391  
|Advances to suppliers and others                         |  |                  | 12,665 
|Current maturities of loans receivable                   |  |                  | 10,918 
|Receivables in respect of gift certificates              |  |                  | 25,785 
|Receivables in respect of sale of property and equipment |  |                  | 106,957
|Other                                                    |  |                  | 57,229 
|                                                         |  |                  | 430,707



The fair value of other receivables
is usually identical or close to their carrying value.



F-71







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14 – INVENTORIES:



Inventories presented in current
assets as at December, 31.2014:



|                                       |  | NIS in
    thousands |        
|-------------------------------------- |  | -------------------- | -------
|Fuel and oil products                  |  |                      | 79,919 
|Consumer (including non-food) products |  |                      | 431,742
|                                       |  |                      | 511,661



Real estate inventories (presented
as non-current assets)



Representing approximately a 240-dunam
parcel of property in Point-Wells near Seattle, Washington, USA, acquired by BSRE from a former related party ( Alon USA see note
36); BSRE has also signed a development agreement with the former related party to initiate and promote a detailed plan for the
approval of the building of at least 2,000 residential units on the land.



BSRE is operating to change the
zoning of the land from heavy industrial use to urban center zoning, and so far has received an "in principal" approval
for the zoning change from the Snohomish County.



Based on the new zoning, BSRE
filed with the redistrict committee a detailed plan that includes the construction of three residential complexes at a scope of
3,000 residential units public premises on the real estate and development plans (the detailed plan). the county approved 2,700
residential units as Urban Village zoning. In the process of changing the land designation from "Heavy Industrial" to
"Urban Center", 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”.



Through December 31, 2015, BSRE
invested U.S. $8.5 million (NIS 33.2 million) in the development of property rights and capitalized borrowing costs of U.S. $6.9
million (NIS 26.9 Million) (in 2014: U.S. $7.4 million and U.S. $5.5 million, respectively).



The property serves primarily
as a plant for storage and distribution of fuel and oils by the former related party, and is rented to the related party for a
period of up to 10 years. According to the development agreement, all demolition and contamination cleanups required for the land
will be the responsibility of the former related party and on its account; the former related party will also compensate BSRE
for any damages incurred in connection with such activities. In case BSRE was to sell the land the related party will be entitled
to some of the consideration, net of costs, as defined in the agreement.



As at December 31, 2015, BSRE
plans do not include the development of the property on its own, however, BSRE continues to promote the betterment and value appreciation
of the property with the intent to put it for sale.



F-72







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
15 – PROPERTY AND EQUIPMENT:



| | a. | Composition
                                         of assets and accumulated depreciation, grouped by major classifications, and changes
                                         therein are as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                            |  | Land, buildings and
    leasehold improvements (see d. below) |            |   | Filling station
    equipment |  |          | Motor vehicles |  |  | Furniture, equipment
    and installations |   |  | Total |           
|----------------------------------------------------------- |  | ------------------------------------------------------------- | ---------- | - | ----------------------------- |  | -------- | -------------- |  |  | ------------------------------------------ | - |  | ----- | ----------
|                                                            |  | NIS in thousands                                              |           
|Cost:                                                       |  |                                                               |            |   |                               |  |          |                |  |  |                                            |   |  |       |           
|Balance at January 1, 2015                                  |  |                                                               | 2,642,886  |   |                               |  | 342,953  |                |  |  | 25,354                                     |   |  |       | 1,384,336 
|Continued operations:                                       |  |                                                               |            |   |                               |  |          |                |  |  |                                            |   |  |       |           
|Transfer to investment property                             |  |                                                               | (1,253,496 | ) |                               |  | -        |                |  |  | -                                          |   |  |       | -         
|Additions                                                   |  |                                                               | 1,065      |   |                               |  | -        |                |  |  | 446                                        |   |  |       | 2,357     
|Disposals                                                   |  |                                                               | (37        | ) |                               |  | -        |                |  |  | -                                          |   |  |       | (7,619    
|Discontinued operations:                                    |  |                                                               |            |   |                               |  |          |                |  |  |                                            |   |  |       |           
|Transfer to disposal group classified as  held
    for sale |  |                                                               | (639,315   | ) |                               |  | (342,953 | )              |  |  | (11,522                                    | ) |  |       | (87,580   
|Deconsolidation of subsidiary                               |  |                                                               | (634,875   | ) |                               |  | -        |                |  |  | (13,385                                    | ) |  |       | (1,281,143
|Balance at December 31, 2015                                |  |                                                               | 116,228    |   |                               |  | -        |                |  |  | 893                                        |   |  |       | 10,351    
|Accumulated depreciation:                                   |  |                                                               |            |   |                               |  |          |                |  |  |                                            |   |  |       |           
|Balance at January 1, 2015                                  |  |                                                               | 886,367    |   |                               |  | 105,661  |                |  |  | 16,208                                     |   |  |       | 1,050,501 
|Continued operations:                                       |  |                                                               |            |   |                               |  |          |                |  |  |                                            |   |  |       |           
|Additions                                                   |  |                                                               | 2,752      |   |                               |  | -        |                |  |  | 192                                        |   |  |       | 8,054     
|Disposals                                                   |  |                                                               | (1,120     | ) |                               |  | -        |                |  |  | (50                                        | ) |  |       | (5,285    
|Transfer to investment property                             |  |                                                               | (390,748   | ) |                               |  | -        |                |  |  | -                                          |   |  |       | -         
|Discontinued operations:                                    |  |                                                               |            |   |                               |  |          |                |  |  |                                            |   |  |       |           
|Transfer to disposal group classified held for sale         |  |                                                               | (136,402   | ) |                               |  | (105,661 | )              |  |  | (5,520                                     | ) |  |       | (41,774   
|Deconsolidation of subsidiary                               |  |                                                               | (345,817   | ) |                               |  | -        |                |  |  | (10,717                                    | ) |  |       | (1,005,876
|Balance
    at December 31, 2015                            |  |                                                               | 15,032     |   |                               |  | -        |                |  |  | 113                                        |   |  |       | 5,620     
|Impairment of property and equipment                        |  |                                                               | -          |   |                               |  | -        |                |  |  | -                                          |   |  |       | (1,320    
|Net book value at December 31, 2015                         |  |                                                               | 101,196    |   |                               |  | -        |                |  |  | 780                                        |   |  |       | 3,411     



F-73







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
15 – PROPERTY AND EQUIPMENT(continued):



| | a. | Composition of assets
                                         and accumulated depreciation, grouped by major classifications, and changes therein are
                                         as follows(continued):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                     |  | Land, buildings and
    leasehold improvements (see d. below) |           |   | Filling station
    equipment |  |         | Motor vehicles |  |  | Furniture, equipment
    and installations |   |  | Total |          
|------------------------------------ |  | ------------------------------------------------------------- | --------- | - | ----------------------------- |  | ------- | -------------- |  |  | ------------------------------------------ | - |  | ----- | ---------
|                                     |  | NIS in thousands                                              |          
|Cost:                                |  |                                                               |           |   |                               |  |         |                |  |  |                                            |   |  |       |          
|Balance at January 1, 2014           |  |                                                               | 2,847,920 |   |                               |  | 306,983 |                |  |  | 23,098                                     |   |  |       | 1,435,422
|Additions                            |  |                                                               | 102,831   |   |                               |  | 35,975  |                |  |  | 4,585                                      |   |  |       | 79,130   
|Disposals                            |  |                                                               | (186,402  | ) |                               |  | (5      | )              |  |  | (2,329                                     | ) |  |       | (130,216 
|Transfer to investment property      |  |                                                               | (121,463  | ) |                               |  | -       |                |  |  | -                                          |   |  |       | -        
|Balance at December 31, 2014         |  |                                                               | 2,642,886 |   |                               |  | 342,953 |                |  |  | 25,354                                     |   |  |       | 1,384,336
|Accumulated depreciation:            |  |                                                               |           |   |                               |  |         |                |  |  |                                            |   |  |       |          
|Balance at January 1, 2014           |  |                                                               | 898,977   |   |                               |  | 74,233  |                |  |  | 15,817                                     |   |  |       | 1,071,241
|Additions                            |  |                                                               | 113,454   |   |                               |  | 31,428  |                |  |  | 2,686                                      |   |  |       | 84,483   
|Disposals                            |  |                                                               | (95,176   | ) |                               |  | -       |                |  |  | (2,295                                     | ) |  |       | (105,223 
|Transfer to investment property      |  |                                                               | (30,888   | ) |                               |  | -       |                |  |  | -                                          |   |  |       | -        
|Balance at December 31, 2014         |  |                                                               | 886,367   |   |                               |  | 105,661 |                |  |  | 16,208                                     |   |  |       | 1,050,501
|Impairment of property and equipment |  |                                                               | (14,756   | ) |                               |  | -       |                |  |  | -                                          |   |  |       | -        
|Net book value at December 31, 2014  |  |                                                               | 1,741,763 |   |                               |  | 237,292 |                |  |  | 9,146                                      |   |  |       | 333,835  



| | b. | As to liens placed on assets,
                                         see note 35.
| | -- | -----------------------------------------------------------------------------------



F-74







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 – INVESTMENT PROPERTY:



The changes
in the carrying value of investment property for the years ended December 31, 2015 and 2014 respectively, are as follows:



|                                                                                                               |  | 2014             |         |   | 2015 | 
|-------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | 
|                                                                                                               |  | NIS in thousands |        
|At January 1                                                                                                   |  |                  | 770,490 |   |      | 
|Transfer from property and equipment (b)                                                                       |  |                  | 90,575  |   |      | 
|Transfer to assets held for sale (c)                                                                           |  |                  | -       |   |      | 
|Additions (d)                                                                                                  |  |                  | 48,174  |   |      | 
|Disposals                                                                                                      |  |                  | (8,750  | ) |      | 
|Transfer to disposal group classified as held for sale                                                         |  |                  | -       |   |      | 
|Changes in fair value of investment property, net:                                                             |  |                  |         |   |      | 
|Charged to increase in fair value of investment property,
    net in the income statements (e)                 |  |                  | 50,258  |   |      | 
|Changes in fair value of investment
    property transfered from property and equipment (b) - Carried to OCI : |  |                  | 31,872  |   |      | 
|At December 31                                                                                                 |  |                  | 982,619 |   |      | 



| | a) | All the Company's investment properties
                                         are located in Israel.
| | -- | -------------------------------------------------------------------------------------------------------





| | b) | In 2015, as a result of the loss of control over mega (see Note 5a), all assets leased by Mega
from BSRE (mainly supermarket branches, office building and logistic center), that were classified as own-used and presented in
the consolidated financial statements as property and equipment, were transferred and classified on deconsolidation, as investment
property of the Company. Consequently, these assets are presented at fair value, as from the date of deconsolidation of Mega. The
revaluation of these assets from depreciated cost to fair value, on date of transfer, amounting to NIS 689,153 thousands (net of
deferred income tax affect) was carried to OCI. In 2014, six assets were transferred from property and equipment to investment
property.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As to properties that are leased
to Mega and the lease arrangements with Mega – see also Note 36.



| | c) | Additions in 2015 include mainly
                                         an investment in a commercial assets in Tel Aviv and investment in office building in
                                         Ra'anana. The additions in 2014, totaling NIS 48.2 million, include an amount of approximately
                                         NIS 40 million in respect of theComverse transaction,
                                         the building was completed and the building was transferred to its lessee in December
                                         2014.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | During the fourth quarter of 2015,
                                         BSRE updated the fair value assessments of all the assets that are leased to third parties
                                         (excluding those leased to Mega), in particular, by reducing the discount rate used,
                                         as compared to prior year, by 0.25% (except for one asset, for which it was reduced by
                                         0.5%) and by updating rental cash flows of new lease agreements. The discount rates used
                                         were determined, taking into account the type of the asset and designation, its location
                                         and the quality of the lessees. The range used for discount rates by the Company in mainly
                                         7% - 9,75% for commercial assets, and 8% - 8,25% with respect to the other properties.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-75







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 – INVESTMENT PROPERTY(continued):



| | e) | The change in fair value in 2014
                                         is in respect of the completion of projects, additional rights received on land (amounting
                                         to NIS 33 million) and the reduction of discount rate at 0.25% in some of the commercial
                                         properties.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | For details regarding liens and
                                         guarantees see note 35.
| | -- | ------------------------------------------------------------------------------------------------



| | g) | Rental revenue that has been recognized
                                         in the statements of income within revenues:
| | -- | -----------------------------------------------------------------------------------------------------------------------------



|              |  | Year ended December 31 |       
|------------- |  | ---------------------- | ------
|              |  | 2014                   |       
|              |  | NIS in thousands       |       
|Rental income |  |                        | 51,158



| | * | Includes rentals paid by Mega, as
                                         from the beginning of the third quarter of 2015 (prior periods rentals were eliminated
                                         on consolidation)
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | Break down of investment property
                                         at December 31, 2015 and 2014, by lease rights and ownership of land:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------



|                                                   |  | December 31,     |        
|-------------------------------------------------- |  | ---------------- | -------
|                                                   |  | 2014             |        
|                                                   |  | NIS in thousands |        
|Under ownership                                    |  |                  | 490,681
|Finance lease from the Israel Lands Administration |  |                  | 491,938
|Total                                              |  |                  | 982,619



| | i) | Capitalized borrowing costs:
| | -- | ----------------------------



The amount of borrowing costs
capitalized during the years ended December 31, 2015 and 2014 was NIS 5.6 million and NIS 8.5 million, respectively. The rate
used to determine the amount of borrowing costs eligible for capitalization was 4.6% in 2015 and 4.3% in 2014 (linked to the Israeli
CPI).



| | j) | Fair value of investment property
| | -- | ---------------------------------



The fair value of investment property
items is measured by external independent valuation specialists who are members of the Institute of Real Estate Appraisers in
Israel who possess recognized relevant professional training and ongoing experience on investment property in locations and classifications
that were valued.



F-76







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
16 – INVESTMENT PROPERTY(continued):



Data on measurements of
investment property in level 3



Fair value of investment property
is determined at least annually or when there are indications for changes in value (at the earlier) based on valuations carried
out by external independent valuation specialists with the adequate professional skills.



Fair value is measured using
income capitalization technique: the valuation model is based on the present value of the NOI estimate expected to derive from
the property. The valuation of real estate is based on the net annual cash flows capitalized at capitalization rate reflecting
their specific risks. When there are lease agreements, in respect of which the payments are other than the proper rental fees,
adjustments are made to reflect the rental payments at the end of the lease term.



The valuations take into account
the type of tenants actually occupying the leased property or the responsible parties for meeting the lease liabilities and the
remaining economic life of the property in those locations where such parameters are relevant.



The market value of the rental
data includes a wide range in all of the regions and uses and derives, among others, from the variance of the nature of the leased
property with respect to the age and the finish level of the various properties. For details on the capitalization rates, see
h, as above.



The fair value estimate will
increase if:



| | 1. | The market value of the rental
                                         payments will increase.
| | -- | -----------------------------------------------------------------------------------------------

| | 2. | Cash flow capitalization rate
                                         will decrease.
| | -- | -------------------------------------------------------------------------------------



The key data that are not observable
in the market refer to the following factors:



The return rate of investment
property, is based on professional publications in the relevant markets and comparison with similar transactions and the market
value of rental payments (market rent) is based or professional publications in the relevant markets and comparison with similar
transactions.



F-77







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 – INTANGIBLE ASSETS:



The composition of intangible
assets and the accumulated amortization thereon, grouped by major classifications, and changes therein in 2015 and 2014, are as
follows:



|                                                    |  | Goodwill         |          |   | Software |  |          | Brand name and trade
    marks |  |  | Customer relationships |   |  | Evacuation Fees and Other |         |   | Total | 
|--------------------------------------------------- |  | ---------------- | -------- | - | -------- |  | -------- | ------------------------------ |  |  | ---------------------- | - |  | ------------------------- | ------- | - | ----- | 
|                                                    |  | NIS in thousands |         
|At January 1, 2015                                  |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|Cost                                                |  |                  | 775,857  |   |          |  | 229,512  |                                |  |  | 143,942                |   |  |                           | 138,609 |   |       | 
|Accumulated amortization and impairment             |  |                  | -        |   |          |  | (183,559 | )                              |  |  | (27,008                | ) |  |                           | (72,501 | ) |       | 
|Net carrying amount                                 |  |                  | 775,857  |   |          |  | 45,953   |                                |  |  | 116,934                |   |  |                           | 66,108  |   |       | 
|Year ended  December  31, 2015:                     |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|Opening net carrying amount                         |  |                  | 775,857  |   |          |  | 45,953   |                                |  |  | 116,934                |   |  |                           | 66,108  |   |       | 
|Additions                                           |  |                  | -        |   |          |  | 63       |                                |  |  | -                      |   |  |                           | -       |   |       | 
|Disposals                                           |  |                  | -        |   |          |  | (7,305   | )                              |  |  | -                      |   |  |                           | -       |   |       | 
|Amortization and impairment charge (a)              |  |                  | -        |   |          |  | (2,736   | )                              |  |  | -                      |   |  |                           | -       |   |       | 
|Deconsolidation of subsidiary                       |  |                  | (161,610 | ) |          |  | (30,312  | )                              |  |  | -                      |   |  |                           | (96     | ) |       | 
|Transfer to disposal group classified held for sale |  |                  | (614,247 | ) |          |  | (5,663   | )                              |  |  | (116,934               | ) |  |                           | (66,012 | ) |       | 
|Net carrying amount                                 |  |                  | -        |   |          |  | -        |                                |  |  | -                      |   |  |                           | -       |   |       | 
|                                                    |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|At December 31, 2015:                               |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|Cost                                                |  |                  | 775,857  |   |          |  | 229,575  |                                |  |  | 143,942                |   |  |                           | 138,609 |   |       | 
|Accumulated amortization and  impairment            |  |                  | -        |   |          |  | (193,600 | )                              |  |  | (27,008                | ) |  |                           | (72,501 | ) |       | 
|Deconsolidation of subsidiary                       |  |                  | (161,610 | ) |          |  | (30,312  | )                              |  |  | -                      |   |  |                           | (96     | ) |       | 
|Transfer to disposal group classified held for sale |  |                  | (614,247 | ) |          |  | (5,663   | )                              |  |  | (116,934               | ) |  |                           | (66,012 | ) |       | 
|Net carrying amount                                 |  |                  | -        |   |          |  | -        |                                |  |  | -                      |   |  |                           | -       |   |       | 
|                                                    |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|At January 1, 2014                                  |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|Cost                                                |  |                  | 797,857  |   |          |  | 205,766  |                                |  |  | 143,785                |   |  |                           | 138,609 |   |       | 
|Accumulated amortization and impairment             |  |                  | -        |   |          |  | (159,223 | )                              |  |  | (21,568                | ) |  |                           | (58,385 | ) |       | 
|Net carrying amount                                 |  |                  | 797,857  |   |          |  | 46,543   |                                |  |  | 122,217                |   |  |                           | 80,224  |   |       | 
|Year ended  December  31, 2014:                     |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|Opening net carrying amount                         |  |                  | 797,857  |   |          |  | 46,543   |                                |  |  | 122,217                |   |  |                           | 80,224  |   |       | 
|Additions                                           |  |                  | -        |   |          |  | 23,746   |                                |  |  | 157                    |   |  |                           | -       |   |       | 
|Amortization charge                                 |  |                  | -        |   |          |  | (24,336  | )                              |  |  | (5,440                 | ) |  |                           | (14,116 | ) |       | 
|Impairment                                          |  |                  | (22,000  | ) |          |  | -        |                                |  |  | -                      |   |  |                           | -       |   |       | 
|Net carrying amount                                 |  |                  | 775,857  |   |          |  | 45,953   |                                |  |  | 116,934                |   |  |                           | 66,108  |   |       | 
|At December 31, 2014:                               |  |                  |          |   |          |  |          |                                |  |  |                        |   |  |                           |         |   |       | 
|Cost                                                |  |                  | 775,857  |   |          |  | 229,512  |                                |  |  | 143,942                |   |  |                           | 138,609 |   |       | 
|Accumulated amortization and  impairment            |  |                  | -        |   |          |  | (183,559 | )                              |  |  | (27,008                | ) |  |                           | (72,501 | ) |       | 
|Net carrying amount                                 |  |                  | 775,857  |   |          |  | 45,953   |                                |  |  | 116,934                |   |  |                           | 66,108  |   |       | 



