UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F



(Mark One)



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



OR



| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------------



For the fiscal year
ended December 31, 2012



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
HOLDINGS BLUE SQUARE - ISRAEL LTD.



(Exact
name of Registrant as specified in its charter)



Israel



(Jurisdiction
of incorporation or organization)



2
Amal Street, Rosh Ha’ayin 48092, Israel



(Address
of principal executive offices)



Ortal
Klein, Corporate Secretary

Tel:
(972)-9-9618636; Fax: (972)-9-9618504



(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 one Ordinary Share
(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:



66,161,860
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



Large Accelerated filer
 ̈             Accelerated
filer  ̈            Non-accelerated
filer x



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



U.S. GAAP  ̈



International Financing
Reporting Standards as issued by the International Accounting

Standards Board  S



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 Holdings
Blue Square - Israel Ltd., (b) the terms “we,” “us” and “our,” mean Alon Blue Square and
its consolidated subsidiaries, (c) “Mega Retail” means our wholly-owned subsidiary, Mega Retail Ltd., (d) “Dor
Alon” means Dor Alon Energy In Israel (1988) Ltd., a corporation of which we held approximately 78.43% of the outstanding
ordinary shares as of March 29, 2013, and the balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange,
and its subsidiaries (e) "Bee Group" means our wholly-owned subsidiary, Bee Group Retail Ltd., and (f) "BSRE"
means Blue Square Real Estate Ltd., a corporation of which we held 78.22% of the outstanding shares as of March 29, 2013, and the
balance of whose shares are publicly held and traded on the Tel Aviv Stock Exchange, and its subsidiaries.



We operate in four
reporting segments. As of December 31, 2012, we were the largest retail company in Israel based on the number of stores. In our
Supermarkets segment, we are the second largest food retailer in the State of Israel. In our Fueling and Commercial Sites segment,
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 major gas companies in Israel. In our Non-Food segment, we sell “Non-Food” items both in stand alone retail
outlets and in our supermarkets. In our Real Estate segment, we own, lease and develop yield-generating commercial properties and
projects. In addition to our reporting segments, we have activities in issuing and clearing credit cards through our affiliate,
Diners Club Israel Ltd., of which we held 49% as of March 29, 2013, , and during 2012 we launched our mobile virtual network operator
(MVNO) network in Israel through our wholly-owned subsidiary, Alon Cellular Ltd.



Through our supermarkets,
which are operated mostly through Mega Retail, we offer a wide range of food and beverage products and “Non-Food” items,
such as houseware, small electrical appliances, computers and computer accessories 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). As of December
31, 2012, we owned and operated 212 supermarkets under the brand names, Mega in Town, Mega Bool, Zol BeShefa and Eden Teva
Market (“Eden Teva”).



As of December 31,
2012, Dor Alon supplied motor fuels, motor oil and other petroleum products to a network of 202 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, 2012, Dor Alon also operated 209 convenience stores, of which 163 were convenience
stores branded “Alonit” and “Super Alonit” (called Alonit convenience stores in this Annual Report) and
46 convenience stores were operated by the AM:PM chain of stores. In addition, as of December 31, 2012, Dor Alon also operated
160 internal filling stations.



2







As of December 31,
2012, our Non-Food segment consisted of 219 non-food outlets, partially through franchisees, with activities in the houseware and
home textile, toys, leisure, and baby and young children sectors. Our Non-Food segment operates under the brand names Naaman, Vardinon,
Sheshet, Kfar Hasha’ashuim, All for a Dollar and Dr. Baby. In December 2012, Alon Blue Square resolved to sell during 2013
Kfar Hasha’ashuim and All for a Dollar chains, which sell toy and leisure products and operated 84 non-food outlets, mostly
through franchisees, as of December 31, 2012.



As of December 31,
2012, through BSRE, we were the legal owner (including through long-term leases from the Israel Land Administration and the Municipality
of Tel Aviv) of 114 yield generating real estate properties (including properties owned in connection with our Supermarkets and
Non Food segments, which includes warehouses and offices), totaling approximately 268,000 square meters, and approximately 155,000
square meters of unutilized building rights. In addition, we engaged in the development of five projects totaling approximately
80,600 square meters. In addition, BSRE operated in the area of residential real estate promotion and planning. For further information
regarding our real estate, see “Item 4. Information on the Company - B. Business Overview – Our Real Estate.”



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



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, 2012, which was NIS 3.733 per $1.00, except figures for the first quarter of 2013,
which are based on the representative exchange rate between the NIS and the dollar as published by The Bank of Israel for March
28, 2013, which was NIS 3.648 per $1.00.



3







TABLE OF CONTENTS



|          |                                                                              | Page
|--------- | ---------------------------------------------------------------------------- | ----
|PART I    |                                                                              |     
|          |                                                                              |     
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 5   
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                      | 5   
|ITEM 3.   | KEY INFORMATION                                                              | 5   
|ITEM 4.   | INFORMATION ON THE COMPANY                                                   | 33  
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                    | 89  
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 | 90  
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   | 133 
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 157 
|ITEM 8.   | FINANCIAL INFORMATION                                                        | 176 
|ITEM 9.   | THE OFFER AND LISTING                                                        | 191 
|ITEM 10.  | ADDITIONAL INFORMATION                                                       | 195 
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 211 
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 214 
|          |                                                                              |     
|PART II   |                                                                              |     
|          |                                                                              |     
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              | 216 
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 216 
|ITEM 15.  | CONTROLS AND PROCEDURES                                                      | 216 
|ITEM 16.  | [RESERVED]                                                                   | 218 
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                             | 218 
|ITEM 16B. | CODE OF ETHICS                                                               | 218 
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       | 218 
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 219 
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 219 
|ITEM 16F. | CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT                                 | 220 
|ITEM 16G. | CORPORATE GOVERNANCE                                                         | 220 
|          |                                                                              |     
|Part III  |                                                                              |     
|          |                                                                              |     
|ITEM 17.  | FINANCIAL STATEMENTS                                                         | 222 
|ITEM 18.  | FINANCIAL STATEMENTS                                                         | 222 
|ITEM 19.  | EXHIBITS                                                                     | 222 



4







| | ITEM 1. | IDENTITY OF DIRECTORS,
SENIOR MANAGEMENT AND ADVISERS
| | ------- | -----------------------------------------------------



Not applicable.



| | ITEM 2. | OFFER STATISTICS AND
EXPECTED TIMETABLE
| | ------- | ---------------------------------------



Not applicable.



| | ITEM 3. | KEY INFORMATION
| | ------- | ---------------



| | A. | Selected Financial Data.
| | -- | ------------------------



We have derived the
following selected consolidated financial data as of December 31, 2011 and 2012 and for each of the years ended December 31,
2010, 2011 and 2012 from our consolidated financial statements and notes included elsewhere in this Annual Report. We prepare our
consolidated financial statements in conformity with IFRS. We have derived the selected consolidated financial data as of December
31, 2008, 2009 and 2010 and for each of the years ended December 31, 2008 and 2009 from our audited consolidated financial statements
not included in this Annual Report. As a result of our decision in December 2012 to sell during 2013 Kfar Hasha’ashuim, which
sells toy and leisure products, the data of the toy and leisure activity of the Non-food segment have been presented as discontinued
operations, and the statement of operations for the years 2008 to 2011 have been restated to reflect this classification. 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.



5







|                                                                                                    |  | For
    the year ended December 31,                           |           
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ----------
|                                                                                                    |  | 2008                                                          |           
|Statement of Income Data                                                                            |  | NIS
    (In thousands, except per ordinary share or ADS data) |           
|In accordance with IFRS:                                                                            |  |                                                               |           
|Revenues                                                                                            |  |                                                               | 7,266,907 
|Less – government levies                                                                            |  |                                                               | -         
|Net revenues                                                                                        |  |                                                               | 7,266,907 
|Cost of sales                                                                                       |  |                                                               | 5,238,518 
|Gross profit                                                                                        |  |                                                               | 2,028,389 
|Selling, general and administrative expenses                                                        |  |                                                               | 1,770,205 
|Operating profit before
    other gains and losses and changes in fair value of investment property |  |                                                               | 258,184   
|Other gains                                                                                         |  |                                                               | 12,233    
|Other losses                                                                                        |  |                                                               | (14,716   
|Changes in fair value of investment property, net                                                   |  |                                                               | 19,067    
|Operating profit                                                                                    |  |                                                               | 274,769   
|Finance income                                                                                      |  |                                                               | 60,669    
|Finance expenses                                                                                    |  |                                                               | (158,700  
|Finance expenses, net                                                                               |  |                                                               | (98,031   
|Share of profit (loss) of associates                                                                |  |                                                               | (33       
|Income before taxes on income                                                                       |  |                                                               | 176,704   
|Taxes on income                                                                                     |  |                                                               | 43,181    
|Net income from continuing operations                                                               |  |                                                               | 133,523   
|Gain (loss) from discontinued operations                                                            |  |                                                               | (1,121    
|Net income for the year                                                                             |  |                                                               | 132,402   
|                                                                                                    |  |                                                               |           
|Attributable to:                                                                                    |  |                                                               |           
|Equity holders of the Company                                                                       |  |                                                               | 104,586   
|Non-controlling interests                                                                           |  |                                                               | 27,816    
|                                                                                                    |  |                                                               |           
|Earnings per Ordinary share or ADS attributable to equity holders
    of the Company:               |  |                                                               |           
|Basic                                                                                               |  |                                                               |           
|Continuing operations                                                                               |  |                                                               | 2.43      
|Discontinued operations                                                                             |  |                                                               | (0.02     
|                                                                                                    |  |                                                               | 2.41      
|Diluted                                                                                             |  |                                                               |           
|Continuing operations                                                                               |  |                                                               | 1.64      
|Discontinued operations                                                                             |  |                                                               | (0.02     
|                                                                                                    |  |                                                               | 1.62      
|Cash dividends declared per ordinary share or ADS(2)                                                |  |                                                               | 3         
|Number of  Ordinary Shares Outstanding
    at the end of each year: (3)                             |  |                                                               | 43,372,819



6







| | (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, 2012 (NIS3.733 =$1.00),
as published by The Bank of Israel. During 2012, the US dollar depreciated in value vis-à-vis the NIS by approximately 2.3%.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Including dividends paid of NIS 12.31 ($3.39) on October 18, 2010 after the issuance of 20,328
thousand shares as part of the acquisition of Dor Alon.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Does not include treasury shares.
| | --- | ---------------------------------



|                                                                             |  | At December 31,    |          
|---------------------------------------------------------------------------- |  | ------------------ | ---------
|                                                                             |  | 2008               |          
|                                                                             |  | NIS (in thousands) |          
|Balance Sheet Data:                                                          |  |                    |          
|In accordance with IFRS                                                      |  |                    |          
|Working capital (deficit)                                                    |  |                    | (47,014  
|                                                                             |  |                    |          
|Total assets                                                                 |  |                    | 4,444,873
|                                                                             |  |                    |          
|Short term credit from banks and others and current maturities of debentures |  |                    | 236,901  
|                                                                             |  |                    |          
|Long term debt, net of current maturities                                    |  |                    | 1,457,955
|Total equity                                                                 |  |                    | 1,103,922



| |  | 
| |  | 



| | (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, 2012 (NIS 3.733= $1.00), as published by The Bank of Israel.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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.



7







Risks Related To Our Supermarkets



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



The food retailing
industry in Israel is highly competitive and is characterized by high turnover and narrow operating margins. We compete with the
other largest supermarket chain, Shufersal, low-priced smaller supermarket chains, independent grocers, open-air markets, and other
retailers selling supermarket goods. Competitive pressures increase as the supermarket sector in Israel approaches higher saturation
levels and continue to increase as our competitors expand their operations and new companies enter the market with hard discount
formats.



We believe that
an important factor in the purchase decisions of a large portion of the Israeli public is the price of the products it purchases.
As a result, in recent years, we and our competitors have established and expanded low-price and hard discount store formats.



In addition, smaller
supermarket chains during 2011 and 2012 continued to aggressively increase their market share and expand their presence in selected
areas in Israel, often geographically beyond their original locations, increasing competition in an already difficult market. We
estimate that our market share of the total retail market of food, beverages and tobacco decreased to 11.9% in 2012 from 12.7%
in 2011. The market share of our largest competing supermarket chain, Shufersal, based on its financial reports, was approximately
20.2% of the total retail market of food, beverages and tobacco in 2012 compared to 20.9% in 2011(market share estimates are based
on the calculation of the Central Bureau of Statistics of the total retail market for food, beverages and tobacco for 2010, and
our estimate for market growth of 3.7% in 2011 and 3.2% in 2012).   The difference in market share may give Shufersal
a greater competitive advantage in its dealings with customers, suppliers and other third parties. The low barriers of entry, including
the relatively low cost of establishing a new smaller supermarket chain, have contributed to the increase in the number and expansion
of smaller supermarket chains in recent years. These smaller supermarket chains have been able to capture a significant part
of the sales from the major chains in their areas by using lower cost non-unionized labor and having lower operating costs.



Since 2005, a number
of smaller supermarket chains which previously operated on a local geographic level combined to form a separate entity, Fourth
Chain Company Ltd., in order to develop a private label and to jointly negotiate with suppliers. Since 2006, the Fourth Chain Company
has marketed a private label brand.  This combination, and possible similar combinations of other smaller supermarket
chains, may generate the efficiencies of a major nationally-spread chain and enable them to compete more efficiently with us. In
addition, in January 2013, the Israeli Antitrust Authority approved the merger between Bitan Wines Ltd. and the Zim Direct Marketing
Ltd. chain of discount supermarkets. The merged chain will have 62 outlets throughout Israel. This merger, and possible similar
mergers in the future, could adversely affect our competitive position.



8







If we are unable to
maintain our current level of sales or if we lose market share to our competitors, our negotiating position with suppliers, which
is based, in part, on our market share in the Israeli retail market, and our revenues may be adversely affected, with a corresponding
impact on profitability. We cannot assure that we will be able to maintain our sales and market share.



We are dependent
to a significant extent on a limited number of key suppliers.  If these suppliers raise prices or encounter difficulties
in providing their products, our operating results will be adversely affected.



We purchase most of
our dairy, fresh produce and poultry products from the Tnuva Corporation, which holds a leading position in the domestic dairy
and poultry markets. To the best of the Company's knowledge, some of the collective acquisition entities of Kibbutzim in Israel
that hold shares in Alon, our controlling shareholder, also hold approximately 23% of Tnuva. In 2012, Tnuva’s products accounted
for approximately 15.2% of all the products sold at our supermarkets. For more information on our arrangements with Tnuva, see
Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transaction – Arrangements with Tnuva.”
In addition, the Strauss group, an Israeli food manufacturer, accounted in 2012 for approximately 8.7% of all products sold at
our supermarkets, and the Osem group accounted for approximately 7.6% of all products sold at our supermarkets in 2012.  Due
to our status as a leading food retailer in Israel which allows us to offer a wide assortment of products and promotions on a
national level of these suppliers’ products, and the fact that we maintain an excellent and long-standing relationship with
Tnuva, the Strauss group and Osem, we do not believe that there is a material risk of future discontinuance of the supply of products
of these key suppliers. However, we do not have a written contract with Tnuva, Strauss group or Osem obligating them to supply
products to us. The ten largest suppliers accounted for approximately 60.9% of our product purchases in 2012. Due to the relatively
large market share of these suppliers, we depend on them and on a number of other suppliers that supply brands characterized by
high customer loyalty, such as the Central Company for the Manufacture of Soft Drinks Ltd., which is the exclusive franchisee
of Coca Cola in Israel and which also distributes other popular soft drinks. Increases in prices by our suppliers are generally
not offset, fully or as quickly, by increases in our selling prices and revenues because of competitive pressures. At the end
of 2012, our major suppliers raised prices of the products they supply to us. However, this price increase has not had a significant
impact on our operating results. We cannot assure that, in the future, Tnuva, Strauss group, Osem or any of these other suppliers
will not significantly raise the prices of the products they supply us in the future, or encounter difficulties in providing these
products to us, in either of which cases our operating results might be adversely affected.



9







The enactment of
new laws and regulations, including the enactment of governmental committees such as the "Kedmi Committee", may materially
adversely affect our sales and profits, including limiting our ability to purchase additional stores or obligate us to sell some
of our stores.



The food retail industry
in Israel is subject to laws and regulations which may adversely affect our sales and profits. In addition, from time to time,
new laws and regulations are enactedwhich may adversely affect our business and limit our ability to conduct our business.



In June 2011, the Kedmi
Committee was appointed in order to examine the level of competition and prices in the food and retail industry. On October 21,
2012, the government approved the final recommendations of the Kedmi Committee. In November 2012, the Israeli Ministry of Finance
published a new Legal Memorandum on the promotion of competition in the food industry aimed at implementing the recommendations
of the Kedmi Committee. The purpose of the law is to promote and increase competition in the food and retail industry in order
to reduce product prices. The Legal Memorandum sets a few new provisions, including: (i) geographical regions for the food industry
and geographic competition regions for the "big retailers" (retailers which own at least three stores and annual sales
exceeding NIS 250 million per year); (ii) prohibition on opening additional stores without the consent of the antitrust commissioner;
(iii) authorizations to court to stop one store or more activities as well as the assignment of rights or the sale of rights in
one or more stores; and (iv) prohibition on the designation of shelf space for a product exceeding 30% of the existing shelf space.



The aforementioned
recommendations and the Legal Memorandum may materially adversely affect our ability to purchase additional stores in specific
areas or could obligate us to sell some of our stores, may materially adversely affect our sales and profits, and may adversely
affect our relationships with the suppliers due to limitations on shelves spaces. For additional information on this matter, see
"Risks Related To Our Business As A Whole – Establishment of government committees and protests against high cost of
living may adversely affect our business". We cannot assure you that new laws and regulations will not be enacted in the future,
which may materially adversely affect our sales and profits and limit our ability to conduct our business.



Our profit margin
would be adversely affected if our ability to utilize our distribution centers were limited.



We have a distribution
center in Rishon Letzion from which we distribute a large portion of the products we carry to our supermarkets. The products distributed
by our distribution center to our supermarkets made up approximately 21.7% of our total purchases during 2012. In addition, we
are planning an additional distribution center for our supermarkets which we expect to be completed by the end of the first half
of 2014. Our inability to utilize the distribution centers for any reason may significantly impair our ability to distribute our
products to our supermarkets and would adversely affect our profit margin.



10







The Israeli Antitrust
Authority may take actions that limit our ability to execute our business strategy or otherwise affect our profitability.



Our strategy includes
expanding our market presence in existing retail food markets.  The Israeli Antitrust Authority may limit our ability
to execute our strategy, inter alia, by limiting our ability to acquire existing stores or enter into mergers to acquire
existing stores. In 2011, we requested to purchase four of our competitors' stores, in Ashkelon, Or Akiva, Beer Sheva and Hadera;
however the Commissioner approved the purchase of only two of the stores, in Ashkelon and Or Akiva. Such limitations may materially
adversely affect our ability to expand our business and compete effectively against our competitors.



On January 5, 2005,
the Commissioner of the Israeli Antitrust Authority issued his final position regarding “commercial restrictive practices
between the dominant food suppliers and the major supermarket retail chains”. According to the Commissioner’s final
position, some of these practices were found to be restrictive trade agreements under the antitrust laws. The Commissioner issued
a directive in which he prohibited these practices unless approved by the Restrictive Trade Practices Court or exempted by the
Commissioner himself.



Among the practices
that were found to be restrictive according to the Commissioner were the following: arrangements with suppliers that determine
the suppliers of the retail chains, their identity and their number; arrangements for the management of product categories in conjunction
with suppliers; arrangements regarding the retail selling price; arrangements for determining the market share of a particular
supplier’s products and arrangements for determining prices made by suppliers to competing chains; and arrangements with
regard to the use of suppliers’ manpower to stock merchandise on the shelves of the chains’ stores.  Limits
were imposed on financial incentives to the chains with regard to display areas and on special offers to chains for meeting certain
sale targets. In August 2006, the Restrictive Trade Practices Court approved a consent decree reached between the Commissioner
and certain specific food suppliers.  The consent decree stipulates various prohibitions, conditions and restrictions
that would apply to certain practices of these suppliers. The consent decree addresses the following practices: arrangement by
which suppliers influence the number or identity of competing suppliers; acquisition of shelf and off-shelf display space; category
management; the use of suppliers’ representatives to physically arrange the shelves in the chains’ stores; discounts
and rebates in exchange for meeting sales targets; arrangements that determine a supplier’s market share; and exclusivity
in sales and price dictation by suppliers.  The Company is not a party to the consent decree; however, it could nevertheless
have an effect on the practices of the Company’s suppliers and indirectly on the Company. Although the Commissioner's 2005
position paper determined that the use of suppliers’ representatives to physically arrange the shelves in the chains’
stores may be considered a restrictive arrangement, the Commissioner agreed not to take enforcement measures with regard to such
arrangements until February 2012 so long as such arrangements satisfy the conditions set forth in the consent decree.



11







In February 2012, the
Company submitted a request for an exemption from approval of the restrictive arrangement for 21 months (until September 2013),
although the Company believes that such arrangements are not restrictive arrangements. In January 2013, the Commissioner granted
an exemption from approval of a restrictive arrangement for a limited period. The exemption is until the end of March 2013 with
respect arrangement of soft drinks, until the end of September 2013 with respect to the arrangement of milk products and until
the end of 2013 with respect to the arrangement of "van sale" products (such as ice cream, newspapers and bread products).
During 2012, we began self arranging of some of the product categories, and as of December 31, 2012 we self arrange all of our
dry products, We intend to self arrange the remaining product categories by the end of 2013 in accordance with the Commissioner's
exemption described above. Self arrangement has required the employment by the Company of many new employees, increasing our employment
costs. This may materially adversely affect the Company's profits unless the Company is able to pass these costs to suppliers.
We intend to enter into arrangements with our major suppliers in order to share these costs with such suppliers



We have been applying
most of these directives using an internal compliance program that we have adopted.



Government-imposed
price controls may have a material adverse effect on our operating results.



The Israeli government
is authorized to control the retail and wholesale prices of goods and services offered in Israel.  At present, only a
few of the products we offer in our stores are subject to government-imposed price controls. In addition, during periods of
high inflation in the past, more extensive price controls were imposed throughout Israel.



We do not believe that
current price controls have any material adverse effect on our business or operating results. However, any imposition of more extensive
price controls in the future may have a material adverse effect on our operating results.  We cannot assure you that
broader price controls will not be imposed in the future.



Risks Related To Fueling and Commercial
Sites



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.



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.



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.



12







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. Following
the increase in fuel prices in August 2011, the Israeli government reduced the excise tax on diesel fuel and kerosene by approximately
NIS 0.3 per liter, including VAT. In September 2011, the government raised the excise tax by NIS 0.25 per liter, including VAT
and in October 2011 raised by NIS 0.1 per liter, including VAT. These changes did not have a material adverse effect on Dor Alon's
revenues. As of March 18, 2013, the excise tax on gasoline was NIS 3 (excluding VAT) per liter, the excise tax on diesel oil was
NIS 2.88 (excluding VAT) per liter. Failure to obtain additional credit facilities would have a material adverse effect on the
business, financial condition and results of operations of Dor Alon.



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. In the fourth quarter of
2012, fuel prices decreased, reducing Dor Alon's operating profit by approximately NIS 17 million.



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: Paz Oil Company Ltd. (“Paz”), The Delek Israel Fuel Corporation Ltd. (“Delek”) and Sonol Israel
Ltd. (“Sonol”). The principal competitive factors affecting the retail fuel 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.



With respect to its
direct marketing operations, Dor Alon expects to face continued competition from Paz, Delek and Sonol, the fueling companies Pazgas,
Amisragas and Supergas, and small fuel marketing companies as well as LPG marketing companies, consisting mainly of subsidiaries
of Paz, Delek and Sonol. The principal competitive factors in the direct marketing business are product price, credit terms and
levels of service. Increases in competition may adversely affect the earnings and profitability of Dor Alon. In addition, Dor Alon
may face competition from Oil Refineries Ltd., ("ORL"), after its privatization and increased competition from Paz which
now owns one of the two oil refineries in Israel.



13







The recommendations
of the Trachtenburg Committee may have a material adverse effect on Dor Alon's results of operations.



In July 2011, a public
protest began in Israel with regard to high housing costs. In response to these protests, in August 2011 the Israeli Government
formed the Trachtenburg Committee whose role, inter alia, was to examine the living costs in Israel and the influence that
the lack of competition in the marketplace has had on these costs and to propose solutions to these issues. In September 2011,
the Trachtenburg Committee published its recommendations regarding competition in the filling stations sector and the promotion
of competition in the LPG market.



With regard to the
filling stations field of activity, the following recommendations, among others, were made: (i) the imposition of price control
on diesel oil; (ii) strengthening the independence of filling station operators by releasing the filling stations from agreements
with the fuel companies; (iii) providing priority to the establishment of independence filling stations which are not large fuel
companies; (iv) marketing of Israel Land Administration lands for the construction of 40 new filling stations for independence
filling stations; (v) implementation of a universal automatic fueling device; and (vi) setting a mechanism obligating the sale
of filling stations to small companies in areas with little competition, including assessing the level of competition among filling
stations from their establishment and through the paving and expansion of highways.



Due to such recommendations,
in December 2011, Dor Alon received a letter from the Joint Committee of Prices, the Ministry of Energy and Water and the Ministry
of Treasury, stating that the committee intends to examine the imposition of price control on the marketing margin of diesel oil
for transportation in the filling stations.



With regard to the
LPG market, the following recommendations, among others, were made: (i) supervision on the refinery gate price and the consumer
prices; and (ii) reform in the accessibility to gas bulks in order to increase competition, including the implementation of free
access to different suppliers and protecting the small gas suppliers.



In December 2011, the
Government adopted the committee's recommendations. In July 2012, and 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 pursuant to chapter VII of the Price
Control of Goods and Services Law, 1996. Dor Alon estimates that the provisions of the Order will not have materially adversely
affect Dor Alon's results of operations. For additional information on this matter, see "Risks Related To Our Business As
A Whole – Establishment of government committees and protests against high cost of living may adversely affect our business".



14







Dor Alon is exposed
to risks associated with changes in regulatory arrangements which may influence the financial results of Dor Alon, including as
a result of marketing margins in connection with the sale of 95 octane gasoline.



Dor Alon’s activities
are affected by regulatory changes, which apply from time to time to the fuel industry in Israel, including with respect to the
procurement of petroleum products by fuel companies, the price of petroleum products that are subject to regulation and maintenance
of an emergency supply of fuel.



The removal of the
regulation of prices at the gate of ORL as a result of the privatization of ORL allows the refineries to modify sale prices on
a daily basis (and not on a monthly basis as had previously been the practice), while the prices of one of the products which Dor
Alon sells (benzine octane 95) has remained regulated and is set once a month, which exposes Dor Alon to risks associated with
the change of prices of refined products. Dor Alon may not be able to pass the increased costs of refined products on to customers.



On August 31, 2011,
Dor Alon received from the Israeli Ministry of Energy and Water an order pursuant to which the Ministers of Treasury and National
Infrastructure decided to reduce the marketing margin in connection with the sale of full service gasoline by NIS 0.184 per liter.
On September 1, 2011, Dor Alon and other fuel companies submitted a petition to the Supreme Court sitting as the High Court of
Justice, which ruled that the Ministry of Energy and Water and the Pricing Committee must reevaluate their decision based on updated
data that Dor Alon and the other fuel companies submit to the Ministries, although the court kept the order in place until another
decision. On May 31, 2012, the Ministry of Energy and Water and the Pricing Committee updated the marketing margin of 95 octane
gasoline, increasing the marketing margin for self service by NIS 0.047 per liter (excluding VAT) and reducing the full service
charge by NIS 0.038 per liter (excluding VAT). On November 26, 2012, the Supreme Court sitting as the High Court of Justice rejected
the petition of Dor Alon and the other gas companies on the issue of reducing the marketing margin. The overall impact on Dor Alon's
profits has not been significant. In the fourth quarter of 2011 and in 2012, Dor Alon took steps to mitigate its effect by, among
other things, reducing discounts at its filling stations and to its fleet customers, expenses related to the number of persons
employed at its filling stations, rental expenses, and advertising expenses. Additionally, it has been opening convenience stores
in the proximity of filling stations and broadening its business activities, such as expanding its supply of automobile gas at
existing filling stations and supplying natural gas to industrial customers and power plants. These actions significantly reduced
the impact resulting from the reduction in marketing margins. Future reductions in marketing margings may impact Dor Alon's profitability
depending on the amount of such reduction and the ability of Dor Alon to mitigate their effect.



Changes in the regulatory
arrangements, as described above, or new arrangements may influence the results of Dor Alon.



15







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



The sale and distribution
of petroleum products in Israel is subject to extensive regulation and supervision that is focused on preventing potential harm
to the environment (principally water, air and soil contamination) and maintaining public safety. Petroleum 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 Dor Alon’s
filling stations and private filling stations. If Dor Alon does not comply with the abovementioned regulatory controls, it 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.



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. In each of the Filling Stations and
Convenience Stores operation and the Direct Marketing operation, Dor Alon grants customers credit for up to 90 days. During 2012,
Dor Alon had an average of NIS 627 million in outstanding customer credit (30 credit days) in the Filling Stations and Convenience
Stores operation, and an average of NIS 450 million in outstanding customer credit (90 credit days) in the Direct Marketing operation.
As a result of the extension of customer credit, Dor Alon is 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 competition in the industry in which Dor Alon operates lead to increases in
the amount of credit granted to customers. This would lead to a potential increase in the exposure to credit risks and to an increase
in Dor Alon's working capital requirements. This would require Dor Alon to obtain additional credit lines. Inability to obtain
such additional credit lines may limit Dor Alon’s ability to conduct its business.



16







Some of Dor Alon’s
convenience stores operate on the Jewish Sabbath, holidays and nights. If Dor Alon is required to close some of its stores at these
times, it may have an adverse effect on its results of operations.



Most of Dor Alon’s
filling stations and some of its convenience stores operate on the Jewish Sabbath (Saturday). According to Section 9 to the Hours
of Work and Rest Law, 1951, or the Work and Rest Law, the employment of Jewish workers on Saturday is subject to a permit issued
by the Labor Minister. Dor Alon does not possess such a permit. The Work and Rest Law also prohibits a store owner from trading
in his store during the days of rest as they are defined in the Arrangements of Government and Law Ordinance, 1948.



Anyone who employs
workers in violation of the Work and Rest Law, is subject to a fine or imprisonment of up to a month, or both. According to the
Administrative Offence Regulations, a violation of Section 9 or 9A to the Work and Rest Law is an administrative offence subject
to an administrative fine.



The convenience stores
in the AM:PM chain of stores also operate during the night and on Saturdays. Based on information obtained from Dor Alon, in the
cities in which AM:PM operates, there are municipal regulations limiting activities during the night and on Saturdays. Most of
the AM:PM stores have obtained permits to operate at night. If some of these stores are required to close on Saturdays or at night,
it may have an adverse effect on Dor Alon’s results of operations.



The involvement
of the Israeli Anti-Trust Commissioner in the Israeli fuel industry may restrict Dor Alon’s activity and its expansion by
way of acquiring businesses and companies in its field of activity.



In the past, the Israeli
Anti-Trust Commissioner has become involved in the fuel industry on a number of occasions, including in relation to the privatization
of ORL, exclusivity agreements involving Paz, Delek and Sonol and in approving the acquirement of a controlling stake in Dor Alon
by Alon. In each of these cases, the Israeli Anti-Trust Commissioner imposed restrictions on the companies involved relating to
their activities in the fuel industry.



Continued involvement
by the Israeli Anti-Trust Commissioner in the Israeli fuel industry in the future may restrict Dor Alon’s future operations
as well as limit its ability to expand by acquiring businesses and companies.



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 below 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 Dor Alon’s activities in supplying jet fuel to these airlines.



17







Risks Related To Our Non-Food Segment



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 non-food and wholesale business is varied, and we therefore compete in several different markets. Our "Naaman",
"Sheshet" and "Vardinon" stores compete in the houseware, home textile and accompanying accessories markets.
Our "Dr. Baby" stores compete in the baby and young children accessories market, and our "All for a Dollar"
and "Kfar Hasha’ashuim" stores compete in the toys and leisure accessories market and the back-to-school products
market.



In recent years
competition in the non-food 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, specific stores in the toy industry, such as Toys “R” Us and Red Pirate, 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. Our Sheshet chain is positioned as a chain that provides products at competitive
prices. Increased competition may adversely affect our level of sales and our profitability.



In addition, the barriers
of entry are low in some of the markets in which our non-food 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.



We are dependent
to a significant extent on a limited number of key suppliers.  If these suppliers raise prices or encounter difficulties
in providing their products, our operating results will be adversely affected



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.



18







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



Our non-food 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 non-food 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 non-food segment.



Most of our non-food
segment's imports are from suppliers located in China.  Because most of the products sold by our non-food 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 non-food products on a competitive and timely basis and
on our sales and profitability.



We are dependent
on franchisees that own and operate a portion of our Non Food stores, mainly in our Kfar Hasha'ashuim chain. We have limited control
over franchisees, and our financial results could be negatively impacted by the performance of the franchisees.



We hold and operate,
through our subsidiaries, large chains with a total 200 stores as of December 31, 2012, of which 83 stores are owned and operated
by franchisees, most of which in our "Kfar Hasha'ashuim" chain.  This store ownership mix presents a number
of drawbacks, such as our limited control over franchisees and our limited ability to facilitate changes in the ownership and management
of the franchised stores.



19







Subject to the terms
of our franchise agreements, franchisees independently operate and oversee the daily operations of their stores, and they have
a significant amount of flexibility in running their operations. Their employees are not our employees.  Although we
can exercise control over our franchisees and their store operations to a limited extent through our franchise agreements, the
quality of franchise store operations may be diminished by any number of factors beyond our control. Consequently, franchisees
may not successfully operate stores in a manner consistent with our standards and requirements, or may not hire and train qualified
managers and other store personnel. While we ultimately can take action to terminate franchisees that do not comply with the standards
contained in our franchise agreements, we may not be able to identify problems and take action quickly enough and, as a result,
our image and reputation may suffer, and our franchise and property revenues could decline.



In addition, some of
our franchise agreements limit our ability to open new stores in the vicinity of existing franchised stores, which may limit our
ability to expand our business.



In addition, we provide
our franchisees with credit as part of our franchise agreements. We have had difficulties collecting amounts due to us from franchisees,
and in April 2012 we took over 24 stores and inventory in exchange for the debt owed to us and during the second half of 2011,
we wrote off some of the debt owed to us by franchisees. If we continue having difficulties collecting debt from franchisees, and
the security provided to us by franchisees is not sufficient to cover this debt, we may decrease our sales to the franchisees and
increase our doubtful accounts, which could materially and adversely impact our sales and financial results.



In December 2012, the
Company resolved to sell Kfar Hasha’ashuim, during 2013.



Risks Related To Real Estate



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 in connection with the retail operation of our stores, and the
remainder is leased to third parties or is 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 the Company'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. A deterioration of economic conditions
in Israel or a slowdown in the Israeli yield-generating real estate market could adversely affect our real estate business.A slowdown
in the Israeli yield-generating real estate market occurred beginning in the fourth quarter of 2008 and continued until 2010. The
debt crises generated in Europe may also have a future adverse affect on the economic conditions in Israel. In addition, the public
protest which began in July 2011, among others with regard to high housing costs in Israel, led to a slowdown in the Israeli yield-generating
real estate market which was evidenced by a decline in the demand for real estate during the second half of 2011 due to the sharp
increase in real estate prices and the public's anticipation that such prices will decrease due to the public protest.



20







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.



BSRE is subject
to risks regarding the development of residential building. A recession and/or government policies may have a negative impact
on BSRE's operations in residential building, by causing a decrease in the scope of marketing and sales and a decrease in the prices
of apartments.



We are subject to risks
relating to the residential building sector in Israel, including: changes in interest rates which can affect the costs of projects
and profitability; the speed at which local planning authorities and cities that affect the project timetables approve the building
projects; changes in and increases to the stringency of building and planning laws and regulations, which may require the Company
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; difficulty of buyers to obtain loans on favorable terms to purchase homes due to mortgage interest rates; and
the change of the bank policies with respect to the percentage of equity and collateral required from property purchasers, may
affect the demand for residential apartments.



Changes in the economy,
especially as a result of a recession or a significant deterioration in the economy, may cause a decrease in the scope of 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. In 2012, The Bank of Israel has imposed additional regulatory
requirements on the ability to obtain mortgages, including a limit on the amount of loans granted at variable rates of interest
and a ceiling on the ratio of debt to equity. These initiatives are intended to affect, and do affect, demand for real estate designated
to residence.



21







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 wholesale market project, are largely financed from external sources.  We cannot be certain that BSRE will
be able to obtain financing on favorable terms for its activities, or at all, 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 real estate business. As of December 31, 2012, BSRE had long term loans including debentures
in the outstanding amount of approximately NIS 2.2 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", Item 7. Major Shareholders and Related Party Transactions
– B. Related Party Transactions – Agreement with the Wholesale Market Company”, and "Item 7. Major Shareholders
and Related Party Transactions – B. Related Party Transactions – Agreements Between Alon Blue Square and BSRE- Transfer
of Real Estate Assets from Mega Retail to BSRE."



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. This coverage is subject to a 10% deductible from amount of insurance coverage
for each property, which is between a minimum of NIS 36,000 and a maximum of NIS 4.5 million, although for properties owned and/or
used by Mega Retail, the minimum deductible is NIS 900,000 per property. In addition, insurance for property and loss of rent revenues
is limited as follows: (i) the insurer's liability per property for each insured event will not exceed NIS 300 million; and (ii)
the insurer's liability as a result of an earthquake will not exceed NIS 750 million in the aggregate for each insured event.



Risk Related To Our Business As A
Whole



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.



All of our supermarket
sales are made in Israel, and we acquire a substantial majority of the goods that we sell from Israeli suppliers. During 2010 and
2011, Israel's Gross Domestic Product rose by 4.7% and 4.6%, respectively. Reports of the Israeli Central Bureau of Statistics
indicate that during 2012 Israel's Gross Domestic Product rose by 3.1% as a result of an increase in exports.  We believe
that our customers continue to be cautious in their buying patterns and continue to choose to make their purchases at low-price
and hard discount stores, which have a lower profit margin. In addition, in connection with the public protests resulting from
the economic conditions and described under "Risks Related To Our Business As A Whole – Establishment of government
committees and protests against high cost of living may adversely affect our business", there were protests in Israel against
the supermarket chains and a number of the products that we sell. Although the protests decreased during 2012, they have taken
a toll on the food retailing business in Israel because the public's awareness of the costs of food and other certain products
has increased.



22







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.



The financial performance
of is our Non-Food segment 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, leisure, and baby and young children accessories businesses. Economic instability,
uncertainty or slow down could also affect the growth of our non-food businesses in the future.  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.



For our Real Estate
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 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.



Establishment of
government committees and protests against high cost of living may adversely affect our business.



In July 2011, a public
protest began in Israel with regard to high housing costs. This protest evolved into a wide scale public demonstration encompassing
many other issues, including claims that the cost of living has increased out of control and must be regulated. As a result of
these protests, we have seen a decline in sales in our Supermarket segment. In response to these protests, in August 2011 the Government
of Israel formed the Trachtenburg Committee whose role, inter alia, was to examine the living costs in Israel and the influence
of the alleged lack of competition in the marketplace has had on these costs and to propose solutions to these issues. The Knesset
has already adopted the Trachtenburg Committee's recommendation relating to an increase in our corporate taxes and to an increase
of competition between filling stations. Additionally, another committee was appointed by the Israel Industry, Trade and Employment
Office and by the Minister of Finance to examine the food market (the Kedmi Committee). These developments may have a material
impact on the Israeli economy in general as well as the industries in which we compete, and proposals by any such committees could
materially adversely affect our business by materially adversely affecting our growth and our profitability. These developments
could materially adversely affect our ability to open new supermarkets and convenience stores and the profitability of our existing
supermarkets and convenience stores. These developments and proposals by any such committees could particularly adversely affect
our Supermarkets segment in light of the fact that we are the second largest supermarket chain in Israel. For additional information
on this matter, see "Risks Related To Our Supermarkets - The enactment of new laws and regulations, including the enactment
of governmental committees such as the "Kedmi Committee" may materially adversely affect our sales and profits, including
limiting our ability to purchase additional stores or obligate us to sell some of our stores", and "Risks Related To
Fueling and Commercial Sites - The recommendations of the Trachtenburg Committee may have a material adverse effect on Dor Alon's
results of operations".



23







We have a history
of quarterly fluctuations in our operating results and expect these fluctuations to continue due to seasonality.  This
may cause the share and ADS price of Alon Blue Square to be volatile.



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 supermarkets,
and 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.  However,
the timing of the holidays does not affect our semi-annual results.



Many of our expenses
are unrelated to the level of sales. 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.



Because of the fluctuations
that we have experienced in our quarterly operating results, we do not believe that period-to-period comparisons of our operating
results are necessarily meaningful or should necessarily be relied upon as indicators of future performance. Accordingly, our operating
results may be below public expectations in future periods. Our failure to meet these expectations may cause the share and ADS
price of Alon Blue Square to decline.



24







Since the issuance
of our 5.9% unsecured debentures issued in August 2003, we have limited the cash dividends that we pay on our ordinary shares.



In connection with
our issuance of NIS 400 million in aggregate principal amount of unsecured 5.9% convertible and nonconvertible debentures in August
2003, Alon Blue Square's board of directors resolved that Alon Blue Square would not distribute dividends in any quarter if the
ratio of our net financial obligations (as defined then by S&P Maalot, an Israeli rating agency owned by S&P) to EBITDA
for any quarter exceeds 3.5 until June 30, 2006 or exceeds 3.0 thereafter.  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 on our financial statements to financial obligations (as defined then by
S&P Maalot, an Israeli rating agency owned by S&P) for any quarter is below 120%.



On January 14, 2010,
Alon Blue Square's' board of directors decided that in view of the changes and development of Alon Blue Square's' since 2003, including
the transfer of Alon Blue Square and Mega Retail's real estate properties to BSRE (which has financial obligations to EBITDA ratios
appropriate for real estate companies and currently holds a major part of the consolidated debt), the purchase of Bee Group (a
Non Food retailer), and the reorganization of Alon Blue Square food retail activities in its subsidiary, Mega Retail, that 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). Due to the acquisition of Dor Alon in October 2010, the increase in fuel prices which
increase our capital needs, the Company's then investment plan to open additional Mega Retail stores, the entrance of BSRE to additional
new projects and the launching of Alon Cellular, our board of directors further resolved that Alon Blue Square would not distribute
dividends in any quarter if the ratio of our net financial obligations (calculated in accordance with the deduction described above)
to EBITDA for any quarter exceeds 6. For the quarter ended December 31, 2012, the ratio of our net financial obligations to EBITDA
is less than 6.



A downgrading of
the rating on our debentures may require us to repurchase some of our debentures and may require us to repay some of our bank loans.