F-78







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 – INTANGIBLE ASSETS(continued):



| | a. | Amortization relating to continuing
                                         operations is included in the income statements within Selling, general and administrative
                                         expenses; Impairment losses are presented in other gains or losses. and impairment losses
                                         relating to discontinued operations is included in Profit or Loss from Discontinued Operations.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 18 – LOANS RECEIVABLE



|                                         |  | December 31      |        
|---------------------------------------- |  | ---------------- | -------
|                                         |  | 2014             |        
|                                         |  | NIS in thousands |        
|Loan to jointly controlled companies (1) |  |                  | 44,609 
|Loan to associate                        |  |                  | 36,320 
|Loans to others (2)                      |  |                  | 65,159 
|                                         |  |                  | 146,088
|Less current maturities                  |  |                  | 10,917 
|                                         |  |                  | 135,171



| | (1) | Loans bearing interest of 5.26%
                                         and linked to the Israeli CPI and the repayment date has not yet been determined. These
                                         Loans were granted in connection with the purchase of the leasehold rights in the real
                                         estate of the wholesale market project. The repayment of half of these loans is secured
                                         by a guarantee of the Gindi Group (see also note 6), in the event that it is not repaid
                                         by April 15, 2018. These loans have no stated maturity date.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Mainly owners of filling stations
                                         to which the Company supplies fuel (discontinued operation).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------



The fair value of loans receivables
is usually identical or close to their carrying value.



NOTE 19 – OTHER LONG TERM RECEIVABLES



|                                                  |  | December 31      |       
|------------------------------------------------- |  | ---------------- | ------
|                                                  |  | 2014             |       
|                                                  |  | NIS in thousands |       
|Conditional grants to owners of fuel stations (1) |  |                  | 14,975
|Prepaid rent (2)                                  |  |                  | 13,879
|Others                                            |  |                  | 23,886
|                                                  |  |                  | 52,740



| | (1) | Includes mainly conditional grants
                                         the Company paid to the owners of land in connection with the construction of filling
                                         stations (discontinued operation). The amounts will become grants after the end of the
                                         commitment period or during the period if the filling station owners meet their undertakings
                                         to operate the stations during the agreement period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The prepaid rent in respect of
                                         the fueling and commercial sites (discontinued operation) is amortized over the term
                                         of the lease. As of December 31, 2014 the remaining term of the leases is between 2 and
                                         12 years.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-79







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 20 – OTHER ACCOUNT PAYABLES
AND ACCRUED EXPENSES:



|                                                         |  | December 31      |        
|-------------------------------------------------------- |  | ---------------- | -------
|                                                         |  | 2014             |        
|                                                         |  | NIS in thousands |        
|Payroll and related expenses and other employee benefits |  |                  | 161,616
|Government authorities                                   |  |                  | 164,902
|Liability in respect of gift certificates                |  |                  | 214,302
|Accrued expenses                                         |  |                  | 100,147
|Other                                                    |  |                  | 82,307 
|Total                                                    |  |                  | 723,274





| | * | Mainly in respect of guarantees to Mega.
| | - | ----------------------------------------





NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES



Composition



|                                 |  | December 31      |          
|-------------------------------- |  | ---------------- | ---------
|                                 |  | 2014             |          
|                                 |  | NIS in thousands |          
|                                 |  |                  |          
|Loans from banks and others  (1) |  |                  | 2,472,575
|Debentures (2)                   |  |                  | 2,449,248
|Convertible debentures (2)       |  |                  | 60,424   
|                                 |  |                  | 4,982,247



| | (1) | Loans
                                         from banks and others:
| | --- | ---------------------------------------------------------------------



|                                        |  | December 31      |          
|--------------------------------------- |  | ---------------- | ---------
|                                        |  | 2014             |          
|                                        |  | NIS in thousands |          
|Current liabilities*:                   |  |                  |          
|Bank overdrafts (note 9)                |  |                  | 5,490    
|Loans from banks and others             |  |                  | 657,939  
|Credit from parent company              |  |                  | -        
|Commercial paper                        |  |                  | 111,197  
|Current maturities of non-current loans |  |                  | 283,342  
|                                        |  |                  | 1,057,968
|Non-current liabilities:                |  |                  |          
|Loan from parent company                |  |                  | -        
|Loans from banks and others             |  |                  | 1,414,607
|                                        |  |                  | 2,472,575



| | * | including amounts that are due
                                         for immediate repayment: approximately NIS 262 million from the recovery plan of Mega,
                                         approximately NIS 140 million following the lowering of the credit rating of the Company
                                         NIS 23.3 million in Bee Group and NIS 30 million in relation to Eden Teva guarantee.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Regarding financing agreements
and term with banks and others, see note 34.



F-80







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



Composition and details
of liabilities based on interest rates and linkage terms



|                                                                                     |  | December 31                                                                                                         |     
|------------------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------- | ----
|                                                                                     |  | Weighted
                                         average interest
                                         rate(a) |     
|                                                                                     |  | %                                                                                                                   |     
|                                                                                     |  |                                                                                                                     |     
|NIS - linked to the Israeli CPI and bears a fixed annual interest rate               |  |                                                                                                                     | 3.34
|NIS - linked to the Israeli CPI  without  interest
    from controlling shareholder: |  |                                                                                                                     |     
|Short - term                                                                         |  |                                                                                                                     | -   
|Long - term (discounted at 13%)                                                      |  |                                                                                                                     | -   
|NIS - Unlinked and bearing a fixed annual interest
    rate                          |  |                                                                                                                     | 6.23
|NIS - Unlinked and bearing a variable
    annual interest rate                       |  |                                                                                                                     | 3.4 
|                                                                                     |  |                                                                                                                     |     



| | (a) | Weighted average interest rate,
                                         as of December 31, 2015 See also d below.
| | --- | ------------------------------------------------------------------------------------------------------------------

| | (b) | The long-term loans net of current
                                         maturities are repayable in the years subsequent to the statement of financial position
                                         date as follows.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                          |  | December 31      |          
|------------------------- |  | ---------------- | ---------
|                          |  | 2014             |          
|                          |  | NIS in thousands |          
|Second year               |  |                  | 359,018  
|Third year                |  |                  | 271,356  
|Fourth year               |  |                  | 174,633  
|Fifth year and afterwards |  |                  | 609,600  
|                          |  |                  | 1,414,607



| | (c) | The carrying amounts and fair
                                         value of the non-current loans are as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------



|                     |  | December 31      |          
|-------------------- |  | ---------------- | ---------
|                     |  | 2014             |          
|                     |  | NIS in thousands |          
|                     |  | Carrying amount  |          
|Bank and other loans |  |                  | 1,697,949





| | (*) | The fair values of long-term loans are based on cash flows discounted using a rate based on the
capitalization rate from 2.99% to 6.23% (2014:2.8%).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------





The carrying amounts of short-term
loans approximate their fair value.



F-81







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | (d) | Loan financial
                                         covenants
| | --- | -----------------------------------------------------------------



Blue Square has a loan with total
of approximately NIS 140.5 million as at December 31, 2015, regarding which Blue Square has undertaken to meet certain financial
covenants.



The terms of the loan to Blue Square
provide for the bank to add 0.25% to the interest rate, in the event that a rating company (Standard & Poor's Maalot or Midroog)
reduces the Company’s rating by two grades. Additional 0.25% will be added in the event that the rating of the Company reduces
to BBB under Maalot rating or Baa2 under Midroog rating. Below BBB or Baa2 rating will entitle the bank to call the loan for repayment.
In July 2015, the Company's rating was reduced below Baa2, and accordingly the Company classifies and presents this loan as a
current liability at December 31, 2015. As to subsequent ratings – see note 37d.





As explained below, the Company is
holding negotiations with its banks and Series C debenture holders and did not pay the current maturity of this loan (see note
37).



BSRE has a loan with a total balance
of NIS 398 million, whereby BSRE has undertaken to meet certain financial covenants. As of December 31, 2015, BSRE met the above
mentioned covenants.



Bee Group has long term loans
with a total of NIS 23.3 million, as of December 31, 2015, pursuant to which Bee Group has undertaken to meet certain financial
covenants. As at December 31, 2015 Bee Group did not meet the covenants for the loans, and they were classified and presented
as current liabilities. The bank has agreed, in principal, that if the transaction with the potential buyer of the Company (see
note 37), does not finalise, it will be repaid from the realization of its pledge on Naaman shares (note 35).



The financial covenants in the
subsidiaries' loan agreements restrict the following subsidiaries from transferring funds to Blue Square in the form of cash dividends,
loans or advances, except for Bee Group, which is restricted from transferring funds to the Company in the form of dividends,
and BSRE that is restricted from transferring funds in the form of dividends, when its equity falls below NIS 700 million, and
in Dor Alon below NIS 380 million, following such distribution. As of December 31, 2015, Bee Group did not have any earnings to
distribute as a dividend. As of December 31, 2015, BSRE equity exceeded the above threshold by more than NIS 800 million, and
Dor Alon equity exceeded the above threshold by NIS 200 million.



F-82







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | (2) | Debentures
                                         and convertible debentures
| | --- | ------------------------------------------------------------------------------



|                                                           |  |     |         |  | Weighted Average  |  |      | December 31      | 
|---------------------------------------------------------- |  | --- | ------- |  | ----------------- |  | ---- | ---------------- | 
|                                                           |  |     |         |  | interest rates at |  |      | 2014             | 
|Debentures                                                 |  | Ref |         |  | December 31, 2015 |  |      | NIS in thousands | 
|Blue Square:                                               |  |     |         |  |                   |  |      |                  | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|Alon Blue Square marketable debentures (Series C)          |  |     | d(1)(a) |  |                   |  | 2.50 | %                | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|Blue Square Real Estate:                                   |  |     |         |  |                   |  |      |                  | 
|Marketable debentures-Blue                                 |  |     |         |  |                   |  |      |                  | 
|Square Real Estate (Series B)                              |  |     | d(2)(b) |  |                   |  | 4.70 | %                | 
|Marketable debentures-Blue                                 |  |     |         |  |                   |  |      |                  | 
|Square Real Estate (Series C)                              |  |     | d(2)(c) |  |                   |  | 4.20 | %                | 
|Marketable debentures-Blue                                 |  |     |         |  |                   |  |      |                  | 
|Square Real Estate (Series D)                              |  |     | d(2)(d) |  |                   |  | 4.85 | %                | 
|Marketable debentures-Blue                                 |  |     |         |  |                   |  |      |                  | 
|Square Real Estate (Series E)                              |  |     | d(2)(e) |  |                   |  | 3.80 | %                | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|Dor Alon Energy:                                           |  |     |         |  |                   |  |      |                  | 
|Marketable debentures-Dor Alon                             |  |     |         |  |                   |  |      |                  | 
|Energy (Series B)                                          |  |     |         |  |                   |  |      |                  | 
|Marketable debentures-Dor Alon                             |  |     |         |  |                   |  |      |                  | 
|Energy (Series C)                                          |  |     |         |  |                   |  |      |                  | 
|Marketable debentures-Dor Alon                             |  |     |         |  |                   |  |      |                  | 
|Energy (Series D)                                          |  |     |         |  |                   |  |      |                  | 
|Debentures of Dorgan Batuchot ltd.                         |  |     |         |  |                   |  |      |                  | 
|Dor Debentures                                             |  |     |         |  |                   |  |      |                  | 
|Total                                                      |  |     |         |  |                   |  |      |                  | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|Less- amount of discount (net of accumulated amortization) |  |     |         |  |                   |  |      |                  | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|Less-current maturities                                    |  |     |         |  |                   |  |      |                  | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|                                                           |  |     |         |  |                   |  |      |                  | 
|Convertible debentures                                     |  |     |         |  |                   |  |      |                  | 
|Blue Square Real Estate (Series A)                         |  |     | d(2)(a) |  |                   |  | 6.25 | %                | 
|Conversion component at fair value                         |  |     | a)      |  |                   |  |      |                  | 
|Premium (net of amortization)                              |  |     |         |  |                   |  |      |                  | 
|Total                                                      |  |     |         |  |                   |  |      |                  | 
|Less-current maturities                                    |  |     |         |  |                   |  |      |                  | 
|                                                           |  |     |         |  |                   |  |      |                  | 



F-83







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | a) | Conversion component of convertible
                                         debentures
| | -- | ---------------------------------------------------------------------------------------



The conversion component of the
BSRE convertible debentures is calculated based on a binomial model.



| | b) | Repayment dates of debentures
                                         and convertible debentures (excluding discount or premium):
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



|                                |  | December 31      |          
|------------------------------- |  | ---------------- | ---------
|                                |  | 2014             |          
|                                |  | NIS in thousands |          
|First year - current maturities |  |                  | 463,306  
|Second year                     |  |                  | 391,384  
|Third year                      |  |                  | 353,363  
|Fourth year                     |  |                  | 362,336  
|Fifth year and afterwards       |  |                  | 974,860  
|Total                           |  |                  | 2,545,249



| | c) | The carrying amounts and fair
                                         value of the debentures and the convertible debentures are as
                                         follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                       |  | December 31      |          
|---------------------- |  | ---------------- | ---------
|                       |  | 2014             |          
|                       |  | NIS in thousands |          
|                       |  | Carrying amount  |          
|Debentures             |  |                  | 2,449,248
|Convertible debentures |  |                  | 60,424   
|Total                  |  |                  | 2,509,672



| | * | The fair values of debentures
                                         and convertible debentures, is based on quoted prices, as at the statement of position
                                         date, in active markets
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | Debentures and convertible debentures
                                         – additional details:
| | -- | ----------------------------------------------------------------------------------------------------



| | 1) | Blue Square:
| | -- | ------------



On November
9, 2010, the Company completed its public tender 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). During 2012, Series C was expanded by a private offering
to institutional investors in the amount of NIS 35 million par value for 89.5% of their par value, reflecting a return of 5.7%.
During 2013 additional expansions were made for Series C by private offerings to institutional investors, in the total amount
of NIS 162 million par value, reflecting an average return of 3.67%.



On April
3, 2014 the series C was expanded by a private offering to institutional investors in the amount of NIS 150 million par value,
for 101.3% of their par value, reflecting a return of 3.8%.



F-84







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES (continued):



| | 1) | Blue Square (continued)
| | -- | -----------------------



As of December
31, 2015 the Company's subsidiaries hold NIS 4.4 million of Series C of the Company.



On July
28, 2015, representatives and legal counsel were appointed for Series C bondholders. Starting from October 27, 2015, the
meeting of bondholders convened who decided on the deferment of the principal payment dates from November 4, 2015 to May 29,
2016. The meeting of bondholders, in its decision dated February 15, 2016 allowed for negotiation with the potential buyer
(Ben Moshe) until March 17, 2016. it was also decided at the meeting, to instruct the bonds' trustee to put for immediate
repayment the full balance of the Company's debt to the bondholders and authorized him to take the necessary measures to
execute the decision, including notifying the Company for making a decision in this section and the demand of the debt's
payment within seven days from the notice date ("immediate repayment decision"). The immediate repayment decision
is supposed to enter into effect without further decision at the earlier of: a. transfer of the control of the Company
directly or indirectly (including changing the control in the controlling shareholder) without the consent of bondholders or
b. the exclusivity period (no-shop) of Ben Moshe's proposal has elapsed and a motion was not filed with the court (agreed by
the trustee and the representatives of the bondholders) 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.



The balance
of bonds presented in long term liabilities was classified to short term liabilities starting from the third quarter of 2015.



On November
2, 2015, in the framework of the negotiations conducted by the Company with the representatives of Series C bond holders and the
Company's creditor banks, principles were formulated for an outline of rescheduling and reorganization of the financial debt, including
the guaranteed debt of the Company. As part of the outline, it was agreed that effective from November 1, 2015 all debts bear interest
at the rate of 4% per annum linked to the CPI to be paid regularly by semi-annual installments each year, 1% interest will accrue
and paid at the final payment date of the principal, as well as an addition of up to 1% interest, which terms will be determined
in a detailed agreement. In addition, principal payments (pro-rated among banks and bondholders) will be paid at a rate of 2% each
year from November 2017 until 2019. The outstanding principal will be repaid in one payment in November 2020.