The 5.9% unsecured
debentures that we issued in August 2003 are subject to downgrading upon the occurrence of certain events. A downgrading of the
rating on these debentures to "ilBBB" or lower may require us to repurchase our 5.9% unsecured debentures issued in August
2003. As of December 31, 2012, the remaining principal balance of the Series A Debentures was NIS 162 million (approximately US
$43 million). The Series B Debentures were fully converted or repaid in August 2011.



The credit rating of
our Series A debentures is currently "A2/Stable" by Midroog Ltd., an Israeli rating agency and 51% subsidiary of Moody's
("Midroog").



In October 2010, Bank
Hapoalim loaned us an aggregate amount of NIS 200 million with an interest rate of 2.8% per year linked to the CPI. As of December
31, 2012, the balance of the loan was NIS 175 million (approximately US $47 million). The decrease in the credit rating to “A3”
will cause an increase of 0.25% per year in the interest rate we pay under such loan. An additional decrease to "Baa2"
(two credit levels) will cause a further increase of 0.25% per year in the interest rate we pay under such loan. A decrease in
the credit level rating under "Baa2" will provide the bank the right to an immediate repayment of the balance of the
loan.



25







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



As of March 29, 2013,
Alon owned, directly and indirectly through Alon Retail Ltd., approximately 72.19% of Alon Blue Square's' 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 Alon Blue Square directors, other than
Alon Blue Square's' 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.



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.



In addition to our
wholly owned subsidiaries, Mega Retail and Bee Group, our two main subsidiaries are BSRE, in which we owned a 78.22% interest as
of March 29, 2013, and Dor Alon, in which we owned an approximately 78.43% interest as of March 29, 2013.



Through our subsidiary,
Bee Group, as of March 29, 2013, we held approximately 77.03% of the outstanding shares of Naaman Group (N.V.) Ltd., which is publicly
held and traded on the Tel Aviv Stock Exchange.  In addition, as of March 29, 2013 we owned 51% of the outstanding shares
of subsidiary, Eden Teva.  The ordinary shares of Eden Teva that are not owned by us are held by private third parties
(including the CEO of Eden Teva).



Mega Retail leases
from BSRE the real estate underlying a substantial portion of the supermarkets that it owns. The ordinary shares of BSRE that are
not owned by Alon Blue Square are publicly held and traded on the Tel Aviv Stock Exchange.



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 Alon
Blue Square 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.



26







In recent years,
we have expanded our non-food retail and wholesale business by acquiring businesses with stand alone retail outlets.  We
may not be able to successfully consolidate these business operations with our supermarket business.



As part of our strategy
to expand our presence in “Non-Food” stand alone retail outlets, we acquired 50% of Bee Group in 2005 and increased
our holdings in Bee Group in stages to 100%. During this period, Bee Group acquired the controlling interest in Vardinon Textile
Ltd. (home textile retailer and wholesaler) and the controlling interest in Naaman Group (N.V.) Ltd. (houseware retailer and wholesaler)
(the "Bee Group Acquisition"). We have also resolved to merge Bee Group with Mega Retail in order to reduce costs and
improve efficiency.Realization of the anticipated benefits of our Bee Group acquisitions,
including anticipated operating synergies between our home textile and houseware businesses and our supermarket segment will depend,
in large part, on our ability to successfully consolidate company and shared service responsibilities. We will be required to devote
significant management attention and resources to the consolidation of business practices and support functions while maintaining
the independence of the Bee Group's stand alone brand names.The Company has redefined certain of its Non-Food segment activities
as non-synergetic with the Supermarkets segment. In December 2012, the Company resolved to sell during 2013 Kfar Hasha’ashuim
and All for a Dollar chains, which sell toy and leisure products.



The diversion
of management’s attention and any delays or difficulties encountered in connection with the realization of corporate synergies
and operational improvements could have an adverse effect on our business, financial results, financial condition or share price.
The consolidation and integration process may also result in additional and unforeseen expenses. There can be no assurance that
the contemplated synergies and other benefits anticipated from the Bee Group acquisition will be realized.



In addition, our expansion
into the non-food retail and wholesale business has required us to enter new markets in which we have limited experience and where
competitors may have stronger market positions. If we are not able to successfully compete against our more experienced competitors
in the stand alone Non-food retail and wholesale outlet businesses, our business may be adversely affected.



Failure to obtain
or maintain permits required for our operations may adversely affect our operating results.



Our operation of
stores in Israel requires permits from municipal authorities, which are conditioned on the prior approval of various agencies,
including the health and environment ministries, and the police and fire departments. Some of the permits for Mega Retail stores
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 us, and have not yet been transferred or re-issued to us.  Furthermore, as a result of the reorganization
of our supermarket retail activities, these permits are to be transferred in the name of Mega Retail. Also, some of our stores
require permits that have not yet been obtained, or have expired or require renewal.



27







Some of our stores
do not have permits according to the requirements of the Israeli Business Permits Law, 1968.  A lack of such permits
by any store in many cases is considered a breach of the tenancy agreement for such store, which would allow the landlord to annul
the lease agreement. As of March 29, 2013, none of the landlords had made use of this right.



If we are unable to
obtain or maintain one or more required permits, we may be required to close one or more stores or to take other remedial action
to obtain or maintain these permits.



Increase in employee
minimum wage in Israel may adversely affect our operating results.



A substantial portion
of our employees’ wages is adjusted upon a change in 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, 2013,
the minimum wage was NIS 4,300, or approximately $1,178. Increases in minimum wage in the future will increase our labor costs
and thus may adversely affect our operating results.



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



The majority of filling
stations in the Dor Alon Chain are stations owned by third parties with whom Dor Alon has entered into agreements to rent and operate
filling stations or to supply fuel.  In addition, the majority of the Mega Retail supermarkets are owned by third parties
with whom Mega Retail has entered into agreements to rent the stores, and Naaman stores are owned by third parties with whom Naaman
Group has entered into agreements to rent the stores. Upon the expiration of such agreements, the owners of the stations, supermarkets
and stores may not renew their agreements with Dor Alon, Mega Retail and Naaman Group and enter into agreements with other companies,
or the owners of the stations, supermarkets or stores may decide to worsen the terms of the agreements, either of which would result
in a loss of profits.



28







Increases in oil,
electricity, raw material and product prices may affect our operating results.



The sharp
fluctuation in oil prices in recent years has led to the fluctuation in our electricity prices and the price of raw materials
used in the plastic packing industry. We cannot assure you that our suppliers will not raise prices in the future. Further
increase in oil, raw material and product prices would impose significant expenses and costs on us, which could have an
adverse effect on our operation results. During 2012, electricity prices increased by approximately 8.9%. Increases in oil,
electricity, raw material and product prices may adversely affect our operating results.



Fluctuations of
inflation may adversely affect our financial expenses and operating income.



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 financial statements, leading to lower reported earnings and equity. The extent of this
effect on our financial statements would be dependent on the rate of inflation in Israel. The Company has 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.



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 our operating income. The extent of this effect on our operating income depends on the rate of inflation
in Israel.



In addition, BSRE,
a 78.22% subsidiary of the Company, is exposed to modifications of the construction valuation index, which may affect constructions
costs.



The value of our
securities portfolio may be adversely affected by a change in the capital markets, interest rates or the status of the companies
in whose securities we have invested.



As of December 31,
2012, we held approximately NIS 285.5 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 we have invested could lead to a material increase in our net financing expenses.



29







Volatility of Alon
Blue Square's share and ADS price could adversely affect our shareholders.



The market price
of Alon Blue Square's ordinary shares and ADSs could be volatile and could be subject to fluctuations in response to numerous factors,
including the following:



| | · | actual or anticipated variations in our quarterly operating results or those of our competitors;
| | - | ------------------------------------------------------------------------------------------------

| | · | changes in financial estimates by securities analysts;
| | - | ------------------------------------------------------

| | · | conditions or trends in our business;
| | - | -------------------------------------

| | · | changes in the market valuations of our competitors;
| | - | ----------------------------------------------------

| | · | announcements by us or our competitors of significant acquisitions;
| | - | -------------------------------------------------------------------

| | · | entry into strategic partnerships or joint ventures by us or our competitors;
| | - | -----------------------------------------------------------------------------

| | · | the political, economic, security and military conditions in Israel;
| | - | --------------------------------------------------------------------

| | · | the inclusion of our shares on a specific index on the Tel Aviv Stock Exchange;
| | - | -------------------------------------------------------------------------------

| | · | additions or departures of key personnel; and
| | - | ---------------------------------------------

| | · | sales of ordinary shares by Alon Blue Square's controlling shareholder.
| | - | -----------------------------------------------------------------------



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



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



Currency fluctuations
might affect our operating results 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
Ltd., 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 our non-food retail and wholesale business because
a higher proportion of the goods that we sell in our non-food retail stores 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.



30







Also see "Risk
Related To Our Business As A Whole - Increases in oil, electricity, raw material and product prices may affect our operating
results."



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 High holy days 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.



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



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.



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.



31







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.



Our 100% indirect
subsidiary received a mobile virtual network operator license (MVNO license) from the Israeli Ministry of Communications and is
a cellular operator. We may be required to invest resources in order to develop the business. We cannot guarantee that the cellular
services business will be profitable.



In March 2011, Alon
Cellular Ltd., our 100% indirect subsidiary ("Alon Cellular"), received a mobile virtual network operator license (MVNO
license) from the Israeli Ministry of Communications, enabling Alon Cellular to enter the Israeli communication market Alon Cellular
began offering cellular services in 2012. For additional information, see "Item 4. Information on the Company - A. History
and Development of Alon Blue Square".



Our expansion into
the cellular business has required us to enter a new business in which we have limited experience and where competitors are experienced
and have stronger market positions. We may not be able to successfully compete against our more experienced competitors in the
cellular services market, particularly given the high penetration rate of the Israeli mobile telephone market. Furthermore, during
2012, additional new operators began providing cellular services, further increasing competition in the Israeli cellular services
market, reducing prices in the cellular services provided, and made it more difficult to reach profitability in our cellular services
business.



In addition, the
telecommunications market in Israel is complex and is highly regulated. We may be required to devote substantial management attention
and resources to develop the new business. Current and future regulations will limit the manner in which we may conduct our business
and may increase our costs. We cannot guarantee if or when our cellular services business will be profitable.



32







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



We sell goods to
millions of consumers on a daily basis. As a result of the scope and magnitude of our operations we 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. 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 this trend is expected to
continue. Currently, we are engaged in various material legal proceedings, many of which are for substantial amounts.  Should
these requests to certify lawsuits against us as class actions be approved and succeed, this may have a material adverse effect
on our financial results. For a summary of legal proceedings against us, see “Item 8 - Financial Information - A. Consolidated
Statements and Other Financial Information - Legal Proceedings”.



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. Alon Blue Square's principal executive
offices are located at 2 Hamal Street, Rosh Ha’ayin 48092, Israel and its telephone number is +972-3-928-2222.



In 1996, Alon Blue
Square completed its initial public offering and its ADSs were listed for trading on the New York Stock Exchange. In November 2000,
Alon Blue Square's ordinary shares were listed for trading on the Tel Aviv Stock Exchange.



On October 4, 2010,
Alon Blue Square completed its acquisition of all the shares of Dor Alon Energy in Israel (1988) Ltd. (“Dor Alon”),
a publicly traded company listed on the Tel Aviv Stock Exchange (“TASE”), that were held by Alon Israel Oil Co. Ltd.
(“Alon”). The shares acquired represented approximately 80% of the outstanding shares of Dor Alon, and in exchange,
Alon Blue Square issued 20,327,710 ordinary shares to Alon (the “Acquisition”). Dor Alon is one of the four largest
fuel companies in Israel based on number of filling stations and is a leader in the convenience stores sector.  Immediately
following the Acquisition, Alon's direct and indirect ownership interest in Alon Blue Square increased to approximately 78.35%
of the outstanding share capital of Alon Blue Square. For further information on the Acquisition, see “Item 7. Major Shareholders
and Related Party Transactions Acquisition of Controlling Share in Dor-Alon Energy In Israel (1988) LTD."



33









On March 13, 2011,
we announced that our 100% indirect subsidiary Alon Cellular, was informed by the Israeli Ministry of Communications that
it had received a mobile virtual network operator license (MVNO license). The MVNO license will enable Alon Cellular to enter the
Israeli communication market and add cellular services to the services that the Company offers to its customers. In December 2011,
Alon Cellular entered into an agreement with Partner Communications Ltd. ("Partner") for launching cellular services
in an MVNO model. The term of the agreement is for three years, with an option to extend the term by Alon Cellular in one additional
year. In addition, Alon Cellular has the option to terminate the agreement, at any time, against payment to Partner of an immaterial
amount. The scope of the services provided are at the full discretion of Alon Cellular and will depend, among other things, on
future market conditions. Alon Cellular launched its cellular activity in 2012.



On May 31, 2012, BSRE,
Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (together with Gindi Investments 1 Ltd.,
"Gindi") completed the purchase of long term lease rights for a portion of the wholesale market site in Tel Aviv for
the purpose of building and marketing on the property an apartment building complex (owned by a 49.5% affiliate of BSRE as of December
31, 2012) and a shopping mall (owned by 50% affiliate of BSRE as of December 31, 2012), from the municipality of Tel Aviv and the
Wholesale Market for Agricultural Produce in Tel Aviv Company Ltd..



On July 17, 2010, the
name of the Company was changed to "Alon Holdings Blue Square – Israel Ltd." On February 12, 2013, the Company's
shareholders approved the change of the Company's name to "Alon Blue Square Israel Ltd.", and the Company is awaiting
approval of such name change by the Israel Companies Registrar.



Other Recent Developments



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



In our
Supermarket segment:



| | · | The launch and expansion of “Mega In Town”, a discount supermarket brand designed to
combine fair prices and convenience for neighborhood shoppers. As of December 31, 2012, we had 119 “Mega In Town” stores;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The launch and expansion of "Mega Bool", a hard discount store format. As of December
31, 2012, we had 67 "Mega Bool" stores;
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | Continuation of implementation of our strategy to establish our Eden Teva format as the leader
in Israel's organic/health food market by expanding the number of organic/health food supermarkets operated by Eden Teva to 20
stores as of December 31, 2012, consisting of 11 independent stores and nine Eden stores in Mega under the concept of a "store
within a store";
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The launch and expansion of our private label called "Mega" that has been expanded throughout
our "Mega Bool" and "Mega in Town" store formats. During 2013, the products that we sold under the "Mega"
private label constituted approximately 14% of our supermarket sales;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The launch of a new internet sale site, now known as "Mega@Internet", in October 2009;
| | - | --------------------------------------------------------------------------------------



34







| | · | The establishment of a joint loyalty plan (the "You Plan" or the “Loyalty Plan”)
with Dor Alon in 2005, including the offering to our customers of a Diners Club Israel credit card bearing the name “You”,
and the acquisition, together with Dor Alon, of 49% of the shares of Diners Club Israel Ltd. ("Diners Israel"), a subsidiary
of Credit Cards for Israel Ltd. (allocated 36.75% to Alon Blue Square and 12.25% to Dor Alon), the launching in 2009 of a new "You"
Mastercard credit card and the expansion in 2009 of our customer loyalty plan through the launching of a new membership card in
August 2009. As of December 31, 2012, the number of credit cards held by YOU customers was approximately 166,000 and the total
number of loyalty club households was approximately 1,280,000 (see “Item 4. Information on The Company - B. Business Overview
-Related Businesses”); and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The closing of nine unprofitable stores. As of April 20, 2013, Mega Retail had transferred seven
out of the nine stores.
| | - | ------------------------------------------------------------------------------------------------------------------------



In our Fueling and
Commercial Sites segment:



| | · | The execution, on February 8, 2012, of an agreement between a corporation 55% controlled by Dor
Alon (the "Corporation") and Sugat Sugar Refineries Ltd., pursuant to which the Corporation is to establish a power plant
on its premises with total capacity of up to 124 megawatt. For additional information, see "Item 4. Information on the Company
- B. Business Overview - Fueling and Commercial Sites - Establishment of a Power Plant".
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In our Non-Food segment:



| | · | The Company's resolution to sell during 2013 Kfar Hasha’ashuim and All for a Dollar chains,
which sell toy and leisure products.
| | - | --------------------------------------------------------------------------------------------------------------------------------



In our Real Estate
segment:



| | · | The construction of a 23,000 square-meter office building on real property BSRE owns in Ra'anana
and to construct a 2,300 square-meter basement, both of which will be leased to the third party for a period of 10 years. For additional
information, see "Item 4. Information on the Company - B. Business Overview – Real Estate– Investment in Comverse
Building (Ra'anana)";
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The sale, as of March 13, 2013, of 619 apartments in the Wholesale Market project in Tel Aviv and
the receipt of advance payments in the aggregate amount of NIS 702 million (including VAT) from the purchasers. For additional
information, see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions –
Agreement with the Wholesale Market Company"; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35







| | · | Construction of a 41.5 dunam logistics center in Kibbutz Eyal, which is expected to be completed
by the beginning of 2014. A construction work permit has been received, and the contractors' bidding process is in its final stages.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Capital
Expenditures



In 2012, we
invested approximately NIS 460.3 million, or $123.3 million, in property and equipment, intangible assets and investment
property, a 29.1% increase from our 2011 investment of NIS 356.5 million. Of our investment in property, and equipment
and investment property in 2012, we invested NIS 243.7 million, or $65.3 million, in land and buildings, including land
that we lease and investment property, as compared with NIS 193.4 million in 2011.



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
operate in four reporting segments. In our Supermarkets segment, we are the second largest food retailer in the State of Israel.
In our Fueling and Commercial Sites segment, we operate a chain of filling stations and convenience stores in different formats
in Israel. In our "Non-Food" segment, we sell “Non-Food” items both in our supermarkets and in stand alone
outlets. In our Real Estate segment, we own, lease and develop yield-generating commercial properties and residency projects.



As of December 31,
2012, we had 212 supermarkets with brands including "Mega Bool", "Mega In Town", "ZolBeShefa", "Eden
Teva". In addition, through our subsidiary Dor Alon, we operated 202 filing stations and 209 convenience stores. We also had
135 Non-Food outlets (partially through franchisees) under the brand names Naaman, Vardinon, Sheshet and Dr. Baby. In addition,
we had 84 Non-Food outlets under the brand names Kfar Hasha’ashuim and All for a Dollar which the Company resolved to sell
during 2013.



Through our supermarkets,
we offer a wide range of food and beverage products and “Non-Food” items, such as houseware, small electrical appliances,
computers and computer accessories, entertainment products and textile products, and “Near-Food” products, such as
health and beauty aids, products for babies, cosmetics and hygiene products. We also operate several houseware departments within
most of our large stores. Through our stand alone "Non-Food" outlets, we offer a range of houseware and home textile,
toys, leisure and baby products.



36







Our activities are
carried out via our consolidated subsidiaries, including Mega Retail, which has supermarket retail activities, Dor Alon, which
operates a chain of filling stations and convenience stores, Bee Group and Mega Retail, which conducts non-food activities, and
BSRE, which owns and invests in yield-generating commercial real estate and projects. As of March 29, 2013, Alon Blue Square owned
100% of the outstanding shares of Mega Retail, 78.43% of the outstanding shares of Dor Alon, 100% of the outstanding shares of
Bee Group, and 78.22% of the outstanding shares of BSRE. The balance of BSRE shares and Dor Alon shares is publicly held and traded
on the Tel Aviv Stock Exchange.



As of December 31,
2012, Mega Retail and its direct subsidiaries were the owners of all 212 of our supermarkets. As of December 31, 2012, the consolidated
assets of Mega Retail and its subsidiaries aggregated approximately NIS 1.6 billion, or $442 million. Mega Retail’s assets
constitute approximately 17% of our total consolidated assets at that date.



As of December 31,
2012, Dor Alon also operated 202 filling stations, 209 convenience stores, including 163 convenience stores branded “Alonit”
and “Super Alonit” (we refer to these stores as Alonit convenience stores), and 46 convenience stores operated by the
AM:PM chain of stores. Four convenience stores were operated by third parties. As of December 31, 2012, the total consolidated
assets of Dor Alon and its subsidiaries aggregated approximately NIS 2.9 billion, or $783 million. Dor Alon's assets constitute
approximately 31% of our total consolidated assets at that date.



As of December 31,
2012, we were the owners, through our subsidiaries, of 143 of our Non-Food stores, while the remaining 76 of our Non-Food stores
were owned and operated by franchisees. As of December 31, 2012, the consolidated assets of our non-food segment (excluding the
stores owned and operated by franchisees) aggregated approximately NIS 369 million, or $99 million. Our non-food segment's assets
constituted approximately 4% of our total consolidated asset at that date.



BSRE is the owner of
all of our real estate properties, and its revenues are primarily derived from real estate lease payments received from Mega Retail
and third parties. As of December 31, 2012, the consolidated assets of BSRE aggregated approximately NIS 3.1 billion, or $836 million.
BSRE's assets constituted approximately 33% of our total consolidated assets at that date.