In addition,
it was agreed that debt repayment would be accelerated if Dor Alon or BSRE will be sold, and the debt holders would receive up
to 10% of the Company's shares (see note 37).



F-85







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES (continued):



| | 2) | BSRE
| | -- | ----



| | a) | BSRE (Series A)
| | -- | ---------------



Convertible
debentures (Series A)



These debentures
are to be redeemed in four equal annual installments on August 31 of each year in the period from 2013 through 2016. The
Series A debentures are linked (principal and interest) to the CPI and bear interest at an annual rate of 6.25%, which is payable
every six months, on February 28 and August 31 of each year from 2007 until the final redemption of the debentures. The Series
A debentures are convertible into registered BSRE ordinary shares of NIS 1 par value at any time through August 16, 2016,
except during the periods from August 17 through August 31 in each of the years between 2013-2015 (inclusive). The conversion
rate for these debentures as at December 31, 2015 was NIS 217.76 par value of debentures per share (adjusted to the payment of
dividend in December 2015). The par value balance of the debentures as of December 31, 2015 was NIS 25 million.



The annual
effective interest rate on the debentures, taking into account the issuance expenses as above, is 5.4%.



| | b) | BSRE (Series B)
| | -- | ---------------



These debentures
are to be redeemed in four equal annual installments on August 31 of each year in the period from 2013 through 2016. The
Series B debentures are linked to the CPI and bear interest at an annual rate of 4.7%, which is payable every six months, on February
28 and August 31 of each year from 2007 until the final redemption of the debentures.



The annual
effective interest rate on the debentures, taking into account the issuance expenses as above, is 5.5%.



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
income statement.



| | c) | BSRE (Series C)
| | -- | ---------------



On October
18, 2009, BSRE issued to the public Series C debentures; the debentures were issued through a tender under a shelf prospectus
of the company dated May 20, 2009.



The principal
of debentures is to be redeemed in eight non-equal annual installments on October 31 of each of the years 2011 to 2018 (inclusive),
where six installments each constituting of 7.5% of the amount of the principal of the debentures would be redeemed on October
31 of each of the years 2011 to 2016 and two installments each constituting 27.5% of the amount of the principal of the debentures
would be redeemed in October of each of the years 2017 and 2018.



F-86







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES (continued):



| | c) | BSRE (Series C)(continued):
| | -- | ---------------------------



The Series
C debentures are linked to the CPI and bear interest at an annual rate of 4.2%, which is payable every six months, on April 30
and October 31 of each year from 2010 until the final redemption of the debentures.



The annual
effective interest rate payable on Series C debentures, taking into account the issuance expenses as above is 4.55%.



| | d) | BSRE (Series D)
| | -- | ---------------



On July 12,
2010, BSRE completed its Series D debenture issue in accordance with a shelf prospectus. The Debentures are linked to the Israeli
CPI and bear fixed interest of 4.5%. The Debenture principal is to be redeemed in four equal annual payments, which will be paid
on June 30 in each of the years 2017 to 2020 (inclusive). The Debenture interest is to be paid 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).



During 2012
and 2013, the debentures (Series D) were expanded by several private offerings to institutional investors amounting to NIS 309
million and NIS 276 million par values, respectively. Total net consideration received from such offerings, net of commissions
to the institutional investors and distributors, amounted to NIS 319 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 4.65%.



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



| | e) | BSRE (Series E)
| | -- | ---------------



On October
30, 2013, BSRE issued by a public offering new debentures series (Series E) with par value of NIS 121.7 million, for NIS 120 million
(net of issuance expenses), reflecting a return of 3.5%. The debentures are payable in six annual installments effective from
2018, where the first four installments will represent 7.5% of the par value of the debentures and the last two installments will
represent 35% of the par value of the debentures. The debentures are linked (principal and interest) to the CPI and bear annual
interest of 3.3% payable in semi-annual payments on May 31 and November 30 effective from May 2014.



On January
27, 2014 the Company issued additional NIS 265.5 million par value debentures (Series E) in exchange for Debentures (series B)
– see (b) above.



According
to the deed of trust, BSRE committed to comply with certain financial covenants. The deed of trust includes also a "cross
default" covenant that is triggered when any of BSRE's debentures, or other material obligation, that exceed NIS 100 million
has defaulted.



In addition,
the terms of Series E debentures prescribe that in the event that the rating company decreases the BSRE's credit rating below
A3, the annual interest on the debentures will increase by 0.5% ; any additional reduce of BSRE's rating will increase the interest
with additional 0.25% , up to a maximum annual interest rate of 4.3%.



F-87







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES (continued):



| | e) | BSRE (Series E)(continued):
| | -- | ---------------------------



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 debentures holders (Series E) is obtained or provided that a current charge on its entire assets is created also in favor
of the debentures holders (Series E) at the same ranking.



As of December
31, 2015 BSRE met the financial covenants.



| | f) | During 2015 BSRE's (Series A,
                                         B, C, D and E) debentures rating has declined several times. As at December 31, 2015
                                         the debentures were rated by Midroog at Credit Review A3 with negative implications.
                                         As a result, the annual interest rate that applies to Series D and E was increased by
                                         0.35% and 0.5%, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Dor Alon
| | -- | --------



During 2015,
Dor Alon completed the issuance of NIS 250 million Series E debentures, in which it undertook to meet covenants that are based
on its adjusted equity and distribution limitations. As at December 31, 2015, Dor Alon (discontinued operation) meets these covenants.



NOTE 22 – OTHER LIABILITIES:



|                                                                        |  | December 31      |        
|----------------------------------------------------------------------- |  | ---------------- | -------
|                                                                        |  | 2014             |        
|                                                                        |  | NIS in thousands |        
|Rental contracts and value of unfavorable
    terms of operating leases |  |                  | 96,687 
|Other                                                                   |  |                  | 9,580  
|                                                                        |  |                  | 106,267



NOTE 23 – RETIREMENT BENEFIT OBLIGATIONS:



| | a. | Composition of the liability
                                         for defined benefit plans:
| | -- | ------------------------------------------------------------------------------------------------



|                                                 |  | December 31      |        
|------------------------------------------------ |  | ---------------- | -------
|                                                 |  | 2014             |        
|                                                 |  | NIS in thousands |        
|Statement of financial position obligations for: |  |                  |        
|Present value of funded obligation               |  |                  | 478,603
|Provision in respect of unutilized sick leave    |  |                  | 38,285 
|                                                 |  |                  | 516,888
|Fair value of the plan assets                    |  |                  | 458,172
|                                                 |  |                  |        
|Total present value of the obligation, net       |  |                  | 58,716 



F-88







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 23 – RETIREMENT BENEFIT OBLIGATIONS(continued):



| | b. | Changes in the liability
                                         for defined benefit plans (continued):
| | -- | --------------------------------------------------------------------------------------------------------



|                                                                 |  | 2014             |         |   | 2015 | 
|---------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | 
|                                                                 |  | NIS in thousands |        
|Liability in respect of defined benefit plans at January 1       |  |                  | 534,276 |   |      | 
|Benefits paid                                                    |  |                  | (54,136 | ) |      | 
|Deconsolidation of subsidiary                                    |  |                  | -       |   |      | 
|Current service costs                                            |  |                  | 38,343  |   |      | 
|Past service cost                                                |  |                  | (13,257 | ) |      | 
|Loss from change in demographic assumption                       |  |                  | 792     |   |      | 
|Gain from change in financial assumptions                        |  |                  | (5,469  | ) |      | 
|Experience (gains) losses                                        |  |                  | (4,369  | ) |      | 
|Transfer to disposal groups classified held for sale             |  |                  | -       |   |      | 
|Interest costs                                                   |  |                  | 20,708  |   |      | 
|Liability in respect of defined
    benefit plans at December 31 |  |                  | 516,888 |   |      | 



| | c. | Changes in plans assets:
| | -- | ------------------------



|                                                                     |  | 2014             |         |   | 2015 | 
|-------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- | 
|                                                                     |  | NIS in thousands |        
|Fair value of plan assets at January 1                               |  |                  | 462,972 |   |      | 
|Employer contributions paid into the plan                            |  |                  | 36,607  |   |      | 
|Deconsolidation of subsidiary                                        |  |                  | -       |   |      | 
|Transfer to disposal group classified as held for sale               |  |                  | -       |   |      | 
|Return on plan assets, excluding amounts included in interest income |  |                  | (9,889  | ) |      | 
|Benefits paid                                                        |  |                  | (49,914 | ) |      | 
|Interest income on plan assets                                       |  |                  | 18,602  |   |      | 
|Other adjustments                                                    |  |                  | (206    | ) |      | 
|Fair value of plan assets at December 31                             |  |                  | 458,172 |   |      | 



The actual return (loss) on plan
assets was NIS 1,139 thousands (2014 – NIS 8,713 thousands, 2013 NIS 26,637 thousands).



Expected contributions to post-
employment benefit plans for the year ending December 31, 2016 are approximately NIS 381 thousands.



The accumulated remeasurement
component gains (losses) that were recognized in the OCI, net of taxes, as of December 31, 2015, 2014 and 2013 is 200 NIS 27,263
thousands and NIS 27,170 thousands, respectively.



F-89







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 23 – RETIREMENT BENEFIT OBLIGATIONS(continued):



| | d. | Expense
                                         recognized in the income statements in respect of defined benefit plans:
| | -- | -------------------------------------------------------------------------------------------------------------------------



|                               |  | Year ended December
    31 |        
|------------------------------ |  | -------------------------- | -------
|                               |  | 2013                       |        
|                               |  | NIS in thousands           |        
|Current services costs         |  |                            | 45,748 
|Past service cost              |  |                            | -      
|Interest cost                  |  |                            | 19,911 
|Interest income on plan assets |  |                            | (20,388
|Other adjustments              |  |                            | 799    
|                               |  |                            | 46,070 



The expense recognized in the income
statements for defined contribution plans was NIS 0 in 2015 , NIS 460 thousands in 2014, and NIS 517 thousand in 2013.



| | e. | The
                                         expenses were included in the following income statements items:
| | -- | -------------------------------------------------------------------------------------------------------------



|                                             |  | Year ended December
    31 |       
|-------------------------------------------- |  | -------------------------- | ------
|                                             |  | 2013                       |       
|                                             |  | NIS in thousands           |       
|Selling, general and administrative expenses |  |                            | 46,547
|Financial (income) expenses                  |  |                            | (477  
|                                             |  |                            | 46,070



The principal
actuarial assumptions used were as follows:



|                                   |  | December
    31 |        
|---------------------------------- |  | --------------- | -------
|                                   |  | 2014            |        
|                                   |  |                 | %      
|Discount
    rate                  |  |                 | 2.7-4.1
|Inflation rate                     |  |                 | 1.3-1.9
|Expected return on plan
    assets |  |                 | 3.9-5.4
|Future salary increases            |  |                 | 1-4    
|Rates of employee turnover         |  |                 | 1-54   



Assumptions regarding future mortality
rates are based on actuarial advice in accordance with published statistics and past experience in Israel. Mortality rates are
based on the pension circular 2013-3-1 of the Ministry of Finance.



F-90







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 24 – PROVISIONS FOR OTHER
LIABILITIES AND CHARGES:





|                                                    |  | Real estate related
    disputes (1) |        |  | Legal claims |  |         | Total | 
|--------------------------------------------------- |  | ------------------------------------ | ------ |  | ------------ |  | ------- | ----- | 
|                                                    |  | NIS in thousands                     |       
|At January 1, 2014                                  |  |                                      | 18,820 |  |              |  | 40,370  |       | 
|Charged (credited) to the income statements:        |  |                                      |        |  |              |  |         |       | 
|Provisions made during the year                     |  |                                      | 3,570  |  |              |  | 26,119  |       | 
|Provisions reversed during the year                 |  |                                      | -      |  |              |  | (13,385 | )     | 
|Provisions used during the
    year                 |  |                                      | -      |  |              |  | (7,797  | )     | 
|At December 31, 2014                                |  |                                      | 22,390 |  |              |  | 45,307  |       | 
|                                                    |  |                                      |        |  |              |  |         |       | 
|At January 1, 2015                                  |  |                                      |        |  |              |  |         |       | 
|Deconsolidation of subsidiary                       |  |                                      | -      |  |              |  | (4,813  | )     | 
|Transfer to disposal group classified held for sale |  |                                      | -      |  |              |  | (12,735 | )     | 
|Charged (credited) to the income statements:        |  |                                      |        |  |              |  |         |       | 
|Provisions made during the year                     |  |                                      | 801    |  |              |  | 20,538  |       | 
|Unwind of discount                                  |  |                                      | -      |  |              |  | 178     |       | 
|Transferred to  trade
    payables                  |  |                                      | -      |  |              |  | (19,300 | )     | 
|At December
    31, 2015                            |  |                                      | 23,191 |  |              |  | 29,175  |       | 



| | (1) | Provisions relating
                                         to disagreements with respect to lease fees required for assets where the lease term
                                         has ended, disagreements with respect to balances due to constructors or as to whether
                                         conditions for payment were met, and for development and construction levies that are
                                         under negotiation with the authorities (see also note 33).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 25 – EQUITY



The total authorized number
of ordinary shares as of December 31, 2015 and 2014 is 100 million shares with a par value of NIS 1 per share. and 66,161,860
issued and outstanding shares (of which 207,403 shares are held by the company as treasury shares) All issued shares are fully
paid.



In July 1996, the Company completed
a global offering of 6,900,000 American Depositary Shares (ADS), with each ADS representing one Ordinary share, at a price per
share of $11. In addition, in June 1999, 1,500,000 ADSs were issued upon the exercise of stock options.



The ADSs are traded on the
New York Stock Exchange (NYSE). The ADSs represent 6.26% of the outstanding Ordinary Shares of the Company as of December 31,
2015. As of December 31, 2015 the shares are quoted at $4.29 per ADS.



Commencing November 2000, the
Company’s shares have also been listed for trade on the Tel Aviv Stock Exchange. As of December 31, 2015 the shares are
quoted at NIS 1.73 per ordinary share.



On December 14, 2015, the
Company effected a reverse split, so that every ADS is equal to 10 shares.



F-91







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 26 – OTHER RESERVES:





|                                             |  | Availablefor saleinvestments |        |   | Currencytranslationdifferences |  |        | Transactionswith non-controllinginterests |  |  | Transactionswith parentcompany |   |  | Assetrevaluation |        |  | Total | 
|-------------------------------------------- |  | ---------------------------- | ------ | - | ------------------------------ |  | ------ | ----------------------------------------- |  |  | ------------------------------ | - |  | ---------------- | ------ |  | ----- | 
|                                             |  | NIS
    in thousands         |       
|At January 1, 2013                           |  |                              | 9,896  |   |                                |  | (1,443 | )                                         |  |  | (8,870                         | ) |  |                  | -      |  |       | 
|Change in other reserves:                    |  |                              |        |   |                                |  |        |                                           |  |  |                                |   |  |                  |        |  |       | 
|Available for sale investments               |  |                              | 8,796  |   |                                |  | -      |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|Transactions with non- controlling interests |  |                              | (137   | ) |                                |  | 153    |                                           |  |  | 20,836                         |   |  |                  | -      |  |       | 
|Currency translation differences             |  |                              | -      |   |                                |  | (4,946 | )                                         |  |  | -                              |   |  |                  | -      |  |       | 
|Asset revaluation reserve                    |  |                              | -      |   |                                |  | -      |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|At December 31, 2013                         |  |                              | 18,555 |   |                                |  | (6,236 | )                                         |  |  | 11,966                         |   |  |                  | -      |  |       | 
|Change in other reserves:                    |  |                              |        |   |                                |  |        |                                           |  |  |                                |   |  |                  |        |  |       | 
|Available for sale investments               |  |                              | (1,214 | ) |                                |  | -      |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|Transactions with non- controlling interests |  |                              | (116   | ) |                                |  | (133   | )                                         |  |  | 19,279                         |   |  |                  | -      |  |       | 
|Currency translation differences             |  |                              | -      |   |                                |  | 8,109  |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|Asset revaluation reserve                    |  |                              | -      |   |                                |  | -      |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|At December 31, 2014                         |  |                              | 17,225 |   |                                |  | 1,740  |                                           |  |  | 31,245                         |   |  |                  | -      |  |       | 
|                                             |  |                              |        |   |                                |  |        |                                           |  |  |                                |   |  |                  |        |  |       | 
|Change in other reserves:                    |  |                              |        |   |                                |  |        |                                           |  |  |                                |   |  |                  |        |  |       | 
|Available for sale investments               |  |                              | (4,591 | ) |                                |  | -      |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|Transactions with non- controlling interests |  |                              | (2,377 | ) |                                |  | (567   | )                                         |  |  | 24,495                         |   |  |                  | -      |  |       | 
|Transactions with parent company             |  |                              | -      |   |                                |  | -      |                                           |  |  | -                              |   |  |                  | 23,204 |  |       | 
|Currency translation differences             |  |                              | -      |   |                                |  | 186    |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|Asset revaluation reserve                    |  |                              | -      |   |                                |  | -      |                                           |  |  | -                              |   |  |                  | -      |  |       | 
|At December 31, 2015                         |  |                              | 10,257 |   |                                |  | 1,359  |                                           |  |  | 55,740                         |   |  |                  | 23,204 |  |       | 