Our Strategies



Our strategy is to
take advantage of our position as a leading retailer in Israel in order to offer a variety of products and services which meet
our customers' daily needs, while leveraging potential synergies within our group. To achieve this goal, we intend to pursue a
number of operating and growth strategies, which include:



| | · | continue growing our filling stations and convenience store operations, including the expanding
the variety of products and services offered within the stores and identifying new areas of operation that are synergetic to our
fueling operations;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



37







| | · | maintaining and strengthening our market positioning within the supermarket segment by evaluating
the strategic positioning of some of our stores by building and opening new stores, renovating and improving of existing stores,
adjusting the format of some of our stores according to the needs of our customers, and, if necessary, closing stores with low
performances;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing operational efficiency, including by reviewing and taking concrete steps to improve
our distribution capabilities and distribution efficiency within the food and non-food segments, and the successful implementation
of the self-arrangement of shelves in our supermarkets;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing our market share of “Non-Food” and “Near-Food” products and
capitalizing on potential operating synergies between the food and Non-Food segments of the Company and the other subsidiaries
of the Company, including by increasing of the sale of products of "Naaman" in Mega Retail's supermarkets and merging
Bee Group into Mega Retail;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | strengthening and increasing of our market share in the organic products market and the health
food in order to become a leading company in the organic and health food market in Israel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding and improving our You loyalty plan offering, and increasing the number of You club members
who hold the "You" credit card and the number of customers of our YouPhone MVNO offering; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | developing and expanding of the real estate segment by developing and improving of the existing
real estate properties, maximizing of leasings, increasing building rights, and purchasing additional commercial real estate in
Israel and abroad.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Supermarkets



General



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



38







|                        |  | No. of Stores |  | Store Space (square meters) |        
|----------------------- |  | ------------- |  | --------------------------- | -------
|                        |  |               |  |                             |        
|As of December 31, 2008 |  | 194           |  |                             | 354,500
|As of December 31, 2009 |  | 203           |  |                             | 365,000
|As of December 31, 2010 |  | 206           |  |                             | 366,000
|As of December 31, 2011 |  | 211           |  |                             | 377,650
|As of December 31, 2012 |  | 212           |  |                             | 369,000



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



|                                              |  | For the year ended December 31, |  |  |                           | 
|--------------------------------------------- |  | ------------------------------- |  |  | ------------------------- | 
|                                              |  | 2010                            |  |  | 2011                      | 
|Selected Operating Data:                      |  | NIS (in thousands)              |  |  | U.S. Dollars in thousands | 
|Number of supermarket stores (at year end)    |  | 206                             |  |  | 211                       | 
|                                              |  |                                 |  |  |                           | 
|Increase (decrease) in same store sales(1)    |  | (0.8%)                          |  |  | (2.7%)                    | 
|                                              |  |                                 |  |  |                           | 
|Total square meters (at year end)(2)          |  | 366,000                         |  |  | 377,650                   | 
|                                              |  |                                 |  |  |                           | 
|Supermarket sales per square meter (in NIS)   |  | 18,692                          |  |  | 18,090                    | 
|                                              |  |                                 |  |  |                           | 
|Supermarket sales per employee (in thousands) |  | 1,000                           |  |  | 965                       | 



| | (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 year and that 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.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



We have four supermarket
store formats - Mega Bool, Mega In Town, ZolBeShefa and Eden Teva.Our "Mega Bool" chain stores are hard discount
stores designed to provide customers with name brand quality at everyday affordable prices. The “Mega In Town” chain
stores, located primarily in local neighborhoods and city centers, combine discount prices with convenience for neighborhood shoppers.
“Mega In Town” stores offer fresh food, a large variety of items and convenience in residential areas. Our “ZolBeShefa”
chain stores are low-priced stores oriented towards Israel’s growing ultra-orthodox Jewish population. In our "Eden
Teva" stores, we focus on offering organic, natural and health food products together with offering many of the items sold
in our other supermarket stors. As of December 31, 2012, we operated a total of 212 stores consisting of approximately 369,000
square meters space.



We launched our “Mega
In Town” supermarket format in August 2007. The initiative included the conversion of over 103 of our existing stores to
the new brand.



39







On October 31, 2007,
we acquired 51% of the outstanding shares of Eden BriutTeva Market Ltd. (“Eden Teva”), one of Israel’s largest
retailers of organic, natural and health food products, and specializing in organic, natural and health food products. As part
of the acquisition, (i) we provided Eden Teva with shareholder loans in the amount of NIS 47 million (NIS 58.3 million as of December
31, 2012), and (ii) we agreed to provide all guarantees and financing required in connection with Eden Teva’s operations
in the future. In addition, during 2010, we launched a new Eden Teva store format by establishing EdenTeva stores within our existing
large store formats under the concept of a "store within a store". As of March 29, 2013, Eden Teva operated 20 (including
nine Eden Stores within Mega) supermarket stores.



We launched our "Mega
Bool" hard discount store format in December 2008 in order to provide customers with name brand quality at everyday affordable
prices, in response to an increase in consumer preference for hard discount stores that we have identified in the recent years.
The initiative included the conversion of 57 of our existing stores of various sizes to the new brand.



In parallel, we also
announced the launch of our new "Mega" line of private label goods, including "Mega Home", that are sold in
our "Mega Bool" and "Mega In Town" stores. Private label products provide customers with an attractive alternative
selection of products that are comparable in quality to name brand products. We believe that our private label products enhance
customer loyalty, differentiate our stores from those of our competitors and provide a competitive product to those offered by
our suppliers. In addition, usually the average gross profit from private label products is higher than the average gross profit
from other products. During December 2012, the products that we sold under the "Mega" private label constituted approximately
14% of our supermarket sales.



In July and August
2012, Mega Retail signed agreements with third parties under which it agreed to transfer the lease rights and sell the equipment
attributed to nine of its stores for a total consideration of NIS 26 million. As of April 20, 2013, Mega Retail had transferred
seven stores.



Industry Overview



We estimate that retail
sales of food, beverages and tobacco in Israel were approximately NIS 60 to 64 billion, or $16.1 to 17.2 billion, in 2012. This
estimate is based on the data published by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco
in Israel in 2010 (2011-2012 has not yet been published) and the growth of expenditure of 3.1% in 2012 and 4.0% in 2011 for the
consumption of food, beverages and tobacco of household in Israel at current prices.



The retail sales of
food, beverages and tobacco in Israel includes supermarkets, grocery stores, mini-markets and retail sales of fruit and vegetables,
meat, poultry and fish. The supermarket retail chain market consists of two large chains: Shufersal and us, as well as other growing
chains.



40







Based on data published
by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately
32.1% of the total retail sales of food, beverages and tobacco in Israel in 2012 was made by the two large chains and approximately
31.1% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2012 was made by the two large
chains.



Competition



The Israeli food retailing
industry is highly competitive and is characterized by high turnover and narrow operating margins. We compete with the other largest
supermarket chain, Shufersal, low-priced smaller supermarket chains, independent grocers, open-air markets, and other retailers
selling supermarket goods. Competitive pressures increase as the supermarket sector in Israel approaches higher saturation levels
and will continue to increase in the event that our competitors expand their operations or new companies enter the market with
hard discount formats.



Our market share in
2012 was 11.9% of the total retail market of food, beverages and tobacco. The market share of our competitor, Shufersal, based
on its financial reports, was approximately 20.2% in 2012. This market share is based on revenue as a percent of the retail market
for food, beverages and tobacco in accordance with the definition of the Central Bureau of Statistics for 2010 and market growth
of approximately 3.1% for 2012 and 4.0% for 2011. The difference in market share may give Shufersal a greater competitive advantage
in its dealings with customers, suppliers and other third parties.



In recent years, we
and our competitors have established or expanded low-price and hard discount store formats. In December 2008 we launched our "Mega
Bool" hard discount store format to address the hard discount store market. In addition, smaller supermarket chains in recent
years continued to aggressively increase their market share and expanded their presence in selected areas in 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.



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
we experienced in recent years, particularly at our larger stores.



In January 2013, the
Israeli Antitrust Authority approved the merger between Bitan Wines Ltd. and the Zim Direct Marketing Ltd. chain of discount supermarkets.
The merged chain will have 62 outlets throughout Israel. This merger, and possible similar mergers in the future, could adversely
affect our competitive position.



41







In November 2005, the
Commissioner of the Israeli Antitrust Authority approved certain arrangements between the Fourth Chain Company Ltd. (“the
Fourth Chain”) and certain smaller supermarket chains. This approval was granted subject to certain conditions for an initial
period of two years and has since been extended until June 10, 2015. The Fourth Chain combines a number of smaller supermarket
chains (the “Members”) which operate on a local geographic level and its purpose is to develop a private label and
to jointly negotiate with suppliers. Pursuant to the approved extended arrangement, the Fourth Chain is permitted to negotiate
with suppliers regarding the private label brand. The aforesaid arrangement, and possible similar combinations of other smaller
supermarket chains, may generate some of the efficiencies of a major nationally-spread chain and therefore enable them to compete
more efficiently with the major chains.



At the end of 2012,
a new competitor, Cost 365, entered the market with a hard discount format. Cost 365 has opened two stores, and we expect that
it will to continue to expand its operations during 2013.



In the sale of cosmetic,
toiletries and hygiene products, we compete against establishments that sell such products, including the drug store chains SuperPharm
and NewPharm.



Supermarkets Operations



Our supermarket operations
are conducted under the Mega Bool, Mega In Town, ZolBeShefa and Eden Teva store formats, which are among the most recognized retail
names in Israel.



Our supermarkets offer
a wide selection of supermarket goods. The mix of products of each supermarket format varies to address the preferences of its
target customers. Many of our supermarkets offer specialty departments such as full service bakeries, delicatessens, fresh meat
and prepared food departments; certain supermarkets also contain franchise operations, which sell a variety of goods. In addition,
we offer a range of “Non-Food” and “Near-Food” items and operate several houseware departments within most
of our large stores. Our private label, called "Mega," and "Mega Home" are offered throughout our "Mega
Bool" and "Mega in Town" store formats. All of our supermarket stores operations are owned by Mega Retail and its
subsidiaries, and Mega Retail leases the real estate underlying the stores that it operates from BSRE and third parties.



“Mega Bool”
is our hard discount stores designed to provide customers with name brand quality at everyday affordable prices. “Mega in
Town” is comprised of medium and small sized stores primarily located in city centers and local neighborhoods which combine
discount prices with convenience for neighborhood shoppers; this format is designed to bring discount shopping to the neighborhood
and city centers. “ZolBeShefa” is a format comprised of low-priced supermarkets with a selection of products designed
to compete with local competition and also oriented to Israel's growing ultra-orthodox Jewish population. “Eden Teva”
is comprised of supermarkets that specialize in organic, natural and health food products, together with offering many of the items
sold in our other supermarket stores, operated by Eden Teva, which is 51% held by Mega Retail.



42







The
following table provides certain information regarding our supermarket stores as of December 31, 2012:



|Properties                |  |                             |  | Number |     |  | Square meters | 
|------------------------- |  | --------------------------- |  | ------ | --- |  | ------------- | 
|Stores(*)                 |  | Leased from BSRE            |  |        | 89  |  |               | 
|                          |  | Leased                      |  |        | 123 |  |               | 
|                          |  |                             |  |        | 212 |  |               | 
|Stores In Development     |  | Leased                      |  |        | 16  |  |               | 
|Offices                   |  | Leased from BSRE            |  |        | 2   |  |               | 
|Warehouses                |  | Leased from BSRE            |  |        | 3   |  |               | 
|                          |  |                             |  |        |     |  |               | 
|Warehouses in Development |  | Leased from BSRE and others |  |        | 1   |  |               | 
|Car park                  |  | Leased from BSRE            |  |        |     |  |               | 
|Total                     |  |                             |  |        | 234 |  |               | 



(*)
Includes nine Eden stores within Mega.



Purchasing and
Distribution



We purchase products
for our supermarkets through a central purchasing office that selects products for all of our supermarkets (including Alonit/SuperAlonit
and AM:PM, and not including Eden Teva) and negotiates prices, promotions and terms of payment with individual suppliers on a company-wide
basis. We believe that the large volume of our purchases and our ability to offer chain-wide exposure for our suppliers’
products and promotions, enable us to avail ourselves of attractive volume-buying opportunities and manufacturers’ discounts.



Through our distribution
center in Rishon Letzion, we can distribute products from suppliers, manufacturers and importers, thus reducing prices and broadening
the range of available products. The distribution center is operated on a site of approximately 40,000 square meters. At this site,
we operate approximately 20,000 square meters as warehouse space. We conduct the administration of the warehouse and distribution
by means of a computerized system that consolidates orders from all the stores and other stores while giving consideration to inventory
levels, store requests and company planning. In addition, the Company signed a development agreement to build an additional logistics
and distribution center by end of the first half of 2014, for which a building permit has been received. This new distribution
center will have approximately 41,500 square meters. For more information, see "Item 4. Information of the Company –
B. Business Overview – Real Estate – Description of Real Estate Properties - Kibbutz Eyal."



43







We purchase products
for our supermarkets from approximately 1,000 suppliers, including manufacturers, importers and distributors. In 2012, approximately
84.2% of our grocery items and 95.2% of our meat and fish were delivered directly by suppliers to our stores. For certain other
items, including 82.1% (in 2012) of fruits and vegetables, we provide distribution to our supermarkets through our distribution
center. For the year ended December 31, 2012, approximately 21.7% of our supermarket purchases were of products distributed from
our distribution center.



We
actively seek to diversify our suppliers. However, we still purchase most of our dairy, fresh produce and poultry products from
the Tnuva Corporation, which holds a leading position in the domestic dairy and poultry markets. In 2012, Tnuva’s products
accounted for approximately 15.2% of all the products sold at our supermarkets. For more information on our arrangements with Tnuva,
see "Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transaction – Arrangements with
Tnuva." In addition, the Strauss group, an Israeli food manufacturer, accounted for approximately 8.7% of all products
sold at our supermarkets in 2012, and the Osem-Nestle group accounted for approximately 7.6% of all products sold at our supermarkets
in 2012. Because of our status as a leading food retailer in Israel as a result of which we are able to offer wide exposure on
a national level, to these suppliers' products, and the fact that we maintain an excellent and long-standing relationship with
Tnuva, Strauss group and Osem, we do not believe that there is a material risk of future stoppage of supply of products of these
key suppliers. However, we do not have a written contract with Tnuva, Strauss group or Osem obligating them to supply products
to us. In addition, in recent years, there has been a process of consolidation among our suppliers. As a result, our largest suppliers
now account for a larger percentage of our product purchases. The ten largest suppliers for our supermarkets accounted for approximately
60.9% of our product purchases in 2012. We have not experienced any material problems in obtaining products of the quantity and
type required.



Marketing



We have joint advertising
and sales initiatives together with some of our suppliers. The stores accept cash, checks, credit cards, gift certificates and
prepaid electronic cards.



During the Jewish New
Year and Passover seasons, we run gift certificates programs, under which we issue and sell gift certificates and prepaid cards
to institutions, companies and individuals. The gift certificates and the prepaid cards can be used in our stores as well as other
stores with which we entered into collaboration agreements. We also participate in tenders in connection with the sale of our gift
certificates and prepaid cards. From time to time, we also operate joint marketing promotions with other entities.



In addition, we operate
the Mega@Internet website which allows customers to place orders via the Internet 24 hours a day and to have the products in our
stores delivered to our customers’ homes from a nearby store within a few hours. Likewise, customers may order products by
phone (through a call center) or by fax. The service is provided in most of Israel.



44







We aim to create an
awareness of our supermarkets as offering a combination of broad selection, high-quality service and competitive prices. Our primary
advertising outlets, in addition to point-of-sale marketing, are television, newspapers, radio, internet, billboards and direct
mail. Store promotions are conducted from time to time in all our supermarkets, in specific chains or in individual stores. These
promotions include, among other things, price reductions, gifts, coupons or deferred payment terms and are often available exclusively
to members of our Loyalty Plan - "You", and the customer clubs of ZolBeShefa and Eden Teva.



The goal of our Loyalty
Plan, which we established together with Dor Alon and which offers to our 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 by, among other things,
granting exclusive benefits to the Loyalty Plan members, including providing discounts and benefits at other businesses that joined
the Loyalty Plan, such as a monthly refund to the customer's YouPhone account based on the aggregate purchases made in Mega supermarkets,
Alonit convenience stores or at Dor Alon filling stations. In addition, through the Loyalty Plan the Company may provide other
services such as personal finance, insurance products and tourisms packages. The benefits are advertised and disseminated each
month via e-mail to the members of the Loyalty Plan.



The Loyalty Plan also
owns a 50% share in the Israeli Hebrew-language free daily newspaper, Israel Post, the distribution of which began in August 2007,
mainly in establishments such as Mega Retail supermarkets, AM:PM convenience stores Dor Alon filling stations and third parties
establishments. A majority of the revenue from this newspaper comes from selling advertisement space. Mega Retail believes that
the partnership in this newspaper provides it with a marketing platform for Mega Retail’s network.



Government Regulation



Supermarkets



Our operation of
stores in Israel requires permits from municipal authorities, which are conditioned on the prior approval of various agencies,
including the health ministry, the police and fire departments. If we are unable to obtain or maintain one or more required permits,
we may be required to close one or more stores or to take other remedial action to obtain or maintain these permits. See “Item
3. Key Information - D. Risk Factors - Failure to obtain or maintain permits required for our operations may adversely affect our
operating results”.



Price Control



The Israeli government
is authorized to control the retail and wholesale prices of goods and services offered in Israel. At present, a few of the products
we offer in our stores, certain bread, salt, eggs, milk and milk products and butter, are subject to government-imposed price controls.
Any imposition of more extensive price controls in the future than those that currently exist may have a material adverse effect
on our operating results. See “Item 3. Key Information – D. Risk Factors - Government-imposed price controls may have
a material adverse effect on our operating results”.



45







Deposits for Drink
Containers



We are required to
charge a deposit for drink containers of less than 1.5 liters and more than 0.1 liter and accept the return of empty containers
for refund pursuant to the Law of Deposits for Drink Containers-1999. In February 2010, the Knesset passed an amendment to the
Law, that determined, among other things: (i) the expansion of the law to apply to additional drink containers, obligating all
businesses that sell drink containers to accept empty containers and to repay the deposit for them (there is no obligation to accept
more than 50 drink containers from a person in a single day), (ii) an increase in the deposit amount from 25 agorot to 30 agorot
per drink container, and (iii) an increase in the obligations of manufacturers and importers of drinks to recycle and collect drink
containers. We have also incurred expenses for personnel and equipment dedicated for returning of deposits, including equipment
in some of our stores that enable consumers to automatically receive their deposits when bringing back the empty containers without
the need for store personnel.



Arrangements between
Major Supermarkets Chains and Large Suppliers



From April 2000 to
May 2003, the Israeli Antitrust Authority conducted an investigation into alleged restrictive trade arrangements between major
supermarkets chains in Israel and large suppliers. During the investigation, an inquiry was conducted in our offices, and our former
CEO and other senior officers were questioned.



On January 5, 2005,
the Commissioner of the Israeli Antitrust Authority issued his position regarding “commercial restrictive practices between
the dominant food suppliers and the major supermarket retail chains”. According to the Commissioner’s position, some
of these practices were found to be restrictive trade agreements under the antitrust laws. The Commissioner prohibited these practices
unless approved by the Restrictive Trade Practices Court or exempted by the Commissioner himself.



Among the practices
that were found to be restrictive according to the Commissioner were the following: arrangements with suppliers that determine
the suppliers of the retail chains, their identity and their number; arrangements for the management of product categories in conjunction
with suppliers; arrangements regarding the retail selling price; arrangements for determining market share of a particular supplier’s
products and arrangements for determining prices made by suppliers to competing chains; arrangements with regard to the use of
suppliers’ manpower to stock merchandise on the shelves of the chains’ stores. Limits were imposed on financial benefits
to the chains with regard to display areas and on special offers to chains for meeting certain sale targets.



After the publication
of the position paper, the Commissioner stated his position that these directives constitute a position paper, which is “intended
to provide the guidance concerning the normative status of various practices in the food retail industry as perceived by the Antitrust
Authority”. The Commissioner indicated that this document does not have normative status.



46







We have been applying
most of these directives among others, by an internal compliance program that we have adopted.



In August 2006, the
Restrictive Trade Practices Court approved a consent decree reached between the Commissioner and certain food suppliers. The consent
decree is directed at the food suppliers listed therein and stipulates various prohibitions, conditions and restrictions that apply
to these suppliers with regard to certain practices. The consent decree addresses the following arrangements:



| | · | Reduction in the number of suppliers. Suppliers are prohibited from being a party to an
arrangement by which they influence the setting of the number or identity of competing suppliers’ presence at retail chains.
Decisions regarding the number and identity of suppliers and their products’ quantities, kind or location on the shelf space
are to be made by the retail chain without interference by suppliers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Acquisition of shelf and off-shelf display space. A dominant supplier is prohibited to be
a part of: (i) an arrangement granting an allocation exceeding half of the overall display area designated for the product category
in which it has dominance; (ii) an arrangement the purpose of which or effect is granting exclusivity to one or more of the supplier’s
products in an off-shelf display in which it has dominance (nevertheless, exclusive arrangement for off-shelf display for a limited
discount period will not constitute a basis for enforcement measures under certain circumstances). In addition, arrangements with
suppliers (as opposed to dominant suppliers) regarding allocation of shelf area or off-shelf display, if not prohibited according
to the decree, may not exceed a period of one year (the retail chain and the supplier may enter into a new arrangement at the end
of the one year term, provided the period of such new arrangement does not exceed one year and is in accordance with the provisions
of the decree).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Category management: Unless prior approval of the antitrust authorities is obtained, a dominant
supplier is prohibited to be party to an arrangement whose purpose or effect is the supplier involvement (including as advisor)
in the process of category management (nevertheless, a retail chain may consult with a supplier regarding innovations in this area).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47







| | · | Shelve arrangements: Whereas in his position document, the Commissioner determined that
the use of suppliers’ representatives to physically arrange the shelves in the chains’ stores constitutes a restrictive
arrangement, the suppliers disagree with this position, and the Commissioner agreed not to take enforcement measures with regard
to such arrangements for 30 months, as long as such arrangements satisfy certain conditions. In February 2009, the above period
was extended by 36 months, until February 2012. The Commissioner has indicated that it will no longer permit such practices. In
February 2012, the Company submitted a request for an exemption from restricted agreement for 21 months (until September 2013)
in order to make the appropriate preparations for self arrangements of shelves in the chains’ stores, although the Company
believes that such arrangements are not restrictive arrangements. In January 2013, the Commissioner granted an exemption from approval
of the restrictive arrangement for a limited period. The exemption is until the end of March 2013 with respect arrangement of soft
drinks, until the end of September 2013 with respect to the arrangement of milk products and until the end of 2013 with respect
to the arrangement of "van sale" products (such as ice cream, newspapers and bread products). During 2012, we began self
arranging of some of the product categories, and as of December 31, 2012 we self arrange all of our dry products, we intend to
self arrange the remaining product categories by the end of 2013 in accordance with the Commissioner's exemption described above.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Discounts and rebates in exchange for meeting sales targets. A dominant supplier may not
be party to an agreement whose objective or effect is the grant of benefits to the retail chain in connection with meeting sales
targets for the products in which the supplier has dominance, unless the benefit is given only as a discount to the purchase of
units sold in excess of the supplier’s sales basis in the chain and is restricted to these units alone. The prices of units
sold in excess of the sales goals shall not be lower than the production costs of these units. In addition, a dominant supplier
is prohibited from sanctioning a retail chain for failure to meet monopolistic sales targets regarding products for which the supplier
possesses monopolistic power.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Setting market share. A supplier is prohibited from being a party to an arrangement whose
purpose or effect is to determine the supplier’s market share (or restricting the market share of competing suppliers) in
the chain’s sales.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Exclusivity in sales: A supplier is prohibited from entering into the following arrangements
with retail chains without the prior approval of the antitrust authorities: (i) an arrangement whose purpose or effect is to restrict
the ability of competing suppliers to respond to sales conducted by such supplier by way of lowering their prices and (ii) an arrangement
whose purpose or effect is to restrict the ability of competing chains to respond to sales conducted by another chain, including
by way of commitment of the supplier not to offer a similar sale to competing chains.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Price dictation by supplier. A supplier is prohibited from setting the consumer price of
its products sold in the chain and from intervening in chain decisions regarding the setting of the consumer price of its products
or of its competitors’ products. Nevertheless, a supplier may recommend the resale consumer price of its products to the
chain, provided that the supplier takes no action to enforce such recommendation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48







The consent decree
clarifies that nothing in the provisions contained therein prevents the chain from allocating shelf space at its own independent
discretion, even if such allocation exceeds half the available shelf space, so long as there is no involvement or interference
from the supplier and so long as there is no prior coordination or understanding with said supplier.



The Company is not
a party to the consent decree; however, it could nevertheless have an effect on the practices of the Company’s suppliers
and indirectly on the Company.



For additional
information regarding government regulations relating to our Supermarket 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 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 our financial reports 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 our semiannual results.



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.



Supermarkets Strategies



Our strategy in our
retail activities is to take advantage of our position as a leading food retailer in Israel by expanding our market presence in
the existing food retail market. To achieve this goal, we intend to pursue a number of operating and growth strategies, which include
-:



| | · | maintaining and strengthening our market positioning by evaluating the strategic positioning of
some of our stores, renovating and improving of existing stores, adjusting the format of some of our stores according to the needs
of our customers, and, if necessary, closing stores with low performances;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | increasing operational efficiency, including by improvement of our distribution capabilities, and
the successful implementation of the self-arrangement of shelves in our supermarkets;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49







| | · | increasing our market share of "Non-Food" and "Near-Food" products and capitalizing
on potential operating synergies between the food and Non-Food operations of "Naaman" and Mega Retail's supermarkets;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding and improving our You loyalty plan offering, and increasing the number of You club members
who hold the "You" credit card customers;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding sales through our internet sale site, Mega@internet website; and
| | - | --------------------------------------------------------------------------



| | · | solidifying and expanding our market share in the organic/health food market with the goal of establishing
Alon Blue Square as a leader of Israel's emerging organic/health food market.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Fueling and Commercial Sites



General



We operate filling
stations and convenience stores and market petroleum products in Israel through Dor Alon, our direct subsidiary in which we held
78.43% as of March 29, 2013. Dor Alon’s activity includes three primary fields of activity:



| | · | Filling Stations and Convenience Stores - Dor Alon supplies motor fuels, motor oil and other
petroleum products to a network of public filling stations operating under the “Dor Alon” brand. Dor Alon’s public
filling stations consist of four formats: stand-alone gasoline service stations, Alonit convenience stores (with gasoline service
stations), travel centers (commercial centers that include a gasoline service station) and “AM:PM” stores, a leading
convenience store brand in the Tel Aviv metropolitan region offering merchandise and food products, most of which operate 24 hours
a day and seven days a week. Dor Alon also supplies motor fuels and other petroleum products to internal filling stations in Israel
located primarily on kibbutzim and moshavim (cooperative communities).
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Filling Stations
and Convenience Stores



As of December 31,
2012, Dor Alon supplied motor fuels, motor oil and other petroleum products to a network of 202 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.



50







As of December 31,
2012, Dor Alon operated 209 convenience stores, including 163 convenience stores branded “Alonit” (we refer to these
stores as Alonit convenience stores) mostly located adjacent to our filling stations (26 stand alone stores), and 46 stand alone
convenience stores operated by the AM:PM chain of stores. 205 convenience stores are operated by the Alon Group, and four 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, 2012, Dor Alon (either solely or through joint companies or partnerships) owned or held under lease and operating
agreements 165 commercial and filling sites. The other 37 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.



The filling stations
and convenience stores sector demands substantial capital investment (the cost of establishing a refueling and commercial complex
is estimated at NIS 4-5 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, improvement
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 higher building standards
of filling stations and due to planning and regulatory strict requirements regarding environmental protection and safety;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | reduction of the marketing margin of 95 octane;
| | - | -----------------------------------------------



| | · | an expansion of retail trading activity in convenience stores apart from the filling stations;
| | - | ----------------------------------------------------------------------------------------------



| | · | decrease in the discounts to customers and fleet customers, reduction of credit days and reduction
in operating expenses; and
| | - | -----------------------------------------------------------------------------------------------------------------------------



| | · | imposition of price control on diesel oil.
| | - | ------------------------------------------



Dor Alon adds filling
stations to its network by either developing - new commercial and filling stations or, less frequently, entering into an agreement
with the owner of an 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.



51







Dor Alon anticipates
opening and operating an additional 9-13 filling stations during 2013 and 2014. 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 SegaFredo “espresso-bars” to
be located in Dor Alon’s filling stations. As of December 31, 2012, Dor Alon’s filling stations included 17 SegaFredo
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 "SegaFredo" brand as well as other products. In addition, most of the Alonit convenience stores include
a small coffee bar.



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,
2012, Dor Alon supplied motor fuels to 160 internal filling stations operating under the Dor Alon brand, including 80 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, 2012, this joint company operated
and supplied motor fuels and other petroleum products to 80 internal filling stations operating in moshavim.



52







Industry Overview



Recent
Developments in the Israeli Fuel Market



The Recommendations
of the Trachtenburg Committee



In December 2011, the
Israeli Government adopted certain recommendations regarding competition in the filling stations sector of the Trachtenburg Committee
which was established by the Israel government, inter alia, in order was to examine the living costs in Israel and the influence
that the lack of competition in the marketplace has had on these costs and to propose solutions to these issues. In July 2012,
and 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. For additional information on this matter, see "Risks Related To Fueling and Commercial Sites - The recommendations
of the Trachtenburg Committee may have a material adverse effect on Dor Alon's results of operations" and "Risks Related
To Our Business As A Whole – Establishment of government committees and protests against high cost of living may adversely
affect our business".



Control on the
Reducing of the Gasoline's Marketing Margin



On August 31, 2011,
the Goods and Services Prices Order (Maximum Prices at Gas Stations) - 2011 was published reducing the marketing margin of the
gas companies by approximately NIS 0.018 per liter (including VAT). On May 31, 2012 the Ministry of Energy and Water and the Pricing
Committee updated the marketing margin of 95 octane gasoline, increasing the marketing margin for self service by NIS 0.047 per
liter (excluding VAT) and reducing the full service charge by NIS 0.038 per liter (excluding VAT).



The reduction of
the marketing margins has had a negative effect on Dor Alon's financial results. In the fourth quarter of 2011 and in 2012, Dor
Alon took steps to mitigate its effect by, among other things, reducing discounts at its filling stations and to its fleet customers
and reducing expenses. These actions significantly reduced the impact resulting from the reduction in marketing margins. For additional
information, see "Risks Related To Fueling and Commercial Sites – Dor Alon is exposed to risks associated with changes
in regulatory arrangements which may influence the financial results of Dor Alon".



Competition



Competition
in the Israeli energy industry is intense. Dor Alon’s major competitors are the other large fuel companies in Israel: Paz,
Delek and Sonol. 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 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 Sonol, the
gas companies Pazgas, Amisragas and Supergas, and small fuel marketing companies as well as other LPG marketing. There are
at least 25 additional gas companies besides the large companies. 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.



53







Purchasing and Distribution



Motor Fuel and Other
Petroleum Products



Dor Alon, like the
other fuel companies in Israel, is dependent on Oil Refineries Ashdod ("ORA") and ORL for the supply of refined petroleum
products. Dor Alon believes that most of the petroleum products manufactured by ORA are supplied to Paz, while ORL constitutes
the main source of supply for Dor Alon and other fuel companies in Israel. 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. However, as of 2013,
Dor Alon has significantly increased the purchase of refined petroleum products from ORA on account of ORL.



Dor Alon purchases
most of the motor oils marketed by it from ARAL Lubricants GmbH and from SA Texaco N.V. Since 1990, Dor Alon has been the exclusive
representative of ARAL Lubricants GmbH in Israel under an oral agreement. In addition, others oils are purchased and marketed under
the private label brand name “Dor Oil.”



Convenience Store
Products



Dor Alon purchases
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 pays that subsidiary 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. The agreement also provides that if Alon Blue Square's income from the agreed margin, less additional expenses
incurred by it as a result of the performance of the agreement, falls below a minimum amount of NIS 1 million a year, Dor Alon’s
subsidiary will pay our subsidiary the difference up to NIS 1 million. The agreement, dated May 1, 2004, has an initial five year
term and automatically renews for additional one-year terms unless terminated by either party upon 90 days notice prior to the
end of the term. The convenience stores that are not operated directly by Dor Alon have also joined this agreement and they pay
our subsidiary an additional profit margin. For further information on this agreement, see “Item 7. Major Shareholders and
Related Party Transactions – Procurement Agreement with Dor Alon Management."



54







When
Alon acquired Alon Blue Square, the Anti-trust Commissioner prescribed that he may direct Dor Alon and Alon Blue Square to fully
separate the purchasing activities of Dor Alon from those of Alon Blue Square if he deems that current market conditions, the purchasing
power of Alon Blue Square, or the state of competition so require.



Marketing



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
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.



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 of this field of operations.



Most engagements with
industrial and commercial customers include installation of end equipment at the customer’s site. 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.



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, 2012, Dor Alon had approximately 107,000 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.



Marketing of Jet
Fuel



Dor Alon’s jet
fuel marketing operations include the marketing of jet fuel to civilian airlines, which, since 1997, 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-2014 and is subject to renewal by the parties. 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.



55







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. Some of the sales campaigns are conducted jointly with Alon Blue Square;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| | · | strengthening Dor Alon's
relationship with its customers, and promoting customer loyalty to the filling stations and to the services provided by Dor Alon,
through the Loyalty Plan established by Dor Alon and Mega Retail in order to promote Dor Alon's and Mega Retail's marketing operations,
including by entering into a services agreement with Diners Israel. For more information on the Loyalty Plan, see “Item 7.
Major Shareholders and Related Party Transactions – B. Related Party Transactions – Transactions with Dor Alon in Connection
with Establishment of a Joint Loyalty Plan”;
and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As of July 2009, a joint company established by the You Loyalty Plan and a third party, began publishing
and distributing a free daily newspaper called “Israel Post”, which is distributed in Dor Alon’s filling stations,
AM:PM stores, Mega Retail stores and third parties. A majority of the revenue from this newspaper comes from selling advertisement
space. Dor Alon believes that the partnership in this newspaper provides it with a marketing platform.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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.



56







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 between 55 to 62 megawatts.



Through the use of
the power plant, the Partnership is to provide Sugat's energy requirements until January 2037 pursuant to the terms of the aforementioned
agreement. Sugat has the option to extend the term of the agreement following the first stage of the agreement.



The Partnership will
be authorized to sell electricity and steam manufactured at the facility also to third parties. It was also determined that the
prior to the first stage, the Partnership is to connect Sugat's plant to Israel's main natural gas pipeline, convert the plant
into a dual function system which will enable Sugat to use both oil and natural gas and operate and maintain the facility, in accordance
with the terms of the agreement.



On March 1, 2012, the
Partnership entered into an agreement with Israel Natural Gas Ltd. (INGL) for the purpose of connecting Sugat's facility to Israel's
main natural gas pipeline and providing for transportation of natural gas using INGL's services (the "INGL Agreement").



In the framework of
the INGL Agreement, INGL will establish the necessary foundations, including building the structures enabling streaming of natural
gas to Sugat's plant (during the stage of conversion of Sugat's existing energy facility into a dual function system which allows
operation both by oil and natural gas), and installing the necessary foundations which provide natural gas to the plant that the
Partnership is planning to establish in Sugat's industrial area.



The agreement is in
effect until July 31, 2029 with an option to extend for an additional five years.



In the framework of
the INGL Agreement, the Partnership will bear the costs of the connection to the main pipeline which is estimated to be approximately
NIS 15 million. Additionally, the Partnership undertook to pay annual payments to INGL which are not considered material for the
main pipeline services until the termination of the agreement, whether the Partnership chooses to use main pipeline services or
not.



57







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 (the "Supply Agreement"). Pursuant
to the Supply 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 accordance with the terms of the Supply Agreement. 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 Supply Agreement
is to be effective from the beginning of 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.



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



| | · | 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 permits to operate filling stations, Dor Alon must install
devices at some of its stations to prevent over-filling of underground fuel tanks as well as devices to prevent spillage during
unloading of fuel tanks. At several of its filling stations, Dor Alon is required to perform soil surveys in order to identify
soil and groundwater contamination. The cost of treatment of soil or groundwater contamination at a retail site typically does
not exceed a few million shekels, depending on the extent of the contamination.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



58







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



Dor Alon is aware of
environmental law proposals including, inter alia the Bill for Preventing Land Contamination and Treatment of Contaminated
Lands, 5772-2012which, 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. At this stage, Dor Alon cannot estimate
which of the bills will be approved or rejected.



Dor Alon expects to
invest approximately NIS 13 million in 2013 in order to satisfy the environmental laws and regulations. Dor Alon currently expects
that the costs of environmental restoration and implementation of the environmental laws and regulations in the upcoming years
are expected to be similar to those in 2013. 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.



From time to time,
Dor Alon does incur costs resulting from spills of petroleum products at its filling stations. Although Dor Alon is not aware of
any contaminated sites as to which material outstanding claims or obligations exist, the discovery of additional contaminants or
the imposition of additional cleanup obligations at these or other sites could result in significant unexpected costs in the future.



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.



59







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 2015. Pursuant to the aforementioned
directives, Dor Alon is required to install the steam recycling system in 18 filling stations by the end of 2013; and in additional
90 filling stations by the end of 2015.



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. In addition, the law imposes various requirements, including that a person
who deals with LPG be qualified and licensed, that the gas supplier satisfies all applicable safety requirements and to maintain
specific types and levels of insurance in order to cover damages;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Impose duties of licensing and obtaining permits for Dorgas LPG’s storage facilities;
| | - | -------------------------------------------------------------------------------------



| | · | Impose restrictions and duties related to the provision of gas to the private sector, such as a
prohibition to act to preserve customers who have previously delivered written notices of their intention to replace their gas
supplier, the duty to serve new customers in a fair manner providing the same conditions as provided to similar customers and the
duty to perform periodic tests to the gas systems;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | · | 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:



| | · | The Planning and Building Law, 5725-1965, or the Planning and Building Law, which provides that
any use of property must be done in accordance with the designated purpose of the property. Often, the permit for establishing
filling stations involves changing the designated purpose of the property. Under the National Land Planning Program for Refueling
Stations NLP 18 – 1986, promulgated under the Planning and Building Law, or NLP 18, the issuance of permits for filling stations
are subject to different conditions and criteria such as, inter alia, the prevention of safety, environmental and transport
hazards, minimal distance between filling stations and minimal distance between gas containers and pumps and residential buildings.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



60







| | · | 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. With respect to five filling stations and with
respect to three convenience stores closure orders have been issued. These closure orders have been suspended for a short period
of time in order to obtain the appropriate permits;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 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 restrictions on operations of fuel companies aimed at promoting competition in the fuel
market, including restrictions with respect to the terms of exclusivity agreements between fuel companies and the unrelated owners
of filling stations and restrictions on the location of new filling stations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | impose restrictions on the planning and establishing filling stations and retail stores;
| | - | ----------------------------------------------------------------------------------------



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



| | · | prohibit fuel companies from selling fuel products to illegal filling stations;
| | - | -------------------------------------------------------------------------------



| | · | impose restrictions on the operation of filling stations and convenience stores on the Jewish Sabbath
(Saturday) and regarding a permit 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; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



61







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



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 service by a licensed fuel provider to any person
under the same circumstances and similar terms provided to another person.



Tax Pre-rulings



In connection with
the split of the gas exploration activity from Dor Alon to Alon Natural Gas Exploration Ltd. (the "Split") and the transfer
("Share Transfer") by Dorgas (a subsidiary) of approximately 4.4% of the outstanding Dor Alon shares held by Dorgas (the
“Treasury Shares”) to Dor Alon, Dor Alon received a pre-ruling from the Israeli Tax Authority that provides that the
Split and the Share Transfer will be tax free. However, the abovementioned pre-ruling is subject to several conditions. 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).



For additional information
regarding government regulations relating to our Filling Stations and Convenience Stores segment, please see “General Government
Regulation” below.



62







Fueling
and Commercial Sites Strategies



Our
strategies in our filling station and convenience stores segment is to continuously expand our filling station coverage in Israel
and expand our convenience stores, both as part of our filling stations and on a stand alone 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);
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | expanding the "SegaFredo" coffee shop chain and launching new services such as: ATM machines,
bill payment kiosks, cellular charging kiosks, and more. Moreover, "Alonit" launched stands under the "Alonit"
brand for selling fast food in its stores in cooperation with a certain food company;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | initialy operating a few of our convenience stores by franchises, and if such action will succeed,
to operate additional convenience stores by franchises;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | entering into city centers in which the number of filling stations of Dor Alon is relatively small;
| | - | ---------------------------------------------------------------------------------------------------



| | · | combining parallel activity of building and operating convenience stores in three segments (urban,
village, and roadside complexes) in order to provide Dor Alon the basis for a national chain in the Fueling and Commercial Sites
segment;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | sales goal of above NIS 1 billion annually at the convenience stores and coffee shops;
| | - | --------------------------------------------------------------------------------------



| | · | expanding the fleet customers base;
| | - | -----------------------------------



| | · | preserving and nurturing the Dor Alon brand as a leader in the fueling sector;
| | - | ------------------------------------------------------------------------------



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



| | · | broadening Dor Alon’s presence and activities of the "YOU" club in its filling
stations and commercial retail centers;
| | - | ----------------------------------------------------------------------------------------------------------------------



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



63







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



| | · | significantly expanding the quantities of benzin and diesel purchased from ORA while continuing
to purchase the remaining quantities from ORL;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



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



| | · | entering into the sector of marketing natural gas for industry, which is subject to establishment
of distribution systems by local franchises;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



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



| | · | 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 Fueling and Commercial Sites segment
as of December 31, 2012:



|Filling stations       |  | Owned (including leases exceeding 25 years) |  |  | 34  | 
|---------------------- |  | ------------------------------------------- |  |  | --- | 
|                       |  | Leased (leases of up to 25 years)           |  |  | 131 | 
|                       |  | Supply agreements                           |  |  | 37  | 
|                       |  |                                             |  |  | 202 | 
|                       |  |                                             |  |  |     | 
|                       |  | Internal stations (1)                       |  |  | 160 | 
|                       |  |                                             |  |  |     | 
|Convenience Stores (2) |  | Operated                                    |  |  | 205 | 
|                       |  | Franchised                                  |  |  | 4   | 
|                       |  |                                             |  |  | 209 | 
|                       |  |                                             |  |  |     | 
|                       |  | Sites In Development (3)                    |  |  | 54  | 
|                       |  |                                             |  |  |     | 
|Total                  |  |                                             |  |  | 625 | 



| | (1) | Typically, our stations are in kibbutzim and Moshavim which are
used by defined populations.
| | --- | --------------------------------------------------------------------------------------------



64







| | (2) | Convenience Stores: 137 Alonit stores are adjacent to filling
stations and 26 Alonit stores and 46 AM:PM are stand alone stores.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (3) | There is no certainty that permits will be granted for all sites.
| | --- | -----------------------------------------------------------------



Non-Food



General



As of December 31,
2012, we operated, through our subsidiaries and franchisees, a total of 135 non-food stores under the Naaman, Vardinon, Sheshet
and Dr. Baby chains, of which 21 stores were owned and operated by franchisees. In addition, as of December 31, 2012, we operated
84 non-food stores, mostly by franchisees, under the Kfar Hasha'ashuim chain. In December 2012, the Company resolved to sell during
2013 Kfar Hasha’ashuim and All for a Dollar chains, which sell toy and leisure products.