F-92







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 27 – EXPENSES BY NATURE(continuing operations):





|                                                                     |  | Year ended December 31 |        
|-------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                     |  | 2013                   |        
|                                                                     |  | NIS in thousands       |        
|Change in inventories                                                |  |                        | (7,504 
|Net purchases                                                        |  |                        | 33,227 
|Wages salaries and related expenses                                  |  |                        | 51,400 
|Depreciation, amortization and impairment charges                    |  |                        | 30,342 
|Advertising costs                                                    |  |                        | 9,420  
|Rent and maintenance expenses                                        |  |                        | 38,502 
|Other expenses*                                                      |  |                        | 11,005 
|Total cost of sales, selling general
    and administrative expenses |  |                        | 166,392



| | * | mainly provision for claims
| | - | ---------------------------



NOTE 28 – OTHER GAINS (LOSSES)(continuing operations):



|                                                                           |  | Year ended December
    31 |      
|-------------------------------------------------------------------------- |  | -------------------------- | -----
|                                                                           |  | 2013                       |      
|                                                                           |  | NIS in thousands           |      
|Other gains:                                                               |  |                            |      
|Gain from sale of property and
    equipment                               |  |                            | -    
|Other                                                                      |  |                            | 3,131
|                                                                           |  |                            | 3,131
|Other losses:                                                              |  |                            |      
|Provision for losses and guarantee in Kfar (see note
    7)                |  |                            | -    
|Loss from sale of property and equipment and
    other assets              |  |                            | 326  
|Impairment provisions of property and equipment
    and intangible  assets |  |                            | 2,677
|Reorganization costs                                                       |  |                            | -    
|Other                                                                      |  |                            | -    
|                                                                           |  |                            | 3,003



| | * | On December 31, 2014,
                                         BSRE sold and transferred to the buyer the logistic center in Rishon Lezion that was
                                         used by the Company, for approximately NIS 95 million; NIS 62 million were deposited
                                         on that date in a trust fund, which was released to the Company on January 4, 2015, and
                                         the balance was paid on March 31 2015. In addition to the above, a land parcel in Rishon
                                         Lezion was sold in 2014 for NIS 35 million.As a result of these sales, the Company
                                         recognized gain of NIS 57 million in 2014.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-93







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 29 – EMPLOYEE BENEFIT EXPENSES(continuing operations):



|                                                 |  | Year ended December 31 |       
|------------------------------------------------ |  | ---------------------- | ------
|                                                 |  | 2013                   |       
|                                                 |  | NIS in thousands       |       
|Wages, salaries, including social security costs |  |                        | 49,644
|Share options granted to managers and employees  |  |                        | (151  
|Post-employment benefits                         |  |                        | 1,907 
|                                                 |  |                        | 51,400
|Number of positions at December 31               |  |                        | 156   



NOTE 30 – FINANCE INCOME AND
EXPENSES(continuing operations):



|                                                              |  | Year ended December
    31 |        
|------------------------------------------------------------- |  | -------------------------- | -------
|                                                              |  | 2013                       |        
|                                                              |  | NIS in thousands           |        
|Income:                                                       |  |                            |        
|Interests:                                                    |  |                            |        
|Interest income on short-term bank deposits                   |  |                            | 3,420  
|Interest income from bank and others                          |  |                            | 8,168  
|Net gain from marketable securities available for sale        |  |                            | 9,433  
|                                                              |  |                            | 21,021 
|                                                              |  |                            |        
|Expenses:                                                     |  |                            |        
|Interest and differences from linkage to the Israel CPI:      |  |                            |        
|Bank borrowings                                               |  |                            | 46,376 
|Debentures and convertible debentures                         |  |                            | 149,985
|Bank commissions, foreign currency exchange losses and others |  |                            | 1,365  
|Changes in fair value of derivatives                          |  |                            | 565    
|Net of capitalization of finance expenses                     |  |                            | (9,885 
|                                                              |  |                            | 188,406
|Net finance cost                                              |  |                            | 167,385



F-94







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME:



| | a. | Corporate taxation of
                                         the Company:
| | -- | ---------------------------------------------------------------------------



Corporate taxation
in Israel



| | 1) | The Company and most of its subsidiaries
                                         are Israeli companies and act within the borders of Israel, hence, assessed for corporate
                                         tax in Israel.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2) | Commencing with tax year 2008, the
                                         results of operations for tax purposes of the Company and its subsidiaries are measured
                                         in nominal values. Through tax year 2007, the results of operations of the Company and
                                         its subsidiaries were measured having regard to the changes in the CPI in accordance
                                         with the Income Tax (Inflationary Adjustments) Law, 1985 (hereafter – the inflationary
                                         adjustments law).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Tax rates
| | -- | ---------



On December 5, 2011 the Knesset
approved the Law to Change the Tax Burden (Legislative Amendments) – 2011. According to the law the company tax rate was
set at 25%, as from 2012.



On August 5, 2013 the Knesset
passed the Law for Changes in National Priorities (Legislative Amendments for Achieving Budget Objectives in the Years 2013 and
2014) – 2013, by which, inter alia; the corporate tax rate was raised by 1.5% to a rate of 26.5%, as from 2014.



Current taxes for the periods
reported in these financial statements are calculated according to the tax rates specified above.



| | 3. | Tax rates(continuing)
| | -- | ---------------------



Capital gains are taxed at
regular corporate tax rates on income.



An amendment to the Income
Tax Ordinance that was published in January 2016, will reduce corporate tax back to 25%, starting 2016. As a result, the net amount
of deferred tax liabilities of the Company will decrease by NIS 26 million, of which NIS 19 will reduce income taxes in the income
statement for the first quarter of 2016 and NIS 7 will reduce income taxes relating to capital items.



Corporate taxation in other
jurisdictions



A subsidiary company incorporated
in the U.S. is subject to U.S. Federal, State and City taxes; the weighted tax rate that apply to the subsidiary is approximately
35%.



| | b. | Tax assessments
| | -- | ---------------



Blue Square has received final
tax assessments for tax years through 2011.



Some subsidiaries have received
final assessments for tax years through 2009-2010. For some of the subsidiaries, no final tax assessments have been received since
their inception.



F-95







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME:



| | c. | Effect of adoption
                                         of IFRS in Israel on tax liability
| | -- | ----------------------------------------------------------------------------------------------



In the years 2007 to 2011,
a Temporary Order was in affect (the meaning of the temporary order is that IFRS would actually not be applied upon computation
of the income reported for tax purposes for the said tax years). Legislation proceedings in respect of the adoption of IFRS and
its consequential amendments to the Income Tax Ordinance have not been completed to date and therefore the Company estimates that
the temporary provisions set for the years 2007 through 2013, will be extended to 2015, and that a new legislation shall not apply
to tax years preceding 2016. The Company computed its taxable income for tax years 2007 to 2015 based on Israeli accounting standards
applicable prior to adoption of IFRS in Israel, subject to certain adjustments.



| | d. | Losses for tax purposes,
                                         carried forward to future years
| | -- | -------------------------------------------------------------------------------------------------



As of December 31, 2015 and
2014 the Company and its subsidiaries (continuing operating) have mainly capital tax loss carry forwards of approximately NIS
431 million and NIS 210 million. The balance of carry forward losses, in respect of which deferred tax assets were not included,
amounted to NIS 133 million and NIS 171 million, respectively.



| | e. | Taxes on income included
                                         in the income statements:
| | -- | -------------------------------------------------------------------------------------------



|                                      |  | Year ended December 31 |       
|------------------------------------- |  | ---------------------- | ------
|                                      |  | 2013                   |       
|                                      |  | NIS in thousands       |       
|Current taxes:                        |  |                        |       
|Current tax on profits for the year   |  |                        | 3,165 
|Adjustments in respect of prior years |  |                        | (3,602
|Total current taxes                   |  |                        | (437  
|Deferred taxes                        |  |                        | 24,095
|Income tax expense                    |  |                        | 23,658



| | f. | The income tax credited
                                         (charged) to OCI during the year is as follows:
| | -- | ----------------------------------------------------------------------------------------------------------------



|                                                             |  | Year ended December 31 |     
|------------------------------------------------------------ |  | ---------------------- | ----
|                                                             |  | 2013                   |     
|                                                             |  | NIS in thousands       |     
|Deferred tax:                                                |  |                        |     
|Tax on actuarial loss on post-employment
    benefits scheme |  |                        | (24 
|available-for-sale financial assets                          |  |                        | (972
|Tax on asset revaluation reserve                             |  |                        | -   
|                                                             |  |                        | (996



The other items transferred
to other comprehensive income do not have a tax affect



F-96







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





NOTE 31 – TAXES ON INCOME(continued):



| | g. | The tax on the Company's profit before
                                         tax differs from the theoretical amount that would arise using the weighted average tax
                                         rate applicable to profits of the consolidated entities as follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                     |  | Year ended December
    31 |         
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | --------
|                                                                                                                                     |  | 2013                       |         
|                                                                                                                                     |  | NIS in thousands           |         
|Profit (loss) before tax                                                                                                             |  |                            | (168,209
|Theoretical tax expenses (tax benefit) (25%, 26.5%
    and 26.5 %, respectively)                                                     |  |                            | (42,052 
|Tax effects of:                                                                                                                      |  |                            |         
|Difference between the measurement basis of income
    for tax purposes and the measurement basis of income for book purposes, net   |  |                            | 8,849   
|Expenses not deductible for tax purposes, net                                                                                        |  |                            | 168     
|Utilization of previously unrecognized tax losses                                                                                    |  |                            | (442    
|Reassessment of deferred tax assets (see j below)                                                                                    |  |                            | -       
|Tax losses for which no deferred income tax asset was
    recognized                                                                 |  |                            | 13,931  
|Increase (decrease) in taxes resulting from computation
    of deferred taxes at a rate which is different from the theoretical rate |  |                            | 1,240   
|Non-taxable financial (income) expenses*                                                                                             |  |                            | -       
|Tax impact relating to investments accounted for
    using the equity method results                                                 |  |                            | (4,313  
|Eliminations of intercompany transactions between continuing and discontinued operations                                             |  |                            | 44,573  
|Change in future tax rate                                                                                                            |  |                            | 5,894   
|Adjustment in respect of prior years                                                                                                 |  |                            | (3,602  
|Other                                                                                                                                |  |                            | (588    
|Tax charge                                                                                                                           |  |                            | 23,658  



| | * | Mainly resulting from changes in value
                                         of conversion component in convertible debentures.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



F-97







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME(continued):



| | h. | Deferred tax assets and liabilities,
                                         as presented in the statement of financial position are expected to be recovered or settled,
                                         as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                     |  | December 31      |         
|-------------------------------------------------------------------- |  | ---------------- | --------
|                                                                     |  | 2014             |         
|                                                                     |  | NIS in thousands |         
|Deferred tax assets:                                                 |  |                  |         
|Deferred tax asset to be recovered after more than
    12  months    |  |                  | -       
|Deferred tax asset to be recovered within 12 months                  |  |                  | 27,844  
|                                                                     |  |                  | 27,844  
|Deferred tax liabilities:                                            |  |                  |         
|Deferred tax liability to be recovered after more than
    12 months |  |                  | (214,011
|Deferred tax liability to be recovered within 12 months              |  |                  | (18,741 
|                                                                     |  |                  | (232,752
|Deferred tax liabilities, net                                        |  |                  | (204,908



The deferred taxes are computed
at the tax rates of 26.5%. For changes in tax rate enacted during 2013 and 2016 – see also note 31a.



| | i. | The movement in the net deferred income
                                         tax accounts is as follows:
| | -- | ------------------------------------------------------------------------------------------------------------



|                                                       |  | Year ended December 31 |         
|------------------------------------------------------ |  | ---------------------- | --------
|                                                       |  | 2014                   |         
|                                                       |  | NIS in thousands       |         
|Balance at January 1                                   |  |                        | (16,327 
|Statement of income charge:                            |  |                        |         
|Tax charged to tax expenses from continuing operations |  |                        | (182,168
|Tax in respect of discontinued operation*              |  |                        |         
|Discontinuance of consolidation                        |  |                        | -       
|Tax transferred  to discontinued operation             |  |                        | -       
|Tax charged directly to other comprehensive income     |  |                        | (6,413  
|Tax charged directly to capital items                  |  |                        | -       
|Balance at
    December 31                             |  |                        | (204,908



| | * | relating to disposal
                                         group fair value adjustment.
| | - | ------------------------------------------------------------------------------------------



F-98







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – TAXES ON INCOME(continued):



| | j. | The movement in deferred income tax
                                         assets and liabilities during the year, without taking into consideration the offsetting
                                         of balances within the same tax jurisdiction, is as follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Deferred tax liabilities                                |  | Investment
 property and 
depreciable 
property and 
equipment |          |   | Intangible 
assets and 
other |  |          | Total | 
|------------------------------------------------------- |  | -------------------------------------------------------------- | -------- | - | ----------------------------- |  | -------- | ----- | 
|                                                        |  | NIS in thousands                                               |         
|Balance at January 1, 2014                              |  |                                                                | (125,102 | ) |                               |  | (67,429  | )     | 
|Credited to the income statements                       |  |                                                                | (22,955  | ) |                               |  | (700     | )     | 
|Charged directly to OCI                                 |  |                                                                | (8,446   | ) |                               |  | 1,283    |       | 
|Balance at December 31, 2014                            |  |                                                                | (156,503 | ) |                               |  | (66,846  | )     | 
|Credited to the income statements                       |  |                                                                | (31,091  | ) |                               |  | (25,942  | )     | 
|Charged directly to OCI                                 |  |                                                                | (258,172 | ) |                               |  | (94,641  | )     | 
|Deconsolidation of subsidiary                           |  |                                                                | (5,326   | ) |                               |  | 40,399   |       | 
|Transfer to disposal group classified as  held for sale |  |                                                                | 17,988   |   |                               |  | 61,152   |       | 
|Tax charged directly to capital items                   |  |                                                                | -        |   |                               |  | (28,078  | )     | 
|Balance at December 31, 2015                            |  |                                                                | (433,104 | ) |                               |  | (113,956 | )     | 



|Deferred tax assets                                          |  | Provisions for employee
    rights |         |   | Carry forwards tax
    losses |  |          | Derivative instruments |  |  | Provision for impairment
    of trade receivables |   |  | Total |        
|------------------------------------------------------------ |  | ---------------------------------- | ------- | - | ----------------------------- |  | -------- | ---------------------- |  |  | ------------------------------------------------- | - |  | ----- | -------
|Balance at January 1, 2014                                   |  |                                    | 42,969  |   |                               |  | 123,013  |                        |  |  | (207                                              | ) |  |       | 10,429 
|                                                             |  |                                    |         |   |                               |  |          |                        |  |  |                                                   |   |  |       |        
|Charged (credited) to tax expenses in the income statements* |  |                                    | (39,148 | ) |                               |  | (119,949 | )                      |  |  | (90                                               | ) |  |       | 674    
|Charged directly to OCI                                      |  |                                    | 750     |   |                               |  | -        |                        |  |  | -                                                 |   |  |       | -      
|Balance at December 31, 2014                                 |  |                                    | 4,571   |   |                               |  | 3,064    |                        |  |  | (297                                              | ) |  |       | 11,103 
|                                                             |  |                                    |         |   |                               |  |          |                        |  |  |                                                   |   |  |       |        
|Charged (credited) to tax expenses in the income statements  |  |                                    | 4,583   |   |                               |  | 78,106   |                        |  |  | (161                                              | ) |  |       | -      
|Charged directly to OCI                                      |  |                                    | -       |   |                               |  | -        |                        |  |  | -                                                 |   |  |       | -      
|Deconsolidation of subsidiary                                |  |                                    | 39      |   |                               |  | -        |                        |  |  | -                                                 |   |  |       | -      
|Transfer to disposal group classified
    held for sale      |  |                                    | (7,214  | ) |                               |  | (3,604   | )                      |  |  | 690                                               |   |  |       | (11,103
|Balance at  December 31, 2015                                |  |                                    | 1,979   |   |                               |  | 77,566   |                        |  |  | 232                                               |   |  |       | -      



| | * | Taking into account the successive tax losses and their
magnitude, the Company reassessed the probability of utilization of its deferred tax assets (see note 4(4)) and as a result reduced
the balance of the deferred tax assets. The net effect on the year ended December 31, 2014, was NIS 141 million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-99







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – LOSS PER SHARE:



| | a. | Basic
| | -- | -----



Basic earnings per share is calculated
by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue
during the year, (see note 25).



|                                                                                                               |  | Year ended December 31, |           
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                                               |  | 2013                    |           
|Loss attributable to equity holders of
    the Company(NIS in thousands) from continuing operations            |  |                         | (212,834  
|Income (loss) attributable to
    equity holders of the Company(NIS in thousands) from discontinued operations |  |                         | 67,139    
|Loss attributable to equity
    holders of the Company (NIS in thousands)                                      |  |                         | (145,695  
|Weighted average number of ordinary shares in issue                                                            |  |                         | 65,954,427



| | b. | Diluted
| | -- | -------



Diluted earnings per share are
calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential
ordinary shares. The Company had one category of dilutive potential ordinary shares: convertible debt (through 2013). For the
reported periods, the effect of such potential ordinary shares was not dilutive.



In addition there are convertible
debentures in Company's subsidiary BSRE that had no dilutive effect on the Company's earnings per share.



NOTE 33 – CONTINGENCIES:



In the ordinary course of
business, the Company is involved in various lawsuits against it. The costs that may result from these lawsuits are only accrued
for when it is more likely than not that a liability, resulting from past events, will be incurred and the amount of that liability
can be quantified or estimated within a reasonable range. The amount of the provisions recorded is based on a case-by-case assessment
of the risk level, while events that occur in the course of the litigation may require a reassessment of this risk. The Company’s
assessment of risk is based both on the advice of its legal counsels and on the Company's estimate of the probable settlements
amounts that are expected to be incurred, if such settlements will be agreed by both parties. The provision recorded in the consolidated
financial statements in respect of all lawsuits against the Company amounted to NIS 29.2 million (from continuing operation) (see
also note 24 regarding provisions).



Described hereunder are the
outstanding lawsuits against the Company, classified into groups with similar characteristic. These include contingencies relating
to Dor Alon and Naaman that are held for sale (note 7), but not Mega which is currently under the control and supervision of Trustees
and information is not available to the Company (note 7d.).



The amounts presented below
are calculated based on the claims amounts as of the date of their submission to the Company.



| | a. | Customer claims
| | -- | ---------------



In the ordinary course of
business, lawsuits have been filed against the Company by its customers. These are mostly requests for approval of class action
lawsuits, particularly concerning allegations of illegal collection of funds, unlawful conduct or breach of license, or a breach
of agreements with customers, causing monetary and non-monetary damage to them.