As part of our strategy
to increase our market share of “Non-Food” and “Near-Food” products and to offer a wider selection of these
products to consumers in our stores, in May 2005, we acquired 50% of the holdings of Bee Group Retail Ltd. ("Bee Group"),
and by October 2010 we had increased our holdings in Bee Group to 100%. Our non-food segment is concentrated into three activities:
(i) houseware and home textile, concentrated in our Naaman, Vardinon and Sheshet stores and wholesale sales, (ii) baby and young
children products and wholesale sales, concentrated in our Dr. Baby stores, and (iii) toys and leisure, concentrated in our Kfar
Hasha'ashuim and All for a Dollar stores. The chain operates under a number of different brand names: (i) "Naaman", which
sells houseware products; (ii) "Vardinon", which sells home textile products and accompanying accessories; (iii) "Sheshet",
which sells houseware and small electrical appliances; (iv) Dr. Baby, which sells baby and young children accessories; (v) "Kfar
Hasha’ashuim" (Toy Village), which sells toys; and (vi) “All for a Dollar". The stores of our "Naaman",
"Vardinon", "Sheshet", "Dr. Baby" chains are primarily owned and operated by us, while the stores
of our "Kfar Hasha'ashuim" and “All for a Dollar" chains are primarily owned and operated by franchisees.
In addition to these stores, we have established houseware departments within most of our large supermarket stores. In December
2012, the Company resolved to sell during 2013 Kfar Hasha’ashuim and All for a Dollar chains, which sell toy and leisure
products.



As of December 31,
2012, Bee Group owned approximately 77.03% 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, 2012, Naaman had its own chain of 40 houseware stores, 10
of which are operated by franchisees, and is a supplier to Mega Retail. Naaman also sells its products to wholesale customers,
including privately owned stores, retail chains, institutional customers, employee committees and sales promotion companies.



On December 30, 2012,
the merger between Naaman and Vardinon Textile Ltd. ("Vardinon") was completed. Pursuant to the merger, Vardinon merged
into Naaman and ceased to exist. The products are distributed by Vardinon's chain of retail stores (43 stores as of December 31,
2012) and by wholesale to customers that include other wholesalers, hotels, restaurants, retail chains, employee committees and
catalogues.



65







On December 31, 2012,
the board of directors of Naaman approved the merger agreement between Naaman and Sheshet Chain of Stores for Household Utensils
Ltd. ("Sheshet"), pursuant to which Sheshet is to merge into Naaman and cease to exist. As of the date of this Annual
Report, Naaman and Sheshet are waiting for the satisfaction of conditions precedent to the merger, including third party consents.
As of December 31, 2012, Sheshet had its own chain of 33 houseware stores, four of which are operated by franchisees, and points
of sale in approximately 200 supermarkets of Mega Retail.



In May 2011, the shares
of Dr. Baby Marketing Ltd., a fully owned subsidiary of "Dr. Baby", were sold to Mega Retail; consequently, Mega Retail
has 100% control and ownership on the operations of Dr. Baby. On December 22, 2011, Mr. Ronen Levi was acquired 10% of the issued
and outstanding shares of Kfar Hashashuim and an option to purchase additional 10% of its issued and outstanding shares. In December
2012, the Company resolved to sell during 2013 Kfar Hasha’ashuim and All for a Dollar chains, which sell toy and leisure
products.



Industry Overview



The Non-Food 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.



The non-food retail
sales of baby products and toys in Israel include mainly smaller privately owned stores. We do not have enough information to assess
our market share in these markets, as most of our competitors are privately owned companies.



Competition



In addition, due
to our sale of other “Near-Food” and “Non-Food” products in our supermarkets and in our stand alone non-food
stores, and our controlling interests of “Non-Food” chains, Vardinon and Naaman, we also face competition in the non-food
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., Fox Home and Kitan Textile Industries Ltd., houseware stores, electricity appliances
stores, specific stores in the toy industry, such as Toys “R” Us, Red Pirate and Idan 2000, and also due to the expansion
of the houseware and home textile departments in supermarkets. This competition affects the sales prices of our products and our
sales. Increased competition may adversely affect our sales and our profitability.



66







In addition, the
barriers of entry are low in some of the markets in which our non-food 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.



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



In the houseware
market, in which our "Naaman" and "Sheshet" 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 Fox Home and Kitab Textile. In addition, 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.



Non-Food Operations



As of December 31,
2012, we held and operated, through our subsidiaries, large chains with 219 stores, some of which are owned and operated by the
subsidiaries and some 76 of which are owned and operated by franchisees as of December 31, 2012. The stores are operated under
the brand names "Naaman", "Vardinon", "Sheshet", "Dr. Baby", “All for a Dollar",
"Kfar Hasha’ashuim". The stores of our "Naaman", "Vardinon", "Sheshet" and "Dr.
Baby" chains are primarily owned and operated by us, while the stores of our "Kfar Hasha'ashuim" and "All for
a Dollar" chains are primarily owned and operated by franchisees. In December 2012, the Company resolved to sell during 2013
Kfar Hasha’ashuim and All for a Dollar chains, which sell toy and leisure products.



The relationship with
the franchisees is generally governed by franchise agreements between the relevant subsidiary ("Franchiser") and the
franchisee. The majority of the franchise agreements provide for a term of 10 years with two renewal options, each for a period
of five additional years. Under most of the agreements, the franchisee may terminate with prior written notice.



67







The franchisee generally
commits to establishing its store(s) in designated locations and purchasing products for the stores only from the Franchiser or
from third party suppliers designated by the Franchiser. The Franchiser typically has no similar obligation to sell its products
only through its franchisees.



As of December, 31,
2012, our non-food segment had 76 stores owned and operated by franchisees, both on their own and with other third parties - 10
"Naaman" stores, 62 "Kfar Hasha’ashuim" stores, and four "Sheshet" stores.



The following table
provides certain information regarding our non-food stores as of December 31, 2012:



|Non-Food Properties |  |                    |  | Number |     |  | Square
 meters | 
|------------------- |  | ------------------ |  | ------ | --- |  | -------------- | 
|Stores              |  | Leased             |  |        | 113 |  |                | 
|                    |  | Franchise operated |  |        | 30  |  |                | 
|                    |  | Franchises         |  |        | 76  |  |                | 
|Offices             |  | Leased             |  |        | 1   |  |                | 
|Warehouses          |  | Leased from BSRE   |  |        | 1   |  |                | 
|                    |  | Leased             |  |        | 2   |  |                | 
|Total               |  |                    |  |        | 223 |  |                | 



Purchasing and
Distribution



Naaman, Sheshet,
"Kfar Hasha’ashuim" and "All for a Dollar" acquire the products and accompanying accessories which they
market 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.



Our distribution
and logistics center in Beer Tuvia, which is 100% held by BSRE, is used for storage and distribution of Non-Food and Near-Food
products for our Non-Food chains and our supermarket stores. The distribution center is operated on an approximately 24,000 square
meter site and is currently leased to Bee Group by BSRE.



Marketing



Our main marketing
channels for our Non-Food products are (i) the non-food stores operating under various brand name chains, (ii) non-food 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.



68







For additional information
regarding our marketing strategies in the Non-Food segment, please see “Supermarkets - Marketing” above.



Government Regulation



Non-Food



Our non-food 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 plasticware used for food and
drink.



Business Permits



Some of our non-food
stores do not have permits according to the requirements of the Business Permits Law, 1968. A lack of such permits by any
store would be considered a breach of the tenancy agreement for such store, which would allow the landlord to annul the lease agreement.
As of March 29, 2013, none of the landlords has made use of this right.



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



69







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",
"Vardinon" and "Sheshet" 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 our financial reports in either the third or the fourth quarter. In our "Kfar
Hasha'ashuim" chain, increased sales are generally attributable to Purim, which occurs in March, and to the "Back-to-School"
season in August. 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 our semiannual results.



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.



Non-Food Strategies



Please see the sections
entitled "Business Overview- Our Strategies" and “Supermarkets – Supermarkets Strategies” above for
a description of our strategies in our Non-Food segment.



Real Estate



Most of our real
estate is currently used in connection with the retail operation of our stores.



Recent Activities
in Our Real Estate Sector



Wholesale Market
Companies



On May 31, 2012,
BSRE, Gindi Investments 1 Ltd. and an additional entity controlled by Moshe and Yigal Gindi (together with Gindi Investments 1
Ltd., "Gindi"), completed the purchase of long term lease rights to a property in the wholesale market site in Tel Aviv
(the "Project") for the purpose of building and marketing on the property an apartment buildings 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, 2012, BSRE owned 49.5% of the company that owns the residential building rights
and 50% of the company that owns the commercial building rights. Within the framework of the approved plan, the Project will include
10 buildings, each consisting of 14 floors. The Project will also include 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 Project will contain approximately 37,000 square meters leased space for commercial use. As of December 18, 2012, the
building permits for 652 of the residential units has been granted, while the permits for the additional 70 residential units are
still being processed. For more information on the transaction with the Wholesale Market Company, see "Item 7. Major Shareholders
and Related Party Transactions – B. Related Party Transactions – Agreement with the Wholesale Market Company."



70







Investment
in Comverse Building (Ra'anana)



On May 13, 2012,
BSRE signed a memorandum of understanding with a third party (the "Lessee"), pursuant to which BSRE agreed to erect a
23,000 square-meter office building on real property it owns in Ra'anana and to construct a 2,300 square-meter basement (the "structure"),
both of which will be leased to the Lessee for a period of 10 years for annual rental fees of approximately NIS 20 million linked
to the CPI, with a renewal option for an additional 5 years, during which the rental fees would increase by 7.5% (the "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 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. As of the date of filing of this Annual Report, BSRE has obtained all of the necessary
building permits to erect the building and the construction work has begun.



On January 21, 2013,
BSRE and several subsidiaries of Harel Insurance Investments & Financial Services Ltd. (collectively, "Harel Investments")
entered into an agreement pursuant to which Harel Investments acquired half of the BSRE's rights in the Ra'anana property and the
Project in consideration for approximately NIS 51 million (including Harel Investments' portion of the Project's establishment
expenses). Pursuant to the agreement, BSRE will be entitled to additional consideration for the additional 2,500 square-meter building
rights that have yet to be used by BSRE within the Project's framework. Pursuant to the agreement, BSRE will have sole ownership
of any future additional building rights granted on the property, and Harel Investment will have the option to purchase half of
such future rights at a consideration to be determined according to the value of the rights.



Option of Third
Party to Purchase Building in Petach Tikva



In November 2012,
BSRE granted to a third party an option to purchase property in Petach Tikva, which contains an empty office building designated
for renovation, subject to certain conditions, in consideration for approximately NIS 56 million. On March 6, 2013, the option
was exercised and a sale agreement was signed pursuant to which 20% of the consideration was to be paid on March 14, 2013 with
the balance to be paid in two equal installments after 120 days and 150 days. The closing of the sale is subject to various conditions
set forth in the sale agreement, which have not yet been satisfied.



Property in
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 is controlled by our indirect controlling shareholder, Alon Israel Oil Co. Ltd. ("Alon").



71







BSRE Point Wells, LP
paid POW a sum of $19.5 million in consideration for the rights in and to the property (apart from the buildings and the existing
equipment/property on the property (including fuel storage tanks, technical systems, pipes and various installations) which remain
under the ownership of POW). BSRE Point Wells, LP bore the expenses relating to the transaction, including the transfer tax (estimated
at approximately $350,000) and ancillary costs for completion of the transfer of the rights in its name.



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.



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. Negotiations are underway with the plan's opponents in order to reach a settlement.
BSRE can not estimate accurately the time required to complete the planning process and receive approval of the authorities to
exercise the building rights pursuant to the detailed plan that established the land use designation as an urban center or alternatively,
if the detailed plan is not approved, as an urban village pursuant to the new regulations.



72







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 2000 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 $4-5 million.  If the detailed plan is not approved and/or if it does
not contain at least 2000 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 $438,750, 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.



Sale by BSRE of
Half its Rights in Kiryat Hasharon Mall



On July 4, 2011,
BSRE and Harel Insurance Company Ltd. ("Harel") signed an agreement whereby Harel acquired half of the BSRE's rights
in a mall located in Kiryat Hasharon-Netanya in consideration for approximately NIS 50.6 million. In 2011, BSRE recorded a gain
from changes in fair value of the said investment property in the amount of NIS 20.5 million to its income statement.



Other Recent
Activities in the Real Estate Sector



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 for a period of 23 years. 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 return 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. BSRE estimates that construction will be completed during 2014. The total cost for establishing the parking lot, including
related costs, is estimated at NIS 144 million ($38.5 million), and the share of BSRE is approximately NIS 72 million ($19.3 million).
On December 12, 2011, BSRE and its partners signed an agreement with the bank for the funding of approximately 80% of the parking
lot construction's costs, and the credit lines provided for financing the project were in the aggregate amount of NIS 60 million
(approximately US $16 million). 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.



73







During 2012, BSRE
invested a total amount of NIS 231 million, including investments in rental offices and land in areas used for commercial and industrial
development. From this amount, BSRE invested approximately NIS 223 million in properties leased to third parties. In addition,
BSRE invested a total of NIS 261 million in real estate inventories for the sale of residential properties.



Description of Real Estate
Properties



Most of our real
estate is owned by our 78.22% subsidiary, BSRE, and includes commercial areas, logistics centers and offices which are mainly designated
for the use of our supermarket segment and our non-food segment, a 50% holding in Hadar Mall and Kiryat Hasharon, small commercial
sites, office buildings, logistics sites, our holdings in the Wholesale Market Company and additional undeveloped properties for
use as commercial areas, office buildings, and logistics centers.



As of December 31,
2012, the total square meters of developed property that we owned was approximately 268,000 square meters, the total square meters
of property in development that we owned was approximately 80,600 and the total square meters of unutilized building rights that
we owned was approximately 155,000 square meters. In addition, BSRE has the building rights for 2,700 to 3,000 apartments 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 Administration), as of December 31, 2012:



|                                                                                                   | Number ofproperties foruse or rent | Area in squaremeter for leasing(property space) | Occupancy rate
|-------------------------------------------------------------------------------------------------- | ---------------------------------- | ----------------------------------------------- | --------------
|Commercial areas, including supermarket stores                                                     | 104                                | 185,400                                         | 99.0%         
|                                                                                                   |                                    |                                                 |               
|Warehouses and Logistics Centers                                                                   | 6                                  | 65,700                                          | 100%          
|                                                                                                   |                                    |                                                 |               
|Offices(1)                                                                                         | 4                                  | 16,900                                          | 81.1          
|                                                                                                   |                                    |                                                 |               
|Total Developed property(2)                                                                        | 114                                | 268,000                                         | N/A           
|                                                                                                   |                                    |                                                 |               
|Total property in development-commercial areas, logistics centers and the wholesale market project | 5                                  | 80,600                                          |               
|                                                                                                   |                                    |                                                 |               
|Total unutilized building rights                                                                   |                                    | 155,000                                         |               



(1)
Not including an area of 14,000 square meters, which is subject to a sale agreement signed in March
2013.

(2) Not including an area of
30,000 square meters of parking lots adjacent to commercial and office areas.



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



74







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 supermarkets properties are leased 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 Various Subsidiaries."
Below are additional commercial areas not designated for supermarkets that BSRE owns:



| | · | 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 Administration ends in 2021 with
an option to extend the lease for an additional 49 years, subject to a fee. The two-floor mall includes 18,000 square meters of
commercial space, including 780 parking places. The space is leased to third parties, including 4,700 square meters to Mega Retail.
As of March 29, 2013, the occupancy rate of the mall is 100%. The property is managed by a joint management company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



BSRE and the third party have
applied to the zoning committee for a permit for an additional commercial floor above the existing floors and additional upper
level parking (the "Expansion Project"). BSRE and the third party received a permit to build above the existing floors
an additional commercial floor of approximately 12,000 square meters, additional service areas, and three upper level parking areas
of approximately 22,000 square meters. BSRE is in the process of constructing an additional commercial floor and parking areas,
and BSRE estimates that the construction will be completed by the fourth quarter of 2013. The estimated budget for the construction
is approximately NIS 175 million (approximately $ 45 million), including renovation of the current building.



On June 5, 2012, BSRE entered
into a loan agreement with a group of institutional companies to finance the building of the addition to the Hadar Mall, which
is currently under construction. The lenders will extend 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 charge on its rights in the Hadar Mall.



75







| | · | Property designated for a shopping center in Netanya- a 19 dunam property with rights for
42,000 square meters of commercial spaces and offices. The cost of this property was approximately NIS 27 million. BSRE constructed
a shopping mall of approximately 13,500 square meters on the first and second floors with an underground parking garage of approximately
12,000 square meters, as a first stage of development of the property. The property includes approximately 28,000 square meters
of unutilized building rights which BSRE plans to use for a senior citizen residency, subject to change in zoning of the property.
The cost of this first stage of development was approximately NIS 100 million. In July 2011, Harel Insurance Company Ltd., Dikla
Insurance Company Ltd. and I.M.R - Ezer, Insurance and Mortage Company Ltd. (together "Harel") purchased 50% of BSRE's
rights in the property in consideration for approximately NIS 50.6 million (approximately US$ 13 million). In September 2012, the
commercial center was opened to the public.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Offices



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



| | · | Comverse Building, Ra'anana –Pursuant to a memorandum of understanding signed with
a third party, BSRE has undertaken to erect a 23,000 square-meter office building on real property it owns in Ra'anana and to construct
a 2,300 square-meter basement, both of which will be leased to the third party for a period of 10 years. For more information see
" – Investment in Comverse Building (Ra'anana) " above.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Afek Industrial Park, Rosh Ha'ayin - BSRE owns an office building in Afek Industrial Park
which is built on a 13,770 square meter plot and includes two floors of offices with a total area of 12,700 square meters, which
are leased to the Company and serve as the Company's and its subsidiaries' executive offices. The ground floor of the buildings
also includes a supermarket, a taxi cab station and a small filling station operated by Dor Alon. The property also includes parking
areas for the offices and the supermarket.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Warehouses and Logistics Areas



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



| | · | Kibbutz Einat - BSRE holds 50% of Einat Yield Generating Real Estate Cooperative Ltd. ("Einat
Ltd."), which has received from Kibbutz Einat its rights to lease a property of 26 dunam of industrial use (all of which is
leased to different lessees). The cost of BSRE's share of the rights in this property was approximately NIS 24.4 million. The property
includes four warehouses containing a total of 14,000 square meters which are leased to different lessees with options to renew.
Following approval of the Israel Land Administration (the "ILA"), Kibbutz Einat transferred its rights to lease to Einat
Ltd. in 2013, and Einat Ltd. holds rights to the property pursuant to a long term lease agreement with the ILA.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



76







| | · | Be'er Tuvia- BSRE owns, through its wholly owned subsidiary Logistic Center Bee Real Estate
Ltd. ("Logistic Center"), a 74 dunam property of which 63 dunam are designated for industrial (and storage) areas. BSRE
estimates that it has rights to build 72,000 square meters of commercial areas and office buildings. Logistic Center entered into
an agreement with the Bee Group pursuant to which the parties completed building a distribution center used for storage and distribution
of Non-Food and Near-Food products for our Non Food chains and our supermarket stores. The lease is for a period of 12 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 9% of the total investment made by Logistic Center in acquiring and building
this distribution center, linked to the CPI. The distribution center is operated on a 24,000 square meter site and is currently
leased to Bee Group. Including the initial expense of NIS 19.0 million to acquire the property, BSRE invested a total of approximately
NIS 112 million in building the distribution center. This entire logistics and distribution center is currently being occupied
by the Bee Group.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Kibbutz Eyal- BSRE and Eyal Hasharon, an agriculture cooperative society ("Eyal Hasharon"),
signed an agreement for the development of a 57 dunam property for storage and logistics usage. Pursuant to the agreement, BSRE
and Eyal Hasharon jointly hold in equal parts a new company, Eyal Baribua Ltd. ("Eyal Baribua"), to which Kibbutz Eyal
transfered 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 29, 2013 represented 50% of the issued and outstanding shares of Eyal Baribua. The Israel Land Administration
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. Construction is expected to be completed by the beginning of 2014. In addition,
a construction work permit was received and the contractors' bidding process is in its final stages.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 the joint new company in acquiring and building the logistic center, according to the calculation mechanism and orders
provided for in the lease agreement.



77







On July 12, 2012, Eyal Baribua
entered into a financing agreement with a bank to provide a credit line of NIS 90 million to Eyal Baribua to establish the logistics
center. The credit line was extended for the construction period, and after the completion of the construction and Mega Retail's
entry into the logistic center, the credit line will be converted into a loan where NIS 63 million is to be repaid in quarterly
payments over 14 years and the balance at the end of the loan term. The credit line and the loan will bear variable annual interest
rate linked to prime. As collateral for the loan repayment, the rights to the lease with the ILA will be charged, and during the
construction period Eyal Baribua shareholders granted a guarantee.



As of the date of this report,
BSRE estimates that the cost of this project will be approximately NIS 120 million.



| | · | Rishon Letzion - Mega Retail's logistics center is located in the western industrial area
of Rishon Letzion. Part of the property is an open area used by Mega Retail for container storage and as a loading area and includes
unutilized building rights of approximately 15,000 square meters that may be used for industrial, commercial and storage purposes.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 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 Company Ltd. The final agreements were signed on June 3, 2010 and received
the approval of the Minister of the Interior on July 11, 2010. For more information, see "Item
7. Major Shareholders and Related Party Transactions – B. Related Party Transactions – Agreement with Wholesale Market
Company."
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Properties with development potential



As of December 31,
2012, BSRE had rights to build a total of 155,000 square meters (143,000 square meters mainly for commercial purposes and 12,000
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. For additional information, see "-
Recent Activites in Our Real Estate Segment - Property in Point Wells, Washington".