F-100







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



Described hereunder are the
outstanding consumer purported class actions with respect to lawsuits with a total claim amount of NIS 653 million or which have
not been quantified, broken down by the amount claimed, as of the date of approval of these financial statements:





|                                                      |  | Total
    claimsamount(NIS in millions) |     |  | Numberof claims | 
|----------------------------------------------------- |  | --------------------------------------- | --- |  | --------------- | 
|Up to
    NIS 50 million                              |  |                                         | 109 |  |                 | 
|NIS 51-100 million                                    |  |                                         | 71  |  |                 | 
|NIS 101-200 million                                   |  |                                         | 167 |  |                 | 
|Above NIS 201 million                                 |  |                                         | 306 |  |                 | 
|Unquantified claims                                   |  |                                         | -   |  |                 | 
|Total                                                 |  |                                         | 653 |  |                 | 
|                                                      |  |                                         |     |  |                 | 
|Against
    the Company and other defendants together |  |                                         | 526 |  |                 | 







On September 6, 2012, a letter
of claim and motion for approval as a class action was filed against Dor Alon, for an aggregate amount of NIS 43.2 million. The
plaintiff claims that as a customer of the Dor Alon “Spidomat” arrangement for car fueling at reduced prices, she
discovered that her reduction was less than the regular discount given to all other customers at the station. As result, the Plaintiff
claims she suffered financial damages from being a member of the “Spidomat” arrangement. In October 2014, the court
approved the claim as a class action, and Dor Alon made a proper provision for this claim in its financial statements.



| | b. | Employees, subcontractors,
                                         suppliers, authorities and other claims
| | -- | -----------------------------------------------------------------------------------------------------------



Tax
and local authorities:



In January 2012 the Company
received a demand from the National Insurance for additional payments, related to certain benefits granted to employees in the
Company’s branches in the amount of NIS 30 million for the years 2001-2004. The Company's appeal was rejected by the National
Insurance. In August 2013 the Company filed an appeal to the Labor Court. In December 2013, the Company received a demand from
the National Insurance for additional payments with respect to years 2005 – 2006 in the sum of approximately NIS 3 million,
and in January 2014 the company filed an appeal with regard to this demand.



In February 2015, during the
deliberations in the Labor Court, and notwithstanding the statute of limitations argument, the parties have agreed that the right
amount for the years 2001- 2004 is approximately NIS 12 million (including CPI linkage differences and fines).



F-101







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



In the opinion
of the Company, based on the opinion of its legal advisors, the Company made a proper provision for this claim in its financial
statements.



The company
is rejecting the claim on the ground that it is obsolescence.



Business
licenses and permits

The Company’s
operations in Israel require permits from several authorities, including the Health Ministry and the Police and Fire Departments.
In the event that the Company is unable to obtain or maintain the required permits, it may be required to close the affected stores
or departments or take other action. However, the Company does not anticipate that not obtaining the necessary permits will have
a material effect on its business. The Company and some of its directors and managers are indicted in connection with business
licenses and planning and building regarding the Company's stores. As of the date of this Report, there are pending indictments
and provisional closure orders against some of the Company's stores or departments. The Company estimates that these matters will
not have a material adverse effect on the Company's operations.



Other

On March 17, 2016 the Company
received a letter from a shareholder claiming that payments on account of legal services rendered by S. Biran & Co., a law
firm in which the Company's indirect controlling shareholder is a partner, did not receive requisite corporate approvals. The
Company is evaluating the shareholder's claiming and will respond as required by law.



| | c. | Contingencies related
                                         to the Company and Mega
| | -- | --------------------------------------------------------------------------------------



In July
2015, a claim was filed against the Company and Mega with the Tel Aviv District Court, in connection with the 51% subsidiary of
Mega, Eden Health Teva Market Ltd. ("Eden"), by the minority shareholders (49%) in Eden. 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
for NIS 77.6 million. Prior to filing an answer, the plaintiffs requested to amend the claim sue to change in circumstances after
filing the claim originating in Eden's entry into stay of proceedings and the sale of its operations. 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 shares'
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. In the amended claim other defendants were added who served in Mega and the Company as office
holders in various dates. On January 17, 2016, an answer a counterclaim was filed by Mega and BSI in the amount of NIS 40 million
(for purposes of court fees). It was argued in the answer, among others, that there was no breach of the claimed liability to
extend financing and this, inter alia, since the agreement between the parties does not apply such liability without derogating
that financing was extended at any stage of Eden's activity including at the stage when Eden entered the stay of proceedings.
The plaintiffs further allege that the claim lacks cause of action toward the Company due to the fact that on May 19, 2009, the
plaintiffs signed an explicit and unqualified consent according to which, upon the transfer of shares in Eden Teva Market from
BSI to Mega, BSI has no liability of any sort whatsoever towards the plaintiffs including by virtue of the agreements that were
signed. In the counterclaim, the Company and Mega alleged that the financing they extended to Eden (guarantees for third parties
extended by Mega and BSI with shareholders' loans extended by Mega) was made based on misrepresentations of the plaintiffs regarding
Eden's ability to move to profitability as well as its ability to repay its debts towards the aforesaid. As of this date, an answer
was not yet filed to the counterclaim and a response was not yet filed to the answer. According to the parties agreement (since
the plaintiffs filed a motion in the stay of proceedings case against Mega to approve the proceedings management) the hearing
that was scheduled April 3, 2016 was canceled until the plaintiffs' motion is heard.



At this preliminary
stage of the proceedings, the Company it is unable to assess the prospects of the lawsuit, including the counterclaim.



F-102







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES(continued):



| | c. | Contingencies related
                                         to the Company and Mega (continued)
| | -- | --------------------------------------------------------------------------------------------------



In July
2015, a lawsuit was filed with the Tel Aviv District Court against the Company, Mega, and whoever served as members of the board
of directors of Mega, by one of Mega's suppliers of dairy products (the petitioner). As a part of the petition that was filed,
an approval as a derivative claim is requested, alleging that in 2013 Mega conducted a prohibited distribution of dividends in
the amount of approximately NIS 100 million. The plaintiff requests the court to order the Company and directors to return to
Mega all payments and/or dividends and/or benefits and/or rights received by them in connection with the said distribution. In
addition, the plaintiff requests the court to order the Company and Mega to provide documents and information about Mega, including
its financial statements for 2011 - 2014. On January 3, 2016, the Company with the directors filed a motion to strike in linine
the approval petition with the key allegation that the petitioner cannot be called a "creditor" for the purpose of filing
a derivative claim as prescribed in the Companies Law – 1999. Following the stay of proceedings against Mega and various
motions filed by the Company and Mega's trustees, the proceeding was stayed at this stage. The Company denies all allegations
contrary, but at this early stage of the proceedings, it is unable to assess the prospects of the lawsuit.



| | d. | Claims and arguments
                                         made by Mega trustees
| | -- | -----------------------------------------------------------------------------------



The following are the arguments
of Mega's trustees to the Company and BSRE



In several
motions to the Company, Mega's trustees notified the Company that Mega and some of Mega's creditors are direct creditors of the
Company in the amount of hundreds of millions of NIS. As per Mega's trustees, this indebtedness is due among other things from
the Company's contractual obligations towards Mega and Mega's creditors and from liabilities in accordance with the reorganization
agreement dated July 2015, as well as from other causes of action. According to Mega's trustees, the Company must meet the following
obligations:



| | 1) | Completion of the liabilities
                                         to inject NIS 320 million. At first, the trustees claimed that the Company had not yet
                                         transferred NIS 63-70 million and on March 7, 2016, the total amount to be completed
                                         was updated to NIS 117 million (see below).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Issuance of rights in the Company
                                         of no less than NIS 150 million and the allocation of options to Mega's large suppliers.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Repayment of the guaranteed and
                                         shared debt to banks of NIS 300 million.
| | -- | -----------------------------------------------------------------------------------------------------------------

| | 4) | Repayment of the Company's guarantee
                                         towards the Company's employees transferred to work at Mega in the amount estimated by
                                         the trustees at NIS 40 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5) | Repayment of guarantee to suppliers,
                                         insurance companies, suppliers' credit and property owners amounting to NIS 150 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | Contingent liability in connection
                                         with the return of NIS 117 million resulting from dividend distribution of Mega in 2013,
                                         as argued in the motion for approval of a derivative claim.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In their request, Mega's trustees
made clear that the indebtedness of Mega and the Company's creditors are on one line having an equal priority. Therefore, the
Company is not permitted and is hereby required not to carry out a debt arrangement with its creditors without including a suitable
arrangement agreed upon with the trustees. The trustees also demanded that the Company would not make any payment nor place a
lien in favor of its financial creditors, since this act would be a preference of the creditors.



F-103







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



| | d. | Claims and arguments
                                         made by Mega trustees (continued)
| | -- | -----------------------------------------------------------------------------------------------



On February 23, 2016 (Motion
37), Mega's trustees filed a motion 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's trustees,
on all of the real estate assets in which Mega has rights.



On February 24, 2016 (Motion
38), the trustees filed with the court a report on behalf of the trustees and a motion for remedies in connection with the Company's
liabilities towards Mega. Among other things the trustees claim that the Company has the following obligations:



| | 1) | The Company owes NIS 118 million
                                         to complete its liability which was taken under the recovery plan from July 2015 to inject
                                         NIS 320 million to Mega, issuance of an option to large suppliers of Mega for a debt
                                         of NIS 193 million to convert their debt into the Company's shares. The trustees also
                                         argue that the Company has no right to return to Mega for the Company's liabilities for
                                         the repayment of Mega's debts to banks (the guaranteed and the shared debt of NIS 301
                                         million).
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Other liabilities of NIS 186 million
                                         mainly for transferring employees, guarantees to suppliers, and to insurers of suppliers'
                                         credit, and property owners. The trustees claim that the Company extended to Mega these
                                         guarantees as a substitute for the equity required for Mega and as part of the policy
                                         of its conduct in thin financing.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Contingent indebtedness in connection
                                         with a dividend of NIS 100 million that was distributed in 2013 from Mega to the Company
                                         in respect of which a derivative claim of NIS 117 million was filed.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | The Company transferred to Mega
                                         its holdings in Eden where during the period it was held by Mega (2010 and onwards) it
                                         lost NIS 100 million and a minority shareholder filed a motion against Mega and the Company
                                         (and this while ignoring the fact that the claim was filed for NIS 40 million).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The trustees also argue that:

| | 1) | Split of real estate activity in
                                         2009 from Mega transferred to BSRE and their rental by Mega- as alleged by the trustees,
                                         under the split a dividend of tens of millions of NIS was distributed to the Company
                                         and as per the trustees' allegations, there is a concern that the lease agreements are
                                         higher than market prices, and in addition BSRE forced Mega to continue renting losing
                                         branches and did not allow Mega's release from such agreements. The trustees also wondered
                                         about Mega's consent regarding the motion filed with the court for an arrangement between
                                         Mega and BSRE under which Mega will receive a discount of 9% on the rental fees for two
                                         years in exchange for a waiver of any claim or demand against BSRE about the lease and
                                         split agreements either in the making and/or approving such agreements.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Mega was operated by thin financing
                                         and therefore, as far as determined that this argument is correct, the trustees believe
                                         that in these circumstances they have a cause of action to charge the shareholders for
                                         all of Mega's debts and/or the rejection of their debts.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Deteriorated corporate governance
                                         – in Mega there was a deteriorated corporate governance resulting from making decisions
                                         by Mega's board which were in contrast to Mega's best interest and these decisions led
                                         to Mega's position.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-104







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



| | d. | Claims and arguments made
                                         by Mega trustees (continued)
| | -- | -----------------------------------------------------------------------------------------------



| |  | Under motion 38, two operative
                                         remedies are sought:
| |  | --------------------------------------------------------------------------------------------



| | 1) | The appointment of an appraiser
                                         in connection with the split agreements of the real estate assets from Mega to BSRE and
                                         regarding the rental fees and terms to which Mega is committed.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Investigation powers – empowering
                                         trustees to investigate the issues listed above and the reasons for the collapse of Mega
                                         including calling officers and controlling shareholders of Mega, the Company, BSRE and
                                         Alon (the Company's parent company) for investigation and instruct them to produce any
                                         document required by the trustees for the purpose of examinations and investigations.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March 2, 2016, the court
approved the motions of the trustees. On March 20, 2016, BSRE
filed a motion with respect to the court's decision and on April 5, 2016, the court denied the motion.



On March 7, 2016, Mega's trustees
filed a motion with the court for leave of instructions regarding the Company's liability to inject funds to Mega by virtue of
the recovery plan from July 2015 and pay on account of the injection of NIS 320 million, the amount of NIS 117 million. As per
the trustees' arguments, the injections of NIS 320 million took effect from the arrangement approval date, namely from July 15,
2015 and not from June 1, 2015 (as claimed by the Company and as stated in the agreement), and accordingly, the amount balance
that was not yet injected by the Company amounts to NIS 117 million (Motion 46).



On February 17, 2016, several
employees of Mega filed a motion to the court (Motion 32) to allow them participate in the negotiations to be held between the
Company and Mega's trustees in connection with a guarantee granted to the employees transferred from the Company to Mega and in
connection with compensation fund. They claim that the guarantee applies also to the early termination notice component and the
employment period in Mega and not only to their employment period in the Company. Responses to the motion were filed by the Company,
Mega's trustees and the Official Receiver. On March 27, 2016, the court dismissed the application.



On February 3, 2016, several
employees of Mega filed a motion with the court (motion 22) in which they requested the Company to transfer the balance of its
central compensation fund to the trustees. In response to the motion, the trustees have extended the motion and demanded that
the Company will transfer to them NIS 26 million in respect of the amounts, allegedly guaranteed by the Company for the employees
transferred from the Company to Mega in 2011. Responses to the motion were filed and the motion is still pending.



On March 11, 2016, the Company
filed a motion (motion 96) that it is no longer obligated for the suppliers' option because Mega entered into a stay of proceedings.
The trustees as well as some suppliers (including the manufacturers association) responded that the Company should issue the option
to suppliers.



In addition, Mega's managers
conduct proceedings requesting to instruct "waiver of onerous contracts" under which the court is requested to instruct
the conclusion of the rental agreements alleging that such agreements are onerous. For one of the above assets, BSI was added
to the proceeding that it guarantees the rental agreement (motion 45).



F-105







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



| | e. | The main reactions of
                                         the Company and BSRE to arguments and motions of Mega's trustees
| | -- | -------------------------------------------------------------------------------------------------------------------------------



The Company objects to the
arguments of Mega's trustees and in the context of the legal proceedings, it argues among others, that it fully complied with
its obligations to Mega, and the Company also claims that with Mega's entry into stay of proceedings, even determined that it
did not complete all its liabilities under the reorganization arrangement, their liabilities expire according to the reorganization
arrangement. The Company claims, among others, all of the following:



| | 1) | Regarding the
                                         Company's liability to inject up to NIS 320 million, the Company's position is that it
                                         has no liability whatsoever, among others, because it met all of its liabilities, injected
                                         all as Mega required, and the total amounts it injected or guaranteed in the arrangement
                                         period, including the guarantees it extended during the agreement and after deduction
                                         of amounts which will be paid by the Company in respect of guarantees given by the Company
                                         before the recovery plan are in excess of NIS 320 million. The Company further claims
                                         that it injected all that was required by Mega, whose decisions were made effective from
                                         recovery plan date by an independent board and for good reason it was not required to
                                         inject amounts in excess of what it injected. The Company claims that if determined that
                                         it did not inject all amounts, the sums that were not injected are amounts for liabilities
                                         so as to extend a framework for the working capital for Mega's needs, if required, which
                                         was purported to assist dealing with "peaks" (short term loan purported to
                                         reconcile the timing differences between the payment date of Mega for goods purchased
                                         from suppliers and the date of receiving the consideration when goods are sold to customers
                                         which is not designated to finance losses), and these were not required by Mega. The
                                         Company further claims that once Mega entered a stay of proceedings, the liabilities
                                         that were not yet performed, if any, are canceled in the Company's circumstances. The
                                         Company also claims that the amounts of the guarantees and the injection from June 1,
                                         2015 shall be included as settled in the agreement.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | 2) | Regarding the
                                         supplier's option, the main argue of the Company is that considering the stay of proceedings,
                                         its duty to carry out the suppliers' option did not arise, among others on the grounds
                                         that its liability was given against the suppliers' commitment to defer their debt, liability
                                         that the suppliers themselves cannot meet considering the stay of proceedings and considering
                                         the fact the suppliers have improved their position following the injections of funds
                                         made by the Company to Mega. In addition, it was emphasized to the court that in the
                                         case of a ruling that will require the Company to issue the options, the Company still
                                         have regulatory limitations to do so.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As to motions of the employees
that the central compensation fund will be transferred to the trustees, the Company claims that the trustees or the employees
have no right in the central compensation fund that belongs to the Company since in the funds central compensation fund that were
used by Mega from June 1, 2015 are debts of Mega to the Company, and therefore should be recorded on account of the liability
to inject funds to Mega. As for the claims of the employees and trustees regarding the scope of the Company's guarantee, beyond
the claims regarding substantial procedural flaws raised in the employees' and the trustees' motions, the Company's position is
that the amounts for which it guarantees are significantly lower than the claimed amounts, and today, the scope of Mega's debts
to its employees that are guaranteed by the Company are negligible. The Company also objected to joining the employees to the
negotiation process (motion 32) and the claims raised by the employees and trustees in the motion in question.



F-106







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



| | e. | The main reactions of
                                         the Company and BSRE to arguments and motions of Mega's trustees(continued)
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | As to the guaranteed debt, the Company's position is
that it has the right to return to Mega for any amount to be paid by it to the financial creditors.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------



On April 10, 2016, the trustees
submitted their answer with respect to the issue of our liability to inject up to NIS 320 million (Petition 46). According to
the trustees, our obligation to inject this amount was not subject to any condition, the amounts paid before the plan of recovery
should not be taken into account, and that guarantees should also not be taken into account in calculating the amounts we were
required to inject. The trustees also claimed that the central compensation fund should not be taken into account in calculating
the amounts we were required to inject. On April 13, the court ruled that this request of the trustees with respect to the options
will be addressed together with the issue of our liability to inject up to NIS 320 million (Petition 46).



The above does not exhaust
the Company's claims and those that are argued as part of the relevant legal proceedings, where the Company's claims and other
arguments will be deliberated as well as the Company's claims and the allegations of Mega's trustees and its creditors. Taking
into account the unique circumstances of the case and the stage of the proceedings and the fact that the claims will be decided
in legal proceedings and therefore the Company has no control over the outcome, there is no certainty that the Company's position
on these matters will be accepted and at this stage it is impossible to estimate the probability that the company's allegations
will be accepted.



On February 29, 2016, BSRE
notified Mega that according to the addendum of the lease agreements between the parties, in the circumstances under which a trustee
was appointed for Mega and the decision was not cancelled with, in 30 days from the date it was granted, then Mega is in breach
of the lease agreements including the addendum and therefore the discount set forth in the addendum is null and void.



BSRE responded to motion 37
and claimed that the trustees' motion should be dismissed regarding the assets that were transferred to the Company under the
asset transfer agreement from Mega Retail where the process of registering them in the Company's name was not yet completed. The
court did not accept the position of BSRE and on March 20, 2016, it rendered a decision that the trustees will register caveats
in their names in the various land registry offices. BSRE filed a motion for stay of execution and a motion for leave of appeal
with the Supreme Court.



On March 8, 2016, BSRE filed
a motion with the court in which the court was requested to appoint a receiver for the purpose of exercising the rights of BSRE
in accordance with a bond issued by Mega for BSRE on March 31, 2009, in relation to assets acquired by BSRE from Mega pursuant
to an agreement dated March 31, 2009, and as of the report date, the registration in BSRE's name in Israel Lands Authority and/or
the Land registry Office had not yet been completed. On March 13, 2016 the court ruled that the motion is not in accordance with
the stay of proceedings order granted to Mega and therefore decided to strike such motion. On March 15, 2016, BSRE filed with
the stay of proceedings court a motion to allow it exercise the pledged rights according to the bond.



On March 9, 2016, BSRE filed
a motion for leave of instructions to be paid NIS 1.8 million representing the balance of the rental fees due to BSRE for leasing
the assets for the period from February 17, 2016 through March 16, 2016. The Official Receiver has suggested to combine this petition
with the Petition 64 (described below) relating to rental fees for the rest of March 2016.



F-107







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES (continued):



| | e. | The main reactions of the Company
                                         and BSRE to arguments and motions of Mega's trustees(continued)
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------



On March 22, 2016, BSRE filed
a motion for leave of instructions to be paid NIS 8.3 million representing the rental fees due to BSRE for leasing the assets
for the period from March 17, 2016 through April 16, 2016 (Petition 64). The trustees of Mega Retail have responded that all required
payments have been made. On April 13, 2014, the court ruled that the Mega Retail trustees should not offset amounts from before
the stay of proceedings against amounts due afterwards and should only offset against amounts from after the stay of proceedings.
On April 19, 2016, the trustees notified the court that they had done the necessary calculation and the amounts due for March
will be paid to BSRE. They also responded that the rental fees for Febuary had been paid in full and therefore Petition 54 should
be dismissed. On April 20, 2016 the court accepted the response of the trustees, and on April 21, 2016, BSRE applied to the court
for a clarification.



On March 4, 2016, the trustees
of Mega Retail applied to the court to release them from a “burdensome” lease for a supermarket branch, of which a
third party is lessor. In the past, we granted to the third party a guarantee of Mega Retail’s performance until the end
of the lease term in 2023, which is alleged by the third party to be NIS 30 million. In light of the early stages of these proceedings,
we are not in a position to evaluate the success of Mega Retail’s motion or the scope of our actual obligations under the
guarantee to the third party.



On March 31, 2016, April 6,
2016, and April 11, 2016, the trustees of Mega Retail applied to the court to release them from three other “burdensome”
leases, consisting of two supermarket branches and a portion of the main offices of Mega Retail, of which BSRE is lessor. To date,
BSRE has submitted its opposition to release from two of the leases.



| | f. | Other arguments made by
                                         the trustees in respect of Mr. Ben Moshe proposal
| | -- | ------------------------------------------------------------------------------------------------------------------



On April 7, 2016, the trustees
of Mega Retail filed a report (Report No. 5) and a motion for leave of instructions to the court (Motion 75) with respect to the
conduct of Mr. Moti Ben-Moshe and the parent company, in which they repeated a number of their claims. The first relief sought
is that the Company and Mr. Ben-Moshe can keep full ownership of Mega only if the full amounts are paid to the Mega creditors.
The trustees also requested that negotiations with respect to the Company's obligations to Mega will be conducted on the Company's
behalf only by members of the Company's Audit Committee who are directors, including external directors, who have no affiliation
with the Company's parent company in the pyramid structure and who don’t serve as directors or officers in other companies
in the pyramid structure.



On April 12, 2016, the trustees
submitted another court motion with respect to Report No. 5 requesting an alternative relief primarily with respect to Mr. Ben-Moshe
and how he is to submit an offer to acquire Mega. The motion includes a request that if Mr. Ben-Moshe doesn’t submit the
offer according the instructions of the trustees, he would be prohibited to submit an offer also through the Company. On April
17, 2016, Mr. Ben-Moshe submitted his response. The Company also submitted a response that day, arguing that the trustees’
request is based solely on the trustees' reports, amongst others, on Report No. 3 (Motion 38), to which the Company was not granted
an opportunity to respond. In addition, the Company argued that the factual statements in the motion do not support the requested
relief. With respect to the trustees' request that the negotiations regarding the Company's obligation to Mega will be conducted
by members of the Audit Committee, it was argued by the Company that it is a gross interference in the conduct of its business.



F-108







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – CONTINGENCIES(continued):



| | f. | Other arguments made by
                                         the trustees in respect of Mr. Ben Moshe proposal(continued)
| | -- | -----------------------------------------------------------------------------------------------------------------------------



The Company also argued that
the trustees did not provide any good reason for their first relief in which they asked that the Company and Mr. Ben Moshe be
only able to keep full ownership of Mega Retail if the full amounts are paid to the Mega Retail creditors – especially because
any agreement regarding Mega Retail will have to be approved in the creditors meeting and by the court.



On 20 April, 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 Mega trustees
to utilize their negotiation with Mr. Ben-Moshe, for reaching an arrangement regarding both the Company and Mega as a whole. According
to the court's decision, at the end of the period, the trustees will submit a notice to the court detailing the outcomes of the
negotiation, 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 aquistion of Mega
made by that date by third parties. Therefore, the court has suggested that the Company and Mr. Ben-Moshe delay the filing of
the above mentioned motion till after the extension period, and recommended to the creditors of Alon Blue Square not to file any
proceedings against the Company till the end of the extension period.



NOTE 34 – COMMITMENTS:



| | a. | Operating lease commitments - these
                                         apply to discontinued operation and include various retail outlets, filling stations
                                         and commercial centers, offices and warehouses under non-cancellable operating lease
                                         agreements. The lease terms are between 5 and 10 years, and the majority of lease agreements
                                         are renewable at the end of the lease period at market rates. In addition, cars are leased
                                         under cancellable operating lease agreement, with two month notice to termination. Continuing
                                         operations have no material operating lease commitments.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Future minimum payments under
non-cancelable operating leases for the years subsequent to the statement of position dates are as follows (applies to both continuing
and discontinued operations, except that 2015 figures do not include Mega as such information is not available - see also note
5a) :



|                          |  | December 31      |          
|------------------------- |  | ---------------- | ---------
|                          |  | 2014             |          
|                          |  | NIS in thousands |          
|First year                |  |                  | 392,164  
|Second year               |  |                  | 347,005  
|Third year                |  |                  | 318,572  
|Fourth year               |  |                  | 265,271  
|Fifth year                |  |                  | 203,835  
|Sixth year and thereafter |  |                  | 620,675  
|                          |  |                  | 2,147,522



F-109







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTSCapital
commitments (continuing operations) (continued)



| | b. | Capital commitments (continuing
                                         operations)
| | -- | ------------------------------------------------------------------------------------



Capital expenditure contracted
for at the statement of financial position date but not yet incurred amount to NIS 96 million at December 31, 2015



In addition, commitment to
investments of jointly controlled entities and associates amounted to NIS 328 million.



| | c. | Wholesale market
| | -- | ----------------



| | 1) | Real estate rights and acquisition
                                         agreements
| | -- | --------------------------------------------------------------------------------------



During June 2010 two 50%:50%
joint ventures between BSRE and Gindi Investments (hereafter – the purchasers) entered into agreements to purchase land
lease rights in part of the wholesale market area in Tel Aviv for a period ending on August 31, 2099. The rights are for the development,
construction and marketing of a project including apartment buildings complex, areas for commercial use and areas for multi-purpose
use. The rights for the apartment building complex were acquired by City Core Tel Aviv Ltd. ("the Residence Company")
and the rights for the commercial and multi-purpose use were acquired by City Mall Tel Aviv Ltd. ("the Mall Company").
The land rights were acquired for a basic total consideration of NIS 950 million (100%) linked to the CPI together with the obligation
to pay additional consideration in certain circumstances. In 2015, the parties have agreed and paid an additional final payment
of NIS 15 million in this respect. As of December 31, 2013, the purchasers paid the full consideration in the amount of NIS 989
million before VAT (BSRE's share in these payment amounts to NIS 495 million).



As part of its commitments
to the sellers, the purchasers are obligated to plan and build public buildings and parking for the sellers. The consideration
to be paid by the sellers is based on cost plus 10%, up to a ceiling of NIS 84 million (which can be extended in certain conditions,
with the sellers approval, to NIS 102 million); Subsequent to December 31, 2015, an agreement was reached between the parties
to set a final cap of NIS 126 million (not yet signed). Any excess of costs, save exceptions, will be born by the purchasers.
The residence and the mall companies do not expect loss from these construction contracts. In addition, the purchasers are obligated
to develop 9 dunams of publicly open landscape, that is the property of the Tel Aviv municipality, and additional 85 parking places
in the public area (additional 40 places are contingent on approval of basement construction) Due to plan changes made by the
municipality, timetables for the project will be changed and will be included in an amendment to the construction contract.



F-110







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTSCapital
commitments (continuing operations) (continued)



| | c. | Wholesale market
                                         (continued)
| | -- | ---------------------------------------------------------------------



| | 2) | Financing of the
                                         project
| | -- | -----------------------------------------------------------------



On June 26, 2013, Tel Aviv
Lev Towers Ltd. (the residence company) a company held 49.5% by BSRE, and the Tel Aviv Mall Ltd. (the mall company) a company
held 50% by BSRE, (the purchasers) entered into financing agreement with banks according to which the banks will extend financing
and credit facilities to the residence company in a total scope of up to NIS 2 billion mainly for granting guarantees under the
sale law to the apartment purchasers 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 credit lines were to be paid on March 31, 2016 (the final payment date)
with additional an annual interest of Prime + 2%. Additional NIS 100 million of credit line was extended during 2014. In June
2015, an amendment to the agreement was signed according to which to the aggregate amount of NIS 1 Billion, (linked to the Israeli
input index) that will provide the necessary funding for the completion of the project.



The credit line to the mall
company will be repaid three years after the opening of the mall, and no later than September 30, 2019.



The credit line bears
variable annual interest of Prime plus 2% (the Prime as at December 31, 2015 was 1.6%). In the case that the Prime rate will
be 3% or more, an alternate loan will be granted to the Mall Company, that will bear fixed interest, in accordance with the
formula agreed between the parties. The amendment to the financing agreement includes also clauses that require higher
interest rate charge, in the event that the mall company fails to meet certain financial covenants, or timetables relating to
the project, minimal rate for lease engagements and execution of payments.



The mall company may early
redeem the credit, in full or in part, provided that this will not prevent it from completing the project, and subject to the
payment of early redemption fee, as determined in the agreement. In addition, the amendment includes default clauses requiring
the mall company to meet certain financial covenants, timetables for completion and opening of the mall and requirements for minimal
rate of lease engagements and rental fees. Each of the financing agreements in the project has a cross default clause, in case
the other agreement is breached.



The collaterals and commitments
under the financing agreements for both companies (residence and mall companies), will also secure the additional credit that
will be loaned to the mall company (the existing collaterals and commitments provided by the companies and the Company will be
amended for that purpose as a condition for availing the additional credit). Also additional commitments were placed that may
require to pledge, from time to time, the lease agreements between the mall company and lessees. As of December 31, 2015, the
mall company utilized NIS 697 million of the credit line availed by the banks. Also, as of that date, the mall and residence companies
meet their covenants under the financing agreements



F-111







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTSCapital
commitments (continuing operations) (continued)



| | c. | Wholesale market
                                         (continued)
| | -- | ---------------------------------------------------------------------



To secure the liability of
the residence company, BSRE provided a constant guarantee of NIS 24.75 million. To secure the liability of the mall company, BSRE
provided a constant guarantee of NIS 100 million. In addition, the purchasers committed that the surplus accumulated in the residential
project after the full credit repayment, will serve as collateral to repay the credit of the mall company.



| | 3) | Principles agreement with Gindi.
| | -- | --------------------------------



In April 2010 BSRE and Gindi
signed an agreement of principles which, inter alia, determined the following:



| | a) | BSRE shall extend 60% (instead
                                         of its 50% share) of the amounts required to make the first payment and 60% of any additional
                                         amount required to promote the project until the second payment is made and which may
                                         not be available under the bank credit line. As of December 31, 2015 the overpayment
                                         balance stands at NIS 37.9 million and is presented under the item of long term loans
                                         granted.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | Gindi will provide management
                                         services, including selling and marketing, to the project in return for a management
                                         fee of 16% of the profit from the project, calculated as determined in the agreement.
                                         As an advance for the management fee above, A minimum amount of NIS 15 million was paid
                                         over five years from the date of the acquisition agreement.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4) | Sale agreements with apartment
                                         purchasers
| | -- | ----------------------------------------------------------------------------------



As of the reporting date,
the residence company entered into commitment for 716 sale agreements (from 722 in the entire project) with a scope of NIS 1,886
million (including VAT) and received advances of NIS 1,318 million (including VAT).



| | 5) | Building permit
| | -- | ---------------



As of the reporting date,
a building permit to construct all the apartments, the mall, commercial spaces and the sport center was received.



F-112







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTSCapital
commitments (continuing operations) (continued)



| | d. | Commitment for establishing a
                                         power plant:
| | -- | -----------------------------------------------------------------------------------



On February 8, 2012, a corporation
controlled by Dor Alon (55% held) entered into a detailed agreement with Sugat Sugar Refineries Ltd. (Sugat) under which the corporation
shall establish a power plant on its premises with total capacity of up to 124 Mega Watt. At the first stage, the plant capacity
shall be 64 Mega Watt. Under the agreement, the power plant shall provide the energy needs of Sugat for 24 years and 11 months
and in addition, the corporation may sell steam and electricity to third parties.



It was further agreed that
in the stage preceding the first stage, the corporation shall connect the Sugat plant to the natural gas transmission systems,
shall convert the existing energy plant of Sugat to a dual system enabling the operation by fuel oil and natural gas and shall
operate and maintain for Sugat its existing energy plant, all as determined in the detailed agreement.



On August 4, 2014, the parties
signed an amendment to the agreement, under which Sugat will operate the existing facilities for a year, and will pay Dor Alon
for the steam, based on specified rates.



On March 1, 2012, the corporation
entered into an agreement with Israel Natural Gas Lines Ltd. ("INGL") to connect Sugat to the national transmission
system for natural gas and to provide natural gas transmission services by INGL (the agreement).



Pursuant to the agreement,
INGL shall establish the infrastructures that include, inter alia, the transmission piping and the facilities necessary to connect
the Sugat plant to natural gas and shall install the infrastructures necessary for natural gas transmission to the power plant
which is planned to be built by the corporation on the Sugat plant premises.



The agreement is for a period
until July 31, 2029 with a renewal option of five additional years.



Pursuant to the agreement,
the corporation shall bear the connecting expenses to the transmission system which is estimated at NIS 15 million. In addition
the corporation is committed to pay the current annual payments to INGL for transmission services until the end of the agreement
term in an immaterial amount, regardless of whether the corporation uses the transmission services or not.



On December 9, 2012, the Corporation
entered into an agreement to purchase natural gas from the partners in Tamar partnership (the partnership agreement) for the purpose
of operating existing installations and a power plant, when established, the purpose of which, is to supply the energy needs of
Sugat. Dor Alon's Board of Directors approved the transaction as an extraordinary transaction, in which the controlling shareholders
may have a personal interest, pursuant to the Companies' Regulations (Relieves in Transactions with Interested Parties) –
2000. Pursuant to the agreement, Tamar partnership partners committed to supply the partnership with natural gas at a scope of
up to 1.68 billion square meters according to the conditions set forth in the supply agreement. The term of the supply agreement
is 15 years, which commenced in June 2014, or the end of consuming the contractual quantity, whichever is earlier. The supply
period can be extended with additional two years, not to exceed the end of consuming the contractual quantity.



| | e. | During 2014, the lease on Dor
                                         Alon offices, located in a building near Kibbutz Yakum, was extended to July 2017, with
                                         an option for two additional years. The annual rental is NIS 3,494 thousand, linked to
                                         the March 2014 CPI.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-113







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTSCapital
commitments (continuing operations) (continued)



| | f. | Dor Alon has agreements with
                                         the owners of land for the building and operation of 22 filling stations and two agreements
                                         for the building of commercial centers. Dor Alon has undertaken to pay Alon Israel Oil
                                         Company Ltd. an amount equal to U.S. $250 thousand for each of the above agreements that
                                         is exercised. An agreement is considered exercised when the filling station or commercial
                                         center has started providing services to the public. As of December 31, 2015, two commercial
                                         centers and two filling stations had started operation. No additional commercial centers
                                         or filling stations has started operations in 2015.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | In November 2013, Dor Alon entered
                                         into an agreement to purchase natural gas from the partners in Tamar partnership (the
                                         "agreement", the "sellers" and "Tamar partnership", respectively).
                                         The term of the agreement commenced in the fourth quarter of 2013 and will end at the
                                         end of 7 years or on the date Dor Alon will consume the overall contractual quantity,
                                         as defined below, whichever is earlier (the term of the agreement).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the agreement,
the sellers committed to supply Dor Alon with a natural gas at a total scope of up to 0.36 BCM estimated at U.S. $85 million under
the conditions set forth in the agreement. Dor Alon committed to Take or Pay for the annual quantity of gas at the scope and according
to the mechanism set forth in the agreement.