78







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, evidenced by a decline in the number of real estate transactions, a reduction in the
availability of credit sources, an increase in financing costs and/or stricter requirements by banks for providing such financing,
could adversely affect our business. This occurred in the fourth quarter of 2008 and continued until 2010. The debt crises generated
in Europe may have a future adverse affect on the economic conditions in Israel. In addition, the public protest which began in
July 2011 with regard to high housing costs in Israel led to a slowdown in the Israeli yield-generating real estate market which
was evidenced by a decline in the demand for real estate during the second half of 2011 due to the sharp increase in real estate
prices and the public's anticipation that such prices will decrease due to the public protest. 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.



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 the Company 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.



79







In 2012, The Bank of
Israel imposed additional regulatory requirements on the ability to obtain mortgages including a limit on the amount of loans granted
at variable rates of interest and a ceiling on the ratio of debt to equity. These initiatives are intended to affect, and do effect
demand for real estate designated for residence.



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, the
economic and financial market crisis 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.



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.



80







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.



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 "General Government Regulation".



BSRE's Strategies



Our strategy in 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:



| | · | developing and improving existing real estate;
| | - | ----------------------------------------------



| | · | maximizing the leasing of existing properties to commercial users;
| | - | ------------------------------------------------------------------



| | · | increasing and developing unused building rights in our existing properties; and
| | - | --------------------------------------------------------------------------------



| | · | acquiring additional commercial real estate and yield-generating assets in Israel, while diversifying
our real estate property base.
| | - | ------------------------------------------------------------------------------------------------------------------------------------



81







Additional Business Information Relating
to Alon Blue Square



Related Businesses



Diners Israel



In connection with
our joint Loyalty Plan with Dor Alon, on November 29, 2005, we and Dor Alon purchased 49% (36.75% Alon Blue Square and 12.25% Dor
Alon) of the shares of capital stock of Diners Club Israel Ltd. (“Diners Israel”) from Credit Cards for Israel Ltd.
(“CAL”) for a total consideration of NIS 21.3 million (of which NIS 15.6 million was paid by Alon Blue Square and NIS
5.7 million was paid by Dor Alon). The remaining 51% is owned by CAL, a credit card company in Israel which itself is a subsidiary
of Israel Discount Bank Ltd. On May 25, 2011, the agreement was amended.



Under the original
agreement with CAL, Alon Blue Square and Dor Alon were entitled to share with CAL the net income of Diners Israel in connection
with the activities of the credit cards bearing the "You" name based on our respective ownership interests in Diners
Israel, and a share of the net income of Diners Israel in connection with the activities of the credit cards not bearing the "You"
name based on certain thresholds set in the original agreement. In addition, Diners signed an agreement with CAL pursuant to which
Loyalty Plan members are to be issued Mastercard "You" credit cards in addition to Diners "You" credit cards.
On May 25, 2011, our management 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, and the amendment to the agreement came into effect. Pursuant to the amendment, Alon Blue Square
and Dor Alon has the right to 49% of the profits 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 (with the exception of certain activities
the profits of which is allocated to the parties per their respective holdings from July 1st, 2011). Alon Blue Square
and Dor Alon repaid the non-recourse loan granted to them by CAL for the purchase of the shares, in the amount of NIS 36 million
(the amount includes accrued interest). Additionally, the amendment sets the terms as to the business relationship between the
parties and extends the agreement until December 31, 2015, following which the agreement will be extended for additional three-year
terms based on the terms and conditions set forth in the amendment to the agreement. The amendment also includes a calculation
method for the purchase of the 49% of Diners owned by us and by Dor Alon in the event the agreement between Diners and the Loyalty
club will not be extended. The Company and Dor Alon handled their financial statements by an agreement to buy Diners as option
for purchasing stock options and recorded in the period income before taxes from revaluation of approximately NIS 102 million ($27.5
million). As of December 31, 2012, the total number of credit cards issued by Diners Iserael was approximately 248,000. See “Item
7. Major Shareholders and Related Party Transactions - B. Related Party Transactions” for more information on the agreement
with CAL and Diners Israel.



82







Alon Cellular



In March 2011, Alon
Cellular received a MVNO license from the Israeli Ministry of Communications, which enabled Alon Cellular to add cellular services
to the services that the Company offers to its customers. In December 2011, Alon Cellular entered into an agreement with Partner
Communications Ltd. for launching cellular services in an MVNO model. The Company launched its cellular activity in 2012. For additional
information, see “Item 4. Information on the Company - A. History and Development of Alon Blue Square”.



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 supply. 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.



A Bill for Social
Economic Modification (Law Amendments) Strengthening of Competition in Favor of the Consumer



The proposed law
is intended to cancel the exemption from restrictive arrangement provided to mutual exclusive arrangements, and grants the authority
to the the Israeli Antitrust Authority in connection with sales of assets by monopoly and centralized groups and authority to perform
examinations regarding the level of competition in various fields in the Israeli economy, including the examination of failures
in competition and obstructions to competition. The law, if approved, will become effective during the years 2013-2014 and may
have an effect on the management of the Company.



Consumer
Protection Laws



We are obligated to
label prices on our products on the basis of two main laws: The Consumer Protection Law, 1981, and the Commodities and
Services (Control) Law, 1957. Contravention of these laws constitutes a criminal offense. In 2009, new regulations under the
Consumer Protection Lawbecame 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 on us 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.



83







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
Lawwith 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
theConsumer 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),
5772-2012attempts to establish a mandatory validity period of a gift card for at least
five years, and that the amount stated in the gift card will be uniform to all businesses subscribing to the gift card. In addition,this bill attempts to establish, via the economic committee, the authority to establish different provisions pertaining to the
gift cards, including conditions which limit the ability to redeem the gift cards. The law, if approved, will have a significant
effect on the Company's revenues.



84







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.



Proposed Business
License Regulation



By virtue of The
Businesses License Law, 1968,and the regulations promulgated thereunder, and as a condition of the receipt of permits, we
are required to comply with various safety, security, health, environment and other requirements. Under the proposed new Businesses
License Regulation (Proper Sanitation Conditions to Grocery), some existing requirements will be tightened and new requirements
will be imposed on the operation of our stores. The new regulation would contain new or more stringent requirements relating to
the following: requirements as to the building of our stores, designation of separated space to some specialty departments, drainage
system requirements, sanitation, ventilation, lighting, temperature, water, sewage, waste handling, food storage, signage, food
transportation and maintenance requirements, cooling device requirements and display and quality requirements. This proposed new
Business License Regulation, would require us to make additional investments in our stores if it were to become effective.



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. The regulations require public 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 proposed 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.



85







Reduction and
Recycling of Packaging Waste



On January 18, 2011,
the Knesset passed the Law for Regulation of Packaging Treatment in connection with the manufacturing process and treatment of
waste resulting from packaging. The purpose of the law is to encourage the decrease in the amount of waste resulting from the packaging
process and the encouragement of reusing packaging. In addition, the new law imposes additional obligations on manufacturers (including
sellers of private label products) or importers (as defined in the bill), including in connection with the collection of the packaging
waste of their products and in connection with the recycling of a relative portion of packaging waste based on the market share
of such packaging waste. We estimate that this law will have a material adverse effect on our operations.



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.



| | C. | Organizational Structure
| | -- | ------------------------



We operate our Fueling
and Commercial Sites segment through our 78.43% 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 202 filling stations and 209 convenience stores in different formats in Israel.



We operate 201 of our
supermarkets through our wholly-owned subsidiary, Mega Retail, and eleven supermarkets are owned and operated by our 51% subsidiary,
Eden Teva. Mega Retail leases from BSRE and third parties the real estate underlying the stores that it operates.



We operate all of our
"Non-Food" outlets through our wholly owned subsidiary Bee Group, which in turn held, as of March 29, 2013, approximately
77.03% of the outstanding shares of Naaman Group (N.V.) Ltd. The shares of Naaman are traded on the Tel Aviv Stock Exchange.



We operate our Real
Estate segment through our TASE traded 78.22% subsidiary, BSRE, which owns, leases and develops yield generating commercial properties
and projects.



86







Below is a chart indicating
our holdings in our material subsidiaries as of March 29, 2013:







* Listed on the Tel Aviv
Stock Exchange.



**We have also resolved
to merge Bee Group with Mega Retail in order to reduce costs and improve efficiency.



Mega Retail, Dor Alon,
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.
Although we appoint all or most of the board of directors of each of Mega Retail, Dor Alon, 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
all of the outstanding shares of Mega Retail as of March 29, 2013. Mega Retail, in turn is the owner of our interests in a number
of its other subsidiaries and affiliates.



87







Alon Blue Square owned
78.22% of the outstanding shares of BSRE as of March 29, 2013. 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.



Alon Blue Square owned
78.43% of the outstanding shares of Dor Alon as of March 29, 2013.



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 29, 2013. The companies marked with an asterisk (*) are not consolidated in our
financial statements.



|Company(1)                            |  | Operations                                                           |  | % Ownership Held by Alon Blue Square
|------------------------------------- |  | -------------------------------------------------------------------- |  | ------------------------------------
|                                      |  |                                                                      |  |                                     
|Mega Retail Ltd.(2)                   |  | Supermarkets and baby and young children products                    |  | 100                                 
|                                      |  |                                                                      |  |                                     
|Bee Group Retail Ltd.(3)              |  | Retail and wholesale of houseware and home textile, toys and leisure |  | 100                                 
|Dor Alon Energy in Israel (1988) Ltd. |  | Filling stations and convenience stores                              |  | 78.43                               
|Blue Square Real Estate Ltd.(4)       |  | Real estate                                                          |  | 78.22                               
|                                      |  |                                                                      |  |                                     
|Diners Club Israel Ltd.* (5)          |  | Credit cards                                                         |  | 49                                  



| | (1) | All companies are incorporated under Israeli law.
| | --- | -------------------------------------------------



| | (2) | As of March 29, 2013, Mega Retail Ltd., held approximately 51% of the outstanding shares of Eden
Briut Teva Market Ltd. and 100% of Dr. Baby.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | In October 2010, we increased our holding in Bee Group Retail Ltd.
to 100%. As of March 29, 2013, Bee Group Retail Ltd., held approximately 77.03% of the outstanding shares of Naaman Group (N.V.)
Ltd., which is traded on the Tel Aviv Stock Exchange and 90% of Kfar Hasha'ashuim.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | As of March 29, 2013, 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.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



88







| | (5) | The remaining shares of Diners Club Israel Ltd are held by Credit Cards for Israel Ltd. (51%),
a subsidiary of Israel Discount Bank Ltd. See “Item 7. Major Shareholders and Related Party Transactions - B. Related Party
Transactions” for information with respect to our rights as a shareholder of Diners Israel.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | D. | Property, Plants and Equipment.
| | -- | -------------------------------



For details regarding
the properties that we and our subsidiaries own and/or lease, see “Item 4. Information of the Company – B. Business
Overview – Supermarkets – Our Operations,” “Item 4. Information of the Company – B. Business Overview
– Fueling and Commercial Sites – Our Strategies,” “Item 4. Information of the Company – B. Business
Overview – Non-Food – Non-Food Operations,” and “Item 4. Information of the Company – B. Business
Overview – Real Estate.”



In 2012, Mega Retail
closed nine supermarkets with a total area of 20,490 square meters and also opened approximately 10 supermarkets with a total area
of 13,400 square meters of store space in localities whose populations are currently under-served by supermarkets or in localities
in which we do not have sufficient market presence. Through March 2013, we have not opened any additional supermarket stores.



During 2012, we spent
more than NIS 89 million (or $23.8 million at the exchange rate as of December 31, 2012) on the acquisition and development
of new supermarkets and the remodeling of our existing supermarkets.



Generally, franchisees
of our non-food chains lease their own store space directly. However, there are a few franchisees that either sublease their stores
from the relevant subsidiary, or lease their stores jointly with such subsidiary. All our non-food stores that are operated directly
by our subsidiaries and not by franchisees, lease their own store space.



In 2013 and 2014, we
plan to open approximately 9 to 13 additional filling stations. For additional information, see “Item 4. Information of the
Company – B. Business Overview – Fueling and Commercial Sites."



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 - Our Real Estate” and “Item 7.
Major Shareholders – B. Related Party Transactions.”



| | ITEM 4A. | UNRESOLVED STAFF COMMENTS
| | -------- | -------------------------



Not
applicable.



89







| | ITEM 5. | OPERATING
AND FINANCIAL REVIEW AND PROSPECTS
| | ------- | --------------------------------------------



The following discussion
and analysis should be read together with “Item 3. Key Information - A. 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



Most of our activities
are located and operated in Israel. We operate in four reporting segments. As of December 31, 2012, we were the largest retail
company in Israel based on the number of stores. In our Supermarkets segment, we are the second largest food retailer in the State
of Israel. In our Fueling and Commercial Sites segment, 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 major gas companies in Israel. In our Non-Food segment, we sell
“Non-Food” items both in our supermarkets and in stand alone retail outlets. In our Real Estate segment, we own, lease
and develop yield-generating commercial properties and projects. In addition to our reporting segments, we have activities in issuance
and clearance of credit cards, and during 2012, we launched our MVNO cellular network in Israel.



We are exposed to
trends and developments in the Israeli economy in general, and in the food and non-food products, fuel and real estate industries
in Israel in particular. An economic slowdown could cause a decline in demand for our products, impacting negatively on our profitability
and exposing us to customer credit risks. According to the Central Bureau of Statistics and The Bank of Israel, from the second
quarter of 2012, the Israeli economy displayed signs of a slowdown, among others, due to the global financial crisis, especially
in Europe. In 2012, the economic growth in Israel was approximately 3.1%, compared to 4.6% in 2011, and the unemployment rate at
the end of 2012 was approximately 6.9%, compared to 6.7% at the beginning of 2012. We cannot predict the duration of the uncertainty
in the global economy in general, and particularly in regards to Israel.



Following the public
protests in Israel during the second half of 2011 with regard to high housing and living costs, the Israeli Government formed the
Trachtenberg Committee to examine the cost of living in Israel, including the tax burden and other regulations changes.. In addition,
an inter-ministerial committee headed by Mr. Kedmi, CEO Ministry of Industry, Trade and Labor, was appointed to examine the competition
and prices in the food and consumer products. In November 2012, the government published a memorandum of law to promote competition
in the food industry, aimed at implementing the recommendations of the Kedmi Committee. These developments may have a material
impact on the Israeli economy in general as well as the industries in which we compete. See "Item 3. Key Information –
D. Risk Factors Risks Related To Our Supermarkets – The enactment of new laws and regulations, including the enactment of
governmental committees such as the "Kedmi Committee" may materially adversely affect our sales and profits, including
limiting our ability to purchase additional stores or obligate us to sell some of our stores", and "Item 3. Key Information
– D. Risks Related To Fueling and Commercial Sites - The recommendations of the Trachtenburg Committee may have a material
adverse effect on Dor Alon's results of operations" for more information.



90







We are working to
improve our operating efficiency by, among other things, evaluating the strategic positioning of some of our stores, capitalizing
on potential synergies, and improving our distribution capabilities and distribution efficiency within the food and non-food segments.
We are also working to expand the products and services that we offer to our customers.



Supermarket Segment



In 2012, a slowdown
in the growth of the Israeli economy affected consumer confidence. In addition, supermarket chains of our competitors continued
to expand. Smaller supermarket chains continued to aggressively increase their market share and expanded their presence in selected
areas in Israel, often geographically beyond their original locations, increasing competition in an already difficult market. The
low barriers of entry, including the relatively low cost of establishing a new smaller supermarket, has contributed to the increase
in number and expansion of smaller supermarket chains in recent years. In addition, in recent years smaller supermarket chains
have transitioned from competing only in the local neighborhood markets to joining with other smaller supermarket chains and competing
on a national scale with a joint private label which competes with the private labels of the large supermarket chains. Both the
economic slowdown and the increased competition affected our sales and profitability in the supermarket segment in 2012.



In order to mitigate
the influence of these factors, we took efficiency measures during 2012 to reduce our operating expenses, including, among others,
reducing the headcount of our headquarters in all levels of management and, in the fourth quarter of 2012, selling unprofitable
supermarkets.



As part of our strategy
to improve our competitive position, during 2012, we continued working to increase our sales of our "Mega" line of private
label goods that are sold in our Mega chains. Private label products provide customers with an attractive alternative selection
of products that are comparable in quality to name brand products. We believe that our private label products enhance customer
loyalty, differentiate our stores from those of our competitors and provide a competitive product to those offered by our suppliers.
In addition, usually average gross profit from private label products is higher than the average gross profit from other products.



We believe that the
volume of annual sales in the organic food market in Israel has been growing consistently and will continue to increase during
the next few years. In order to benefit from this growth, in October 2007, we acquired approximately 51% of the holdings of Eden
Teva, which operates organic/health food supermarkets, to take advantage of the growing local demand for organic, natural and health
food. By the end of 2012, we operated 20Eden Teva stores, nineof them in Mega stores, with Alon Blue Square the clear leader of Israel's emerging organic/health food sector.



91







In our large supermarkets,
we are expanding our sale of baby products and homeware products, including home textile products, in order to expand the range
of products that we offer in our supermarkets.



We currently operate
our supermarket stores under four brands: Mega Bool, Mega In Town, Zol BeShefa and Eden Teva. In planning the mix of our stores,
we have taken a regional view, with the goal of bringing our store brands within the shopping range of every Israeli consumer.



We operate the Mega@Internet
website which allows customers to place orders via the Internet 24 hours a day and to have the products in our stores delivered
to our customers’ homes from a nearby store within a few hours. The service was provided in most of Israel as of December
31, 2012.



Fueling and Commercial
Sites 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. Following our acquisition of Dor Alon in 2010, we combined our and Dor Alon's retail operations into one group, creating
the largest retail group in Israel. In recent years, the Fueling and Commercial Sites segment has been characterized by fierce
competition in direct marketing towards end consumers. This competition is reflected in price wars, improvement in credit terms,
and improvement in the quality of services offered at fueling sites.



In an effort to improve
our competitive position in this segment, we anticipate opening and operating approximately nine to 13 additional filling stations
during 2013 and 2014 as well as investing additional capital to renovate our existing filling 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. We also intend to strengthen our presence in city centers with the goal of closing the gap with our competitors
in the same geographic location. In order to expand the diversity of its business activity, Dor Alon has entered into new lines
of business in the energy sector by establishing and operating power plants, and marketing natural gas to industrial customers
and power plants in Israel.



The price of gasoline
95 octane is subject to government-imposed price controls, and in September 2011, the Fuel and Gas Administration reduced the fuels
market margin, which is subject to government-imposed price controls, by approximately NIS 0.11 to 0.18 for liter. In addition,
on May 31, 2012, the Ministry of Energy and Water and the Pricing Committee updated the marketing margin of 95 octane gasoline,
increasing the marketing margin for self service by NIS 0.047 per liter (excluding VAT) and reducing the full service charge by
NIS 0.038 per liter (excluding VAT). On November 26, 2012 the Supreme Court sitting as the High Court of Justice rejected the petition
of Dor Alon and the other gas companies on the issue of reducing the marketing margin. For additional information on this matter,
see "Risks Related To Fueling and Commercial Sites – Dor Alon is exposed to risks associated with changes in regulatory
arrangements which may influence the financial results of Dor Alon".



92







Non-Food Segment



We have also expanded
our presence in “Non-Food” stand alone retail outlets in an effort to establish Alon Blue Square as a major player
in the non-food retail market. In October 2010, we increased our holdings in Bee Group Retail Ltd. ("Bee Group"), a company
that is a wholesaler and that operates (mostly through franchisees) retail outlets with activities in the houseware and home textile,
toys, leisure and baby and young children sectors, to 100%. In 2007 we acquired, through Bee Group approximately 85.79% of the
holdings of Vardinon Textile Ltd. ("Vardinon"), a company which imports, designs and distributes home textile products
and accompanying accessories. In 2007 we acquired, and in 2009 we increased our holdings in Naaman Group (N.V.) Ltd. ("Naaman"),
one of Israel’s major branded houseware retailers and wholesalers, which imports and markets various houseware products,
such as kitchen utensils, cutlery and dinner sets. As of March 29, 2013, through Bee Group, we held approximately 77.03% of the
outstanding shares of Naaman, which as of such date held 100% of the share capital of Vardinon.



In April 2012, Bee
Group reached an agreement with a franchisee (which operated together with others 25 stores in the non-food segment) which had
financial difficulties. Bee Group took over 24 of the Sheshet and Kfar Hashashuim stores and the inventory in exchange for the
debt and transferred them to self-operation.



In 2012, we decided
to sell our "Kfar Hashashuim" and "All for a Dollar" chain activities, which have not been synergetic with
our Supermarkets segment, and the potential for growth and profitability of these standalone outlets is limited under the current
conditions. As of December 31, 2012, Kfar Hashashuim operated 84 retail outlets, mostly through franchisees.



We are working to
capitalize on potential operating synergies between our non-food and food activities. We have also resolved to merge Bee Group
into Mega Retail in order to reduce costs and improve efficiency.



Real Estate Segment



Through our subsidiary
BSRE, we are engaged in generating yield from 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 the partnership for the 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 Ranana (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, 2012, BSRE
had rights to build a total of 231,000 square meters at different stages of construction (including the projects mentioned above).



93







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



Other activities



Alon Cellular



During 2012, we launched
through Alon Cellular (100% ownership) our cellular activity as an MVNO operator in Israel under the brand name YouPhone. As part
of our work to capitalize on potential synergies we are marketing and selling our cellular services in our supermarkets and convenience
stores and offer those customers who purchase in our supermarkets and filling stations the opportunity to enjoy our cellular services
at discount prices or free of charge.



Diners



We hold 49% of Diners
Club Israel Ltd., which engages in issuing and clearing Diners credit cards in Israel. Diners Club Israel Ltd. is a franchisee
of Diners Club International until 2017. In addition, we are offering our clients credit cards for the You customer loyalty program.