The agreement will come into
effect upon obtaining the approval of the Untitrust Authority. A request for exemption was filed with the Authority. As of December
31, 2015, the Antitrust Authority informed Dor Alon that it will withhold any enforcement actions relating to the agreement until
a decision with regard to the requested exemption is taken.



| | h. | As part of Dor Alon's formal
                                         negotiations with the Environment Ministry it suggested a multi-annual plan for identifying
                                         and rectifying pollution in filling station sites operated by Dor Alon and which were
                                         built after the Water Regulations came into force (approximately 54 filling stations).
                                         Under the plan Dor Alon will perform the above plan over a period of 8 years. The said
                                         plan and any activity performed in the framework of this plan are considered to be of
                                         a positive nature by the Environment Ministry. Such positive actions may be taken into
                                         account when deciding whether to take Dor Alon and its officeholders to Court. In addition,
                                         Dor Alon and the Ministry reached an understanding on the installation of a system designed
                                         to prevent fuel fumes emissions (stage 2) in the filling stations operated by Dor Alon.
                                         As part of the said understandings, Dor Alon would install such systems in sites that
                                         are located up to 40 meters from residential properties. By the end of 2015 Dor Alon
                                         installed such systems in approximately 149 filling stations that it operates, and during
                                         2016-2017 it intends to install such systems in approximately 45 filling stations. Dor
                                         Alon expects that its investment in the relevant equipment, in order to implement the
                                         provisions of the said Regulations, in 2016 will be approximately NIS 8 million and NIS
                                         9.5 million thereafter. In addition, Dor Alon expects that it will be required to invest
                                         further amounts also in future years, and that it may be required to pay for unexpected
                                         expenses for remediation of soil or water contamination.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-114







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 – COMMITMENTS(continued):



On February 5, 2015, Dor Alon
Energy Centers – Limited Partnership, signed an agreement to establish a limited partnership for the purpose of of participating
in the tender published by the Israeli Government for the construction of an Ammonia production plant in the Negev area. Dor Alon
Energy Centers and another partner will have, each, 47% of the rights in the partnership, and another third party will hold the
remaining 6%. The new partnership will be operated and managed by a general partner, a company that is jointly controlled by the
two major partners above. As of December 31, 2015, the new partnership passed the preliminary selection stage, and is preparing
for admitting its proposal for the construction of the Ammonia plant during 2016.



NOTE 35 – LIENS AND GUARANTEES:



LIENS:



Blue Square



The Company has registered
a first ranking fixed lien in favor of BSRE, on all its rights in a bank account where it is required to deposit shares of BSRE
held by the Company with a value of two times the value of such loans (see also note 36e).



BSRE



| | a. | As of December 31, 2014 there
                                         are charges on thirteen of properties transferred to BSRE by Mega and the related lease
                                         agreements, for the purpose of securing bank loans received in 2014, the balance of which
                                         as of December 31, 2015 amounts to approximately NIS 186.3 million. The bank has agreed
                                         to reduce the charges to nine properties.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the above,
at the date of approval of these financial statements on two of the assets which were transferred as part of the split off from
Blue Square in 2006, together with the foundation of BSRE, liens were placed to secure the liabilities to third parties (mainly
banks) relating to these properties to Blue Square.



Also, charges have been registered
on five further properties from among the properties transferred. In the latter case, however, the Company has received ‘exclusion
letters’ (hereinafter - the conditional ‘exclusion letters’) from the holders of the above charges. The Company
has advised BSRE, that it has abided by, or will abide by, the terms of the conditional ‘exclusion letters,’ and that
there is no significant impediment to the completion of their transfer to BSRE.



| | b. | On December 31, 2015 a BSRE subsidiary
                                         had a loan in an amount of NIS 64 million to finance the establishment of logistic center
                                         in Beer Tuvia. A first ranking lien on the property and the accompanying rights was registered
                                         in favor of the bank.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | As of December 31, 2015 there
                                         is a charge on one of the properties transferred from Mega to BSRE for the purpose of
                                         securing the liabilities of the vendors of the property acquired by Mega to the third
                                         parties.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | To secure the repayment of the
                                         loans of the Residential Company and the Mall Company, the rights in the real estate
                                         were pledged in favor of the bank that extended the loans to the purchasers (see note
                                         34.c.2).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-115







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – LIENS AND GUARANTEES(continued):



| | e. | As a collateral to pay the loan
                                         to expand Hadar mall in Jerusalem (BSRE's share in the mall is 50%) (including the additional
                                         loan, if exercised) BSRE charged in favor of the lenders the entire rights in the real
                                         estate of the mall including related rights (such as the Company's rights in lease agreements
                                         signed and/or to be signed with tenants in the mall, placing charges on the Company's
                                         rights in insurance policies). In addition, BSRE placed charges in favor the lenders
                                         by floating charge on its rights in a designated account in which lease fees are to be
                                         deposited (the Company's share) and shall charge its shares in the management company
                                         of the mall (50%). The balance of the above loan as of December 31, 2015 amounts to approximately
                                         NIS 114 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f. | As security for the long term
                                         loan from a bank who provided the financing for the construction of a logistic center
                                         Eyal Baribua (a 50% jointly controlled entity of BSRE) has registered a fixed and floating
                                         charge on the property and the accompanying rights. As of December 31, 2015 the balance
                                         of the loan amounted approximately NIS 92.6 million,
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | As part of the deed of trust of
                                         its Series E debentures, BSRE has committed not to register a floating lien on its assets
                                         (a negative pledge) without the approval of the holders of such debentures, or the creation
                                         of a similar lien in favor of the debenture holders, on a pari-passo basis.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | As security for a long term loan
                                         from a the Harel Insurance group – a partner in a joint operation between the Harel
                                         Insurance group and BSRE for the construction and operation of an investment property
                                         in Ra'anana – BSRE has registered a fixed charge on the property and the accompanying
                                         rights and a floating charge on its rights in a designated account where BSRE's rental
                                         income will be deposited. As of December 31, 2015 the balance of the loan amounted approximately
                                         NIS 99.4 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dor
Alon



In order to secure the liabilities
of Dor Alon and its subsidiaries to banks, the balance of which as of December 31, 2015 amounted to NIS 698 million, Dor Alon
and its subsidiaries placed floating charges on all their assets, share capital and goodwill, excluding relating to the domestic
sales of LPG. Some of the unlimited charges are in accordance with a development contract with the ILA. Liens were also placed
on ownership rights in certain real estate assets and rights to receive funds and notes, insurance rights etc. in connection with
these real estate assets. To secure the liabilities of other subsidiaries to commercial banks a fixed and a current charge were
placed on the current assets, the fixed assets, the goodwill, the insurance rights, the receipts from credit card companies and
share capital.



In addition, Dor Alon recorded
a first degree pledge on the shares of 14 jointly controlled entities and all the accompanying rights, a first degree pledge on
rights which were pledged to Dor Alon in connection with commercial centers and fuel services, including insurance rights and
the right to receive funds from various debtors and shareholders of the jointly controlled entities.



F-116







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – LIENS AND GUARANTEES(continued):



BEE
Group



The BEE Group and its subsidiary
(Naaman) placed unlimited, fixed and floating charges and a first ranking lien on the warehouse and all its assets, property,
book debts, rent, goodwill, profits, revenues, rights of ownership, including its shareholding in Naaman, and other benefits in
favor of banks to secure their liabilities to banks, amounting as of December 31, 2015 to NIS 99 million (of which NIS 75million
relates to Naaman).



In order to secure its liabilities,
Naaman has undertaken not to pledge any of its assets and/or provide any kind of guarantee to a third party without prior approval
of the banks.



GUARANTEES:





| | a. | Blue Square has provided bank guarantees for third parties such as service suppliers, for gift
certificates and customers in an aggregate amount of approximately NIS 3 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Guarantees for Mega (a former subsidiary – see also note 5a)
| | -- | ------------------------------------------------------------



The Company has guaranteed Mega
obligations to banks and to credit insurers (for suppliers), and provided guarantees in respect of employees and certain Mega lease
agreements; the Company has made an appropriate provision in the total cummulative amount of NIS 410 million in respect of these
guarantees.



| | c. | BSRE has issued the following guarantees:
| | -- | -----------------------------------------



| | i. | A guarantee for the liabilities of the purchasers to the sellers as part of the Wholesale market
transaction. In addition, BSRE guaranteed the liabilities of the City Core Tel Aviv company and City Mall Tel Aviv company discussed
in note 34c.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii. | A guarantee for a bank loan to the logistic center company of NIS 64 million.
| | --- | -----------------------------------------------------------------------------



| | iii. | A guarantee to the bank, in connection with Eyal Baribua's loan (see also Liens in f. above), to
secure 50% of the loan, until a new lease agreement is signed for the property. As security for the above, BSRE's partner in Eyal
Baribua has written a fixed charge on his 50% interest in Eyal Baribua in favor of BSRE.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Dor Alon provided guarantees
                                         in the amount of NIS 20 million in connection with tenders in which it participates as
                                         a bidder and in connection with legal proceedings to which it is a party. Dor Alon has
                                         also provided guarantees to its subsidiaries and to its joint ventures totaling NIS 210
                                         million and NIS 31 million, respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-117







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES



Key management
personnel – includes the members of the board of directors and senior managers in the Company, and CEO's of Dor Alon, BSRE,
Mega, Naaman and Alon cellular.



The principal
related parties of the Company are: Alon Retail Ltd., Alon Israel Oil Company Ltd., Alon USA LP (until the date that the company
was sold by the parent company in May 2015), Bielsol Investments (1987) Ltd., collective acquisition entities of kibbutzim in
Israel that hold Alon Israel Oil Company Ltd, and other companies, whose interests are controlled by the Company's directors among
others. In addition there are related parties who are not principal related parties by virtue on the Company's holding in jointly
controlled entities or associates that are held at more than 25%.



| | a. | Transactions with related
                                         parties:
| | -- | ---------------------------------------------------------------------------



|                                      |  | Year ended December 31 |        
|------------------------------------- |  | ---------------------- | -------
|                                      |  | 2013                   |        
|                                      |  | NIS in thousands       |        
|Fuel sales to related parties(a)      |  |                        | 200,068
|Sales to joint control entities(a)    |  |                        | 798,008
|Rental income (b)                     |  |                        | 6,092  
|Management fees to parent company (c) |  |                        | 5,987  
|Directors' fees (d)                   |  |                        | 2,069  
|Legal consulting (e)                  |  |                        | 5,913  
|Purchases (f)                         |  |                        | 901,867
|Rental income from mega               |  |                        | -      



| | (a) | Relate to transactions that
                                         are carried out in the normal course of business in accordance with regular market prices
                                         and credit. Includes sales of fuels of Dor Alon to joint control entities and sales of
                                         products of Mega to Joint control entities.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In January
2004 the shareholders of Blue Square approved an agreement according to which it provides Dor Alon purchasing and supply services
for stores operated by them, which was terminated in June 2015. In consideration for these services, the Company is entitled to
payment equivalent to the cost of the services provided with the addition of a margin as stated in the agreement. In 2015 and
2014 the sales amounted to approximately NIS 105 million and NIS 253 million respectively.



| | (b) | Point Wells
| | --- | -----------



During 2010,
BSRE signed agreements with subsidiaries of Alon U.S.A, a related party, for the acquisition and development of a property in
Point-Wells near Seattle, Washington, USA (presented as real estate inventories - see also note 14(2).). The property, which currently
serves primarily as a plant for storage and distribution of fuel and oils of the related parties was acquired for U.S. $19.5 million.



According to
the development agreement, all demolition and contamination cleanups required for the land will be the responsibility of the related
parties and on their own account; the related parties will also compensate BSRE for any damages incurred in connection with such
activities. In case the Company was to sell the land the related party may participate in the consideration net of costs as defined
in the agreement.



F-118







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



The agreements
provide for the lease of the property to the related parties for a period of up to 10 years. Rental income received by BSRE amounts
to $1.7 million for the years 2014 and 2013, respectively.



| | (c) | In December 2010, Alon and Dor Alon renewed the management
services agreement ("Management Services Agreement"), effective from January 1, 2011, by which Alon provides the following
services and rights to Dor Alon (the "Services"): (i) various management services, including those related to the chairman
of the board and president of Dor Alon, day to day management of Dor Alon, strategy and business development, supplementary legal
counsel, corporate secretary services provided by Alon's in-house counsel, and (ii) the right to use the "Alon"
and "Alonit" brand names. On March 2014, the management services agreement was extended for an additional three year
period with similar terms of the quarterly management fees paid by Dor Alon to Alon equal the aggregate of 3% of Dor Alon's EBITDA
profits according to Dor Alon's quarterly consolidated financial statements but not more than NIS 1,375 thousand on a quarterly
basis, linked to the consumer price index published on February 2004. In 2015, Alon received approximately NIS 5.5 million for
the Services (2014 - NIS 5.4 million).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Commencing November 15, 2005
                                         until March, 2015, the Company's former Chief Executive Officer, Mr. David Wiessman (see
                                         note 37a) received compensation for his services of NIS 49,000 per month plus reimbursement
                                         of actual expenses incurred in connection with his services to the Company. The compensation
                                         amount is linked to the Israeli CPI (base index – November 2005), and is updated
                                         every three months. Due to the recent amendment to the Israeli's Companies Law, this
                                         arrangement was re-approved by our audit committee, board of directors and shareholders
                                         meeting for additional three years commencing on February 2, 2012.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Legal services
| | --- | --------------



The Company
receives legal services from S. Biran & Co. a related party of the Company.



| | (f) | Goods purchase from related
                                         parties
| | --- | ----------------------------------------------------------------------------



Mega purchases
goods from Tnuva. These arrangements are in the ordinary course of our business, and the terms and conditions of these arrangements
are at "arm's-length". The Company purchases most of its dairy, fresh produce and poultry products from the Tnuva corporation,
which holds a leading position in the domestic dairy and poultry markets. To our knowledge, some of the collective acquisition
entities of kibbutzim in Israel that hold shares of Alon, our controlling shareholder, hold 21.5% of Tnuva. 2015 figures in the
above table are for the first half of the year, following which control over Mega was lost (see note 5a).



F-119







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



| | (g) | Discounts
| | --- | ---------



On September
13, 2005, the Company’s general shareholders meeting approved a discount arrangement for some of the employees of the companies
holding directly or indirectly in the Company’s shares (some of the employees of Alon Group) (hereinafter - “the entitled
employees”).



The discounts
to be given to the entitled employees will be identical to those given to the Company’s employees, which during 2014 were:
12% at the Mega In Town stores, 12% at Mega on-line, 6% at the Zol Beshefa stores, You stores and Mega Bool stores, 50% in Vardinon
and 30% in Naaman. In 2015 the discount rates in Mega chain reduced to 10% in all formats.



The discounts
are limited to purchases in a total amount of NIS 8,500 a month.



Gift cards



The Company
sells gift certificates for the par value in the certificate less a discount, according to commercial terms negotiated with the
clients during the regular course of business.



Employment
agreement with Ms. Moran Wiessman



Beginning
in January 2009, Ms. Moran Wiessman has been employed by Alon Blue Square wholly-owned subsidiary Bee Group as the manager of
the Bee Group internet sites. Ms. Wiessman is the daughter of Mr. David Wiessman, the former Company's Chief Executive Officer.
As of December 31, 2014, Ms. Wiessman received a monthly salary of NIS 21,000, a cell phone at the expense of Mega, and Mega assigned
a car to Ms. Wiessman as is customary in Mega for employees at the same level. In addition, Ms. Wiessman was entitled to standard
social allocations by Mega (5% for provident fund, 8.33% for severance payments and 1% for disability insurance) and other social
benefits that are standard for an employee in her position.



To the best
of the Company's knowledge, as of December 31, 2015, Ms. Wiessman is no longer employed by Mega.



F-120







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



| | b. | Balances with related
                                         parties
| | -- | ----------------------------------------------------------------------



Year-end balances
arising from sales/purchases of goods/services:



|                                                           |  | December 31,     |        
|---------------------------------------------------------- |  | ---------------- | -------
|                                                           |  | 2014             |        
|Assets                                                     |  | NIS in thousands |        
|Diners credit card customers                               |  |                  | 68,971 
|Other receivables                                          |  |                  | 191,707
|Available for sale financial assets                        |  |                  | 9,906  
|Loans to investments accounted for using the equity method |  |                  | 80,929 
|Liabilities                                                |  |                  | 351,513
|Trade payables                                             |  |                  | 81,632 
|Other payables                                             |  |                  | 26,526 
|Short term loans from parent Company (see d. below)        |  |                  | -      
|Long term loans from parent Company (see d. below)         |  |                  | -      
|                                                           |  |                  | 108,158



As at December
31, 2014, the receivables from related parties include loan granted to the parent company and balances arise from sale transactions
and are due two months after the date of the sales. The receivables are unsecured in nature and bear no interest. There are no
provisions held against receivables from related parties.



As to a loan
receivable from a related party, see note 18.



| | c. | Acquisition of Dor Alon
| | -- | -----------------------



In connection
with the acquisition Alon and the Company obtained a pre-ruling from the Israeli Tax Authority. The pre-ruling is subject to various
conditions and provides, among other things, that the cost basis and the purchase date of the shares of Dor Alon for tax purposes
in the possession of the Company following the acquisition will be the original price and acquisition date, respectively, as they
had been for Alon prior to the acquisition. Alon has clarified to the Company that, in connection with the payment of tax at the
time of any future sale by the Company of all or part of its shares in Dor Alon, if any, to a third party, Alon will pay that
portion of any applicable tax payable in an amount equal to the amount of tax deferred by the Tax Authority in its pre-ruling
(i.e., the amount of tax that would have been payable by Alon in connection with the acquisition had the acquisition not been
tax exempt according to the pre-ruling).



F-121







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



| | d. | Parent
                                         Company
| | -- | -------------------------------------------------------



During 2015, as part of the
Mega's debt arrangement with its creditors and the group undertaking, the parent company has provided certain loans to the Company,
that do not bear interest, but are linked to the CPI, as follows:



A short-term bridge loan of
NIS 110 million; this loan will be repaid from the consideration to be received from the parent company as investment and participation
in the planned issuance of share rights by the Company.



A long-term loan of NIS 60
million; this loan can be repaid only after the settlement of all company's obligations to banks and debenture holders. The loan
is for a period of 7 years and was recognized initially at fair value of NIS 29 million (discounted on the basis of the effective
interest rate that applies to the Company's debentures); the difference of NIS 31 million was carried as owners contributions
in the statement of changes in equity.



In addition, in replacement
of an additional NIS 50 million loan commitment, the parent company acquired from the Company 1,277,139 shares from its shareholding
in Dor Alon, representing 8.04% ownership in Dor Alon, for NIS 50 million; the shares were acquired on November 8, 2015, at a
price that represents the average market price of the shares during the 7 days of trading preceding the sale. The Company is entitled
to receive additional consideration for these shares in certain events, and has "bring along" and "lock-up"
rights during the first 8 months after acquisition, if a transaction for the sale of Dor Alon is finalized within that period.
The fair value of the contingent consideration is immaterial as at December 31, 2015.



| | e. | Mega
| | -- | ----



As explained in Note 5a Mega
is a former subsidiary of the Company, that was engaged in several inter-group transactions and agreements that had no effect
of the consolidated financial statements; following the lost of control over Mega, and up to the date of issuance of these financial
statements, the agreements with Mega that are still in effect include mainly the following:



Lease agreements with BSRE



A significant portion of BSRE's
investment properties (providing approximately 60% of its rental income in 2015), are leased to Mega under long-term lease agreements
from the years 2006 and 2009, and amendments thereto (including the addendum to the agreement from December 2015 that was approved
by court). The main features of these agreements include:



| | a. | Lease term of 10
                                         years, ending March 31, 2019. The lease is renewed for an additional term of 5 years
                                         each time, unless Mega opts not to renew it, in which case 24 months early notice is
                                         required.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-122







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



| | b. | Annual rentals
                                         computed at 9% of the amount of BSRE's investment in the asset (linked to the CPI), or
                                         2% of the revenue of the store in the relevant year, whichever is higher; according to
                                         the agreement addendum from December 2015, the rental fees as percentage from revenue
                                         was increased to 2.75%, and in addition, 9% discount on the rental fees for the supermarkets
                                         and the office building in Rosh Ha'ain is granted for a period of 24 months, commencing
                                         November 1, 2015.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Early termination
                                         of the lease for certain assets is possible, to the extent that their area, in aggregate,
                                         does not exceed 5% of the total rented space under the agreements at the beginning of
                                         the lease (subject to 12 months early notice by Mega). In addition, at the time of the
                                         lease extension, subject to 12 months early notice, Mega has the option to reduce the
                                         number of assets included in the lease, to the extent that their paid rentals (according
                                         to the average of lease fees in the two years preceding the renewal), does not exceed
                                         15% of the total lease fees paid under the lease agreement.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | The lease agreements
                                         are "net lease" type; all payments and charges in respect of maintaining and
                                         using the assets during the lease term are born by the lessee, unless otherwise agreed.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | In the case a leased
                                         asset is sold or mortgaged by BSRE, Mega will engage in a separate lease agreement with
                                         the buyer, and the rentals to BSRE will be reduced by the basic rentals attributed to
                                         the sold asset, under an agreed formula.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



BSRE have
no collaterals for the rental fee payments under the lease agreements.



During 2015, in the framework
of the recovery plan of Mega, it was agreed that Mega will exit from 12 stores (out of the 86 stores leased by Mega from the group).
In addition, Mega sold its "YOU" discount chain to third parties; including 10 stores that are located on assets leased
from BSRE (new lease agreements for 10 to 20 years were signed with these third parties, commencing 2016).



Subsequent to year end, on
February 29, 2016, a notice was given to Mega, that in accordance with the December 2015 addendum to the agreement, under the
circumstances that a trustee was appointed to Mega and that decision was not annulled within 30 days, Mega is in breach of the
lease agreements, and therefore the discount granted under the adendum for a period of 24 months (of 9%), is not valid.



Rental income from Mega during
the period from July 2015 to the end of the year amounts to NIS 68 million. Rental income from Mega in prior years and during
the 6 months ended June 30, 2015, is not presented in the income statement, as it is eliminated against rental expenses of Mega,
that are presented in the discontinued operations line item. Such rentals amount to NIS 164 million for 2013, NIS 160 Million
for 2014 and NIS 72 million for the first half of 2015.



Other Agreements



Other agreements with Mega include
mainly trading activities in the ordinary course of business with Naaman and Dor Alon (both subsidiaries that are classified as
held for sale).



During July 2015, Dor Alon has
agreed with Mega on the discontinuation of all existing engagements for the purchasing of goods and commenced making independent
acquisitions from food suppliers.



F-123







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES(continued):



Dor Alon



| | 1. | Pursuant to the
                                         agreement entered into in May 2005, and subsequently extended on January 6, 2011 until
                                         January 2016, Dor Alon may, from time to time, deposit funds with Alon and receive in
                                         return funds on ON CALL terms (on an on-demand basis). The amount of funds lent from
                                         each party to the other party may not exceed NIS 150 million at any time (linked to the
                                         prime rate less 1.25%). Against the deposits, the depositor is entitled to require the
                                         recipient party to provide her /or third parties bank guarantees or letters of credit.
                                         Each party is entitled to redeem or require redemption of the balance by giving notice
                                         of three banking business days. Either party may terminate the agreement by providing
                                         three-month prior written notice.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | As part of the
                                         transfer of assets and operations that took place in 2004, Alon undertook to indemnify
                                         Dor Alon for expenses Dor Alon may incur relating to the period through the date of transfer
                                         of the assets and Dor Alon undertook to indemnify Alon in case lawsuits would be brought
                                         against it in respect of expenses relating to the period subsequent to the transfer of
                                         assets to Dor Alon. Also, Dor Alon undertook to indemnify Alon in respect of the tax
                                         liability to which Alon would be subject if Dor Alon were to breach the provisions of
                                         Section 104A of the Income Tax Ordinance regarding the transferred assets. Alon has undertaken
                                         to indemnify Dor Alon in respect of any amount Dor Alon would be required to pay in connection
                                         with the period during which 21 employees of Alon that were transferred to Dor Alon as
                                         part of the transfer of operations were employed by Alon.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Purchase of natural
                                         gas
| | -- | ----------------------------------------------------------------



| | Regarding
    purchase of natural gas from the partners in Tamar partnership under long-term commitments - see note 34.d and g.
| | -------------------------------------------------------------------------------------------------------------------------------



| | f. | BSRE
| | -- | ----



Pursuant to an agreement between
Blue Sqare and BSRE, commencing February 28, 2014, for a period of three years BSRE may, from time to time, deposit funds with
the Blue Square and receive in return funds on ON CALL terms (on an on-demand basis). The amount of funds lent from each party
to the other party may not exceed NIS 150 million at any time. The amounts will be deposited for periods that will not exceed
one year, which can be renewed. The deposit will bear interest at rates that are equal to interest rate paid by these companies
for "on call" credit during same month.



Blue Square "on call"
obligation to BSRE, amounting NIS 50 million at December 31, 2015, is secured by first fixed lien on all its rights in a bank
account where it has deposited 1,130,000 shares of BSRE held by the Company, with a value of two times the value of such obligation.



In addition, if the rating of
Series C debentures of Blue Square decreases below Baa2, the maximum amount of any such deposit may not exceed NIS 50 million.
Two grades decrease in the rating also triggers an increase of 0.5% per annum of the interest paid on the deposit, and additional
0.5% for any additional grade decrease thereafter. Following several decreases in the rating of Series C debentures during 2015
(see note 21.d), Blue Square was required to increase the interest on the above deposit by 4.5%, and decrease the amount funded
to the maximum NIS 50 million prescribed by the agreement.



Either party may terminate the
agreement by providing a seven days prior notice.



F-124







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 36 – RELATED-PARTY DISCLOSURES
(continued):



Key management compensation



|                                                |  | Year ended December
    31 |       
|----------------------------------------------- |  | -------------------------- | ------
|                                                |  | 2013                       |       
|                                                |  | NIS in thousands           |       
|Salaries and other short-term employee benefits |  |                            | 14,433
|Share-based payments                            |  |                            | (168  
|Total                                           |  |                            | 14,265



NOTE
37 – EVENTS SUBSEQUENT TO DECEMBER 31, 2015:



| | a. | As to subsequent
                                         events in relation to Mega – see Note 5a.
| | -- | ---------------------------------------------------------------------------------------------------



| | b. | Offerfor the acquisition of the Parent holding and injection of funds to the
                                         Company
| | -- | -----------------------------------------------------------------------------------------------------------------------------



At the end of
January 2016 and at the beginning of February 2016 the controlling shareholders received several proposals to purchase the control
over the Company two of which were brought for voting before the Series C bondholders. On February 16, 2016, the series C bondholders
approved to hold negotiations with Mr. Ben Moshe regarding his proposal which includes, among others, an outline for the repayment
the Company's financial debt (NIS 932 million), the essence of which is the injection of NIS 900 million to the Company for the
full repayment of the financial debt to financial creditors interested in such repayment. 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.





Under the outlines of the
proposal, the Company entered into negotiations with its financial creditors and Ben Moshe, following which the Company filed a
motion on May 8, 2016 to the District Court of Lod to convene meetings of its financial creditors (consisting of holders of the
Company's bank debt and guaranteed bank debt and holders of its Series C Debentures) and shareholders for the approval of a proposed
debt reorganization and arrangement, or Arrangement, under Section 350 of the Israeli Companies Law, 5759-1999, as detailed in
c. below





The coming into effect of Ben
Moshe offer to acquire the Company as above is conditioned on the approval of the Arrangement by the court, the Company's financial
creditors and shareholders, and satisfaction of all conditions in the proposed Arrangement, including inter alia, the approval
of Ben Moshe's Offer to Acquire Mega.



F-125







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





| | c. | Proposed debt reorganization and arrangement under Section 350
of the Israeli Companies Law, 5759-1999 ("the Arrangement")
| | -- | --------------------------------------------------------------------------------------------------------------------------



The proposed Arrangement will
come into effect concurrently with the execution of the acquisition of the shares and rights in the Company from the Company's
controlling shareholder, as detailed in b. above. The Arrangement contemplates the full repayment of the financial debt of the
Company.



The proposed Arrangement is
also based and conditioned on the 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 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 ("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);



Principal terms of the Arrangement



As part of the Arrangement,
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 (see also hereafter), as follows:



| | - | 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | - | 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 has not yet agreed to the basis of the above conversion rate (NIS
50 million valuation);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-126







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





| | - | 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 Arrangement.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 (for the initial infusion of NIS 240 million), that will entail (post issuance) 0.34%, 13.79% and
85.02% shareholding in the Company (on a fully diluted basis - 0.11%, 4.21% and 95.43%, respectively - in the event Ben Mose convert
all NIS 900 million into shares);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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, in whole or in part, which will be effectuated after the elapse of 12 months from the closing date. After the early debt
repayment, 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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, including the early debt repayment within three months
from the closing date, 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 liabilities to the trustees
and creditors of Mega Retail who would waive their rights as part of the Arrangement) will be paid by the Company in the ordinary
course of business as determined by the Company at its sole discretion. The Arrangement does not apply to debts or liabilities
incurred towards creditors not determined to be financial creditors under the Arrangement;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



To secure full repayment under
the Arrangement, 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%





F-127







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The Company has also requested
the court to grant it several court orders to assist it in carrying out the Arrangement to completion, inter alia, a grace period
was requested so that the Company 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.



It is contemplated that the
Company would convene a meeting of shareholders but would retain its right, in accordance with applicable Israeli law, to apply
to the court at a later date to determine that shareholder approval is not required for the Arrangement.



The Arrangement 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. The Arrangement contemplates the complete waiver of all claims against the Company and against its subsidiaries
and against all whom received indemnification from the Company and its subsidiaries by the trustees 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 .



The Closing of the Arrangement
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 Arrangement sets also timetables for the required
steps until its satisfaction; the deadline for satisfying the closing conditions is July 31, 2016.



Alon, the current controlling
shareholder of the Company, notified the Company that the terms of the Arrangement don't match the agreement signed between Alon
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.



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 Arrangement will be satisfied.



On May
10, 2016, the trustees of Mega Retail submitted to the court in Lod, Israel a noticein 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 Winesfor the reasons detailed in the request
of the trustees (motion 83).   Following the trustees' request, Ben Moshe and a company under his control filed a motion with
the Court requesting the setting of a date for an urgent hearing during which, according to Ben Moshe, the Court would able 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' notice within a time frame determined by the court. As part of the request 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 NIS 40 million. In addition, Ben Moshe detailed in
his motion alleged inconsistencies in the notice filed by the trustees. As of the date of this Annual Report, the Company
do not know if and how the court will respond to the request of the trustees and/or if the offer of Bitan Wines will be included
as part of a final binding Mega Retail arrangement.  In addition, the Company 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 it may be feasible
that Ben Moshe's Proposal will include Mega Retail, as in our proposed debt reorganization and arrangement for the Company submitted
to court on May 8, 2016), or alternatively, that the Company 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 certaintythat 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, the Company cannot estimate the ramifications
such notice of the trustees of Mega Retail.



| | d. | Following the public reports on Ben Moshe's proposal to acquire the parent company's holding in
the Company, the trustee of BSRE debentures (Series E) informed BSRE and the Company that the change in ownership of the Company
may breach a covenant of the debentures and therefore any such sale will need to be pre-approved by Series E debenture holders.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | As to Debentures (C Series) – see note 21d(1)(a)
| | -- | ------------------------------------------------



| | f. | On January 27, 2016, Midroog lowered the Company's rating from B3 to Caa1 and left the rating under
review with uncertain implications.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------



| | g. | On March 15, 2016, BSRE Board of Directors approved certain changes in the employment terms and
compensation of its CEO (subject to the approval of a shareholders' meeting); inter-alia, these include share based compensation
of NIS 1.5 million (fair value) in options to BSRE shares, and NIS 1.5 million fair value of restricted shares of BSRE. The vesting
of the options and the shares will be in 3 quotas, over three years period, and are subject to performance conditions.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-128







ALON BLUE SQUARE ISRAEL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DETAILS
OF PRINCIPAL SUBSIDIARIES, JOINTLY CONTROLLED ENTITIES AND ASSOCIATES AT DECEMBER 31, 2015



APPENDIX



|Holding Company                           |  | Name of Company                                               |  | Percentage of ownership
    and control by holding Company as of December 31, 2014 |       |   | 
|----------------------------------------- |  | ------------------------------------------------------------- |  | ---------------------------------------------------------------------------------- | ----- | - | 
|Alon Blue Square Israel Ltd.              |  |                                                               |  |                                                                                    |       |   | 
|                                          |  | Blue Square Real Estate Ltd.                                  |  |                                                                                    | 53.92 | % | 
|                                          |  | BEE
    Group Ltd1.                                           |  |                                                                                    | 100   | % | 
|                                          |  | Alon Cellular                                                 |  |                                                                                    | 100   | % | 
|                                          |  | Dor
    Alon Energy in Israel (1988) Ltd 3                    |  |                                                                                    | 63.13 | % | 
|                                          |  | Mega
    Retail Ltd. 2                                        |  |                                                                                    |       |   | 
|Mega Retail Ltd.                          |  |                                                               |  |                                                                                    |       |   | 
|                                          |  | Loyalty plan-partnership "YOU"                                |  |                                                                                    | 75    | % | 
|Blue Square Real Estate Ltd.              |  | Kenyon Hadar Management Company Ltd.                          |  |                                                                                    | 50    | % | 
|                                          |  | Hyper Lod Center Ltd.                                         |  |                                                                                    | 100   | % | 
|                                          |  | Blue Square – Hadar – Joint Operation                         |  |                                                                                    | 50    | % | 
|                                          |  | Logistic Center Bee Square Real Estate Ltd.                   |  |                                                                                    | 100   | % | 
|                                          |  | Izdarehet Investments Company Ltd.                            |  |                                                                                    | 50    | % | 
|                                          |  | City Core Tel Aviv Ltd.                                       |  |                                                                                    | 49.5  | % | 
|                                          |  | City Mall Tel Aviv Ltd.                                       |  |                                                                                    | 50    | % | 
|                                          |  | Tel Aviv Parking lots Ltd.                                    |  |                                                                                    | 50    | % | 
|                                          |  | Einat real estate investment agriculture cooperative
    Ltd. |  |                                                                                    | 50    | % | 
|                                          |  | Eyal Baribua Ltd.                                             |  |                                                                                    | 50    | % | 
|                                          |  | BSRE U.S.A Inc                                                |  |                                                                                    | 100   | % | 
|                                          |  | BSRE Point Wells Lp                                           |  |                                                                                    | 99.9  | % | 
|Bee Group Ltd.                            |  | Naaman
    Group (NV) Ltd.3                                   |  |                                                                                    | 77.51 | % | 
|                                          |  | Bee logistic center ltd                                       |  |                                                                                    | 100   | % | 
|Dor Alon Energy in
Israel (1988) Ltd (2). |  | Dor Alon Gas Technologies Ltd.                                |  |                                                                                    | 100   | % | 
|                                          |  | Dor Alon retail sites management LTD                          |  |                                                                                    | 100   | % | 
|                                          |  | Alon fuel management and operation networks (1999)
    Ltd.   |  |                                                                                    | 100   | % | 
|                                          |  | Dor Alon Energy Centers                                       |  |                                                                                    | 55    | % | 
|                                          |  | Loyalty plan-partnership "YOU"                                |  |                                                                                    | 25    | % | 
|                                          |  | Dor energy holdings (2004) ltd                                |  |                                                                                    | 100   | % | 
|                                          |  | Mercury Aviation                                              |  |                                                                                    | 31.25 | % | 








| | 1 | As
                                         to legal merger of Bee Group Ltd with the Company - see note 6h.
| | - | ------------------------------------------------------------------------------------------------------------

| | 2 | Formerely
                                         wholly owned subsidiary, for which the Company lost control (see note 6a). As from January
                                         18, 2016, Mega is under the supervision and control of Trustees.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | Presented
                                         as disposal group held for sale.
| | - | -----------------------------------------------------------------------------------



F-129







SIGNATURE



The registrant hereby
certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.



| | ALON BLUE SQUARE ISRAEL LTD.
| | ----------------------------
| |                             
| | By:                         
| |                             
| |                             
| |                             
| | By:                         
| |                             
| |                             
| |                             
| | By:                         
| |                             
| |                             



Date: May 13, 2016



214