Operating Results



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



|                                                                                                     |  | Year Ended December 31, |       
|---------------------------------------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                                                     |  | 2010                    |       
|                                                                                                     |  | %                       |       
|Continuing Operations                                                                                |  |                         |       
|Sales                                                                                                |  |                         | 100.00
|Gross profit                                                                                         |  |                         | 27.4  
|Selling, general and administrative expenses                                                         |  |                         | 24.5  
|Operating profit before other gains and losses and changes in fair value of investment property, net |  |                         | 2.9   
|Operating profit                                                                                     |  |                         | 3.1   
|Taxes on income                                                                                      |  |                         | 0.5   
|Net income for the year from continuing operation                                                    |  |                         | 0.8   
|                                                                                                     |  |                         |       
|Discontinued Operations                                                                              |  |                         |       
|Net loss from discontinued operation                                                                 |  |                         | (0.1) 



94







Year Ended December 31, 2012 compared
with year ended December 31, 2011



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.



Gross revenues.Revenues (including
government levies) amounted to NIS 15,805.5 million (U.S. $4,234.0 million) in 2012 as compared to revenues of NIS 15,159.4 million
in 2011, an increase of 4.3%. The main reason for the increase in revenues was an increase in the revenues of Dor Alon compared
to the corresponding period last year.



Net revenues.Net revenues amounted
to NIS 12,850.4 million (U.S. $3,442.4 million) compared to revenues of NIS 12,345.8 million in 2011, an increase of 4.1%.



Revenues of the Fueling and
Commercial Sites segment – in 2012 amounted to NIS 5,935.2 million (U.S. $1,589.9 million) as compared to NIS 5,301.9
million in 2011, an increase of 11.9%. The primary reason for the increase was an increase in the prices of petrol, quantity sales
and increase in retail revenues (NIS 39 million) in the convenience stores.



Revenues of the Supermarkets
segment – a decrease of 2.5% in revenues from NIS 6,723.8 million in 2011 to NIS 6,552.9 million (U.S. $1,755.4 million)
in 2012. The primary reason for the decrease was a reduction in the same store sales (SSS) at a rate of 2.6%.



Revenues of the Non-Food segment
– an increase in revenues by 11.1% from NIS 289.0 million in 2011 to NIS 321.1 million (U.S. $86.0 million) in 2012. The
increase in revenues was primarily due to an increase in revenues at houseware stores and in stores transferred from franchise
to self-operation.



Revenues of the Real Estate segment
– an increase in rental income of 9.4% from NIS 31.0 million in 2011 to NIS 33.9 million (U.S. $9.1 million) in 2012. The
increase was primarily due to an increase in leased space and from the effect of the increase of CPI.



Gross profit. Gross profit amounted
to NIS 2,842.3 million (U.S. $761.4 million) (22.1% of revenues) in 2012 as compared to gross profit of NIS 2,903.8 million (23.5%
of revenues) in 2011. The main reason for the decrease in gross profit was due to the decrease in sales of the Supermarkets segment.



In the Fueling and Commercial
Sites segment, gross profit amounted to NIS 883.5 million (U.S. $236.7 million) (14.9% of revenues), compared to NIS 876.0 million
in 2011 (16.5% of revenues). The 0.9% increase in gross profit compared to the corresponding period on 2011 derived from an increase
in the activity of convenience stores and an increase in quantitative sales net of the impact changes in the petrol prices on the
value of inventory between periods.



95







In the Supermarkets segment,
gross profit amounted to NIS 1,788.6 million (U.S. $479.1 million) (27.3% of revenues), compared to NIS 1,850.8 million in 2011
(27.5% of revenues), a decrease of 3.4% which resulted from the decrease in sales and erosion in gross profit.



In the Non Food segment, gross
profit amounted to NIS 148.3 million (U.S. $39.7 million), (46.2% of revenues) compared to NIS 145.9 million in 2011(50.5% of revenues)
an increase in gross profit that was due to an increase in revenues.



Selling, general and administrative
expenses. Selling, general, and administrative expenses amounted to NIS 2,658.2 million (U.S. $712.1 million) (20.7% of revenues)
in 2012, compared to selling, general, and administrative expenses of NIS 2,611.8 million (21.2% of revenues) in 2011, an increase
of 1.8%. The majority of the increase was recorded in the Non-Food segment from the transfer to self-operated stores and from costs
relating to launching "YouPhone" activity.



In the Fueling and Commercial
Sites segment, selling, general and administrative expenses amounted to NIS 718.7 million (U.S. $192.5 million) compared to NIS
702.4 million in 2011, an increase of 2.3%, mainly deriving from the opening new fueling sites, partially offset by efficiency
measures beginning from the fourth quarter of 2011.



In the Supermarket segment,
selling, general and administrative expenses amounted to NIS 1,659.7 million (U.S. $444.6 million), a decrease of 0.8%, resulting
from closing stores and efficiency measures taken at the Company's headquarters.



In the Non Food segment, selling,
general and administrative expenses amounted to NIS 160.4 million (U.S. $43.0 million), a decrease of 3.2% compared to NIS 165.8
million in 2011. The decrease derived from a decrease in allowance for doubtful accounts.



In the Real Estate segment,
selling, general and administrative expenses amounted to NIS 28.3 million (U.S. $7.6 million) compared to NIS 15.6 million in 2011.
The increase in expenses resulted from a provision for management fees in the mall company building the mall in the wholesale market
complex, from an increase in marketing expenses and from the branding of Tel Aviv Mall relating to the fashion week that took place
in December.



Operating profit (before
other gains and losses and changes in fair value of investment property). Operating profit amounted to NIS 184.1 million (U.S.
$49.3 million) (1.4% of revenues) in 2012 as compared to NIS 292.0 million (2.4% of revenues) in 2011, a decrease of 36.9%. The
decrease in the operating profit was primarily due to the decrease in sales in the Supermarket segment and from expenses in Alon
Cellular in connection with the commencement of its activity.



In the Fueling
and Commercial Sites segment, operating profit decreased from NIS 173.7 million in 2011 to NIS 164.8 million (U.S. $44.1 million)
in 2012 due to the reduction of marketing margins and the impact of petrol prices on the value of inventory, and this was partially
offset by efficiency measures.



96







In the Supermarkets
segment, operating profit decreased from NIS 177.3 million in 2011 to NIS 129.0 million (U.S. $34.5 million) due to a decrease
in sales, partially offset by efficiency measures as mentioned above and the closing during the fourth quarter of 2012 of seven
stores.



In the Non
Food segment, operating loss decreased from NIS 19.8 million in 2011 to NIS 12.1 million (U.S. $3.2 million) in 2012 due to an
increase in revenues and decrease in allowance for doubtful accounts.



In the Real
Estate segment, operating profit decreased from NIS 15.4 million in 2011 to operating profit of NIS 5.6 million (U.S. $1.5 million)
in 2012 due to an increase in the selling, general and administrative expenses as mentioned above.



Changes in fair value of investment
property. In 2012, the Company recorded a profit in the amount of NIS 106.4 million (U.S. $28.5 million) compared to NIS 41.9
million in 2011. The profit in 2012 includes NIS 87.6 million (U.S. $23.5 million) from the revaluation of the commercial section
in the wholesale market complex in Tel Aviv.



Other income (expenses), net. In
2012, other income amounted to NIS 23.4 million (U.S $6.3 million) compared to other expenses of NIS 16.9 million in 2011. Other
income in 2012 included a profit in the amount of NIS 19.6 million (U.S $5.3 million) from the decrease in holding rate and loss
of control in the residential company in the wholesale market complex in Tel Aviv.



Operating profit. Operating profit
amounted to NIS 313.9 million (U.S. $84.1 million) in 2012 as compared to operating profit of NIS 317.0 million in 2011, a decrease
of 1.0%.



Net finance costs. Net finance costs
amounted to NIS 245.8 million (U.S. $65.8 million) in 2012 as compared to net finance costs of NIS 171.9 million in 2011. The increase
derived from a decrease in finance income compared to 2011, which included revenues from the revaluation of the option to purchase
shares of Diners in the amount of NIS 101 million.



Taxes on income. Taxes on income
totaled NIS 16.6 million (U.S. $4.4 million) (an effective tax rate of 21% as compared to the statutory tax rate of 25%) in 2012
as compared to NIS 48.5 million (an effective tax rate of 32.0% as compared to the statutory rate of 24%) in 2011. The effective
tax rate in 2012 was affected by a profit from a decrease in our holdings of a proportionately consolidated company resulting in
loss of control in respect of which the Company did not record deferred taxes.



Net income from continuing operations.
Net income from continuing operations amounted to NIS 63.6 million (U.S. $17.0 million) in 2012 as compared to net income of NIS
102.3 million in 2011. The net profit from continuing operations in 2012 attributable to equity holders of the Company amounted
to NIS 19.3 million (U.S. $5.2 million), or NIS 0.29 per share (U.S. $0.08), and the part attributable to the non-controlling interests
amounted to NIS 44.4 million (U.S. $11.9 million).



97







Net loss from discontinued operations.In 2012, net loss from discontinued operations amounted to NIS 22.5 million (U.S. $6.0 million), or NIS 0.34 per share (U.S.
$0.09), compared to a loss of NIS 18.6 million in 2011 attributed in its entirety to the company's shareholders.



98







Segment Information Analysis

Segment Information Analysis for the
year 2012



Fueling and Commercial Sites segment



|                                                                    |  |                   |       |  |      |  |       |                |  |  | Convenience     | 
|------------------------------------------------------------------- |  | ----------------- | ----- |  | ---- |  | ----- | -------------- |  |  | --------------- | 
|                                                                    |  |                   |       |  |      |  |       |                |  |  | translation for | 
|                                                                    |  | For the year      |       |  |      |  |       | the year ended | 
|                                                                    |  | ended December 31 |       |  |      |  |       | December 31    | 
|                                                                    |  | 2012              |       |  | 2011 |  |       | % Change       |  |  | 2012            | 
|                                                                    |  | NIS in millions   |       |  |      |  |       | U.S. $         | 
|Segment Revenues                                                    |  |                   | 5,935 |  |      |  | 5,302 |                |  |  | 12%             | 
|Segment operating profit                                            |  |                   | 164.7 |  |      |  | 173.6 |                |  |  | (5)%            | 
|                                                                    |  |                   |       |  |      |  |       |                |  |  |                 | 
|Segment operating profit (loss) as a percentage of segment revenues |  |                   | 2.8%  |  |      |  | 3.3%  |                |  |  |                 | 





The operating profit for the Fueling and
Commercial Sites segment in the year 2012 amounted to NIS 164.7 million (U.S $44.1 million) (2.8% of segment revenues) compared
to the segment operating profit of NIS 173.6 million (3.3% of segment revenues) in the corresponding period in 2011. The decrease
in the segment operating profit derived mainly from the reduction of marketing margins and the impact of petrol prices on the value
of inventory and was partially offset by efficiency measures.



Supermarkets Segment



|                                                             |  | For the year ended December 31 |       |  |      |  |       | Convenience translation for the year ended December 31 | 
|------------------------------------------------------------ |  | ------------------------------ | ----- |  | ---- |  | ----- | ------------------------------------------------------ | 
|                                                             |  | 2012                           |       |  | 2011 |  |       | % Change                                               | 
|                                                             |  | NIS in millions                |       |  |      |  |       | U.S. $                                                 | 
|Segment Revenues                                             |  |                                | 6,553 |  |      |  | 6,724 |                                                        | 
|                                                             |  |                                |       |  |      |  |       |                                                        | 
|Segment operating profit                                     |  |                                | 140   |  |      |  | 170   |                                                        | 
|                                                             |  |                                |       |  |      |  |       |                                                        | 
|Segment operating profit as a percentage of segment revenues |  |                                | 2.1%  |  |      |  | 2.5%  |                                                        | 



99







|                                           |  | For the year ended December 31 |         |   | Convenience translation for the year ended December 31 | 
|------------------------------------------ |  | ------------------------------ | ------- | - | ------------------------------------------------------ | 
|                                           |  | 2012                           |         |   | 2011                                                   | 
|                                           |  | NIS                            |         |   | U.S. $                                                 | 
|                                           |  | (Unaudited)                    |        
|                                           |  |                                |         |   |                                                        | 
|Decrease in same store sales*              |  |                                | (2.6%   | ) |                                                        | 
|                                           |  |                                |         |   |                                                        | 
|Number of stores at end of period          |  |                                | 212     |   |                                                        | 
|Stores opened during the period            |  |                                | 10      |   |                                                        | 
|Stores closed during the period            |  |                                | 9       |   |                                                        | 
|                                           |  |                                |         |   |                                                        | 
|Total square meters at end of period       |  |                                | 369,000 |   |                                                        | 
|                                           |  |                                |         |   |                                                        | 
|Square meters added during the period, net |  |                                | (7,090  | ) |                                                        | 
|                                           |  |                                |         |   |                                                        | 
|Sales per square meter                     |  |                                | 17,180  |   |                                                        | 
|                                           |  |                                |         |   |                                                        | 
|Sales per employee (in thousands)          |  |                                | 965     |   |                                                        | 

* Compared with the same period in the
prior fiscal year.



Operating profit for the Supermarkets segment
in the year 2012 decreased by 17.7% to NIS 140 million (U.S $37 million) (2.1% of segment revenues) compared to the segment operating
profit of NIS 170 million (2.5% of segment revenues) in the corresponding period last year. The decrease in the segment operating
profit was due to the effects of an intensification of competition in the segment which impaired the sales.



Non Food Retail and Wholesale Segment



|                                                 |  | For the year ended December 31 |       |   | %    |  |      | Convenience translation for the year ended December 31 | 
|------------------------------------------------ |  | ------------------------------ | ----- | - | ---- |  | ---- | ------------------------------------------------------ | 
|                                                 |  | 2012                           |       |   | 2011 |  |      | Change                                                 | 
|                                                 |  | NIS in millions                |       |   |      |  |      | U.S. $                                                 | 
|Segment Revenues                                 |  |                                | 321   |   |      |  | 289  |                                                        | 
|Segment operating loss                           |  |                                | (15   | ) |      |  | (29  | )                                                      | 
|Segment loss as a percentage of segment revenues |  |                                | (4.8% | ) |      |  | (10% | )                                                      | 



The operating loss for the Non Food Retail
and Wholesale segment in the year 2012 amounted to NIS 15 million (U.S. $4.1 million) (4.8% of segment revenues) compared to the
segment operating loss of NIS 29 million (10.0% of segment revenues) in the corresponding period in 2011. The decrease in the segment
operating loss was mainly due to an increase in the revenues in the houseware stores and in stores transferred from franchise to
self-operation and a decrease in expenses derived from a decrease in allowance for doubtful accounts.



100







Real Estate Segment



|                                                             |  | For the year ended December 31 |      |  |      |  |      | Convenience translation for the year ended December 31 | 
|------------------------------------------------------------ |  | ------------------------------ | ---- |  | ---- |  | ---- | ------------------------------------------------------ | 
|                                                             |  | 2012                           |      |  | 2011 |  |      | % Change                                               | 
|                                                             |  | NIS in millions                |      |  |      |  |      | U.S. $                                                 | 
|Segment Revenues                                             |  |                                | 34   |  |      |  | 31   |                                                        | 
|Appreciation of Investment Property                          |  |                                | 106  |  |      |  | 42   |                                                        | 
|Segment operating profit                                     |  |                                | 126  |  |      |  | 57   |                                                        | 
|Segment operating profit as a percentage of segment revenues |  |                                | 371% |  |      |  | 184% |                                                        | 



In the year
2012, the Real Estate segment recorded a gain from appreciation of investment property in the amount
of NIS 106 million (U.S. $29 million) including NIS 87.6 million (U.S. $23.5 million) from revaluation of the commercial section
in the wholesale market in Tel Aviv compared to NIS 41.9 million in 2011, which including NIS 18.4 million in Kiryat Hasharon and
NIS 7.5 million from revaluation of "Hadar Mall" in Jerusalem in the corresponding period of the previous year.



Operating profit for the Real Estate segment
in the year 2012 increased by 120% to NIS 126 million (U.S. $34 million) compared to the segment operating profit of NIS 57 million
in the corresponding period. The increase in the segment operating profit was due to the increase in leased premises net of the
gain from appreciation, as described above.



Discontinued Operations

The following are the operating results
of discontinued operations for the years ended December 31, 2012 and 2011:



|                                      |  | Year ended      |       
|------------------------------------- |  | --------------- | ------
|                                      |  | December 31     |       
|                                      |  | 2012            |       
|                                      |  | NIS in millions |       
|Revenues                              |  |                 | 115.2 
|Gross profit                          |  |                 | 23.3  
|Operating loss                        |  |                 | (11.5)
|Net loss from discontinued operations |  |                 | (22.5)



Year Ended December 31, 2011 compared
with year ended December 31, 2010



Gross revenues.Revenues (including
government levies) amounted to NIS 15,159.4 million in 2011 as compared to revenues of NIS 9,068.1 million in 2010, an increase
of 67.2%. The principal reason for the increase in revenues was the inclusion of a full year of results of Dor Alon in 2011. Dor
Alon's revenues in 2011, including government levies of NIS 2,813.6 million amounted to NIS 8,151.6 million.



Net revenues.Net revenues amounted
to NIS 12,345.8 million compared to revenues of NIS 8,344.4 million in 2010, an increase of 47.9%.



101







Revenues of the Fueling and
Commercial Sites segment – in 2011 amounted to NIS 5,301.9 million as compared to NIS 1,145 million in 2010, an increase
of 363.0%. This increase was primarily the result of 2011 having a full year of results of Dor Alon as compared to 2010, which
included the results of Dor Alon only for the fourth quarter following the Company's acquisition of Dor Alon on October 3, 2010.
The 2011 revenues of Dor Alon increased 22.4% over revenues for the full year 2010 (pre and post acquisition) of Dor Alon of NIS
4,329.9 million. The full year 2010 revenues amount is Non-GAAP financial information and has been presented to allow for a better
understanding of the trends related to this segment. The main reason for the increase in 2011 as compared to the full year 2010
was the increase in the quantitative sales as a result of opening new filling stations, an increase in sales in the convenience
stores and an increase in the price of petrol between the periods.



The following
is the comparison of the GAAP and Non-GAAP segment revenues:



|                      |  | GAAP            |         |  | Non-GAAP | 
|--------------------- |  | --------------- | ------- |  | -------- | 
|                      |  | In NIS millions |        
|Net revenues for 2010 |  |                 | 1,145.0 |  |          | 



Revenues of the Supermarkets
segment – a decrease of 2.5% in revenues from NIS 6,895.0 million in 2010 to NIS 6,723.8 million in 2011. The principal
reason for the decrease was the public protest in Israel that commenced at the end of the second quarter of 2011 which caused a
decrease in selling prices to consumers, a decrease in demand and an acceleration of competition in the sector which impaired the
sales in the Supermarkets segment. For more information, please see "Segment Information Analysis" below.



Revenues of the non-food segment
– an increase in revenues of 3.5% from NIS 279.3 million in 2010 to NIS 289.0 million in 2011. The increase in revenues was
primarily due to an increase in sales of home textiles and was partly offset by a decrease in sales to franchisees in the home
sector.



Revenues of the real estate
segment – an increase in rental income of 23% from NIS 25.2 million in 2010 to NIS 31.0 million in 2011. The increase
was primarily due to an increase in leased space and from the effect of the increase of CPI.



102







Gross profit. Gross profit amounted
to NIS 2,903.8 million (23.5% of revenues) in 2011 as compared to gross profit of NIS 2,286.3 million (27.4% of revenues) in 2010.
The principal reason for the increase in gross profit was the inclusion of the results of a full year of Dor Alon's results in
2011 while in 2010 Dor Alon's results were included in in the fourth quarter only. The gross profit rate decreased for the same
reason; Dor Alon's financial results are characterized by a lower gross profit rate (approximately 16.4%) than the other operating
segments. In the Supermarkets segment, gross profit amounted to NIS 1,850.7 million, compared to NIS 1,889.7 million in 2010, a
decrease of 2.1% resulting from a decrease in sales. In the Non Food segment, gross profit amounted to NIS 145.9 million, compared
to NIS 139.0 million in 2010, an increase of 5.0% that was due to an increase in sales.



Selling general and administrative expenses.
Selling, general, and administrative expenses amounted to NIS 2,611.8 million (21.1% of revenues) in 2011, compared to expenses
of NIS 2,042.7 million (24.5% of revenues) in 2010. The majority of the increase derived from the inclusion of the results of Dor
Alon for a full year in 2011, as described above.In the Supermarket segment, selling, general and administrative expenses
amounted to NIS 1,693.4 million, an increase of 2.6%, resulting from the opening of six new stores, an increase in payroll from
NIS 673.2 million in 2010 to NIS 689.6 million in 2011, and an increase in CPI linked expenses such as rent and municipality taxes
from NIS 445.1 million in 2010 to NIS 472.2 million in 2011. In the Non Food segment, selling general and administrative expenses
increased by approximatly NIS 5 million due to an increase in the provisions for doubtful accounts resulting from financial difficulties
of a major franchisee



Operating profit (before
other gains and losses and changes in fair value of investment property). Operating profit amounted to NIS 292.0 million (2.4%
of revenues) in 2011 as compared to NIS 243.6 million (2.9% of revenues) in 2010, an increase of 19.9%.



In the Fueling
and Commercial Sites segment, operating profit increased from NIS 35.3 million in 2010 to NIS 173.6 million in 2011 due to the
inclusion of the inclusion of the results of Dor Alon for a full year in 2011, as described above.



In the Supermarkets
segment, operating profit decreased from NIS 241.9 million in 2010 to NIS 177.3 million (U.S.$46.4 million) due to a decrease in
sales and an increase in expenses, as described above.



In the Non
Food segment, operating loss increased from NIS 5.0 million in 2010 to NIS 19.8 million in 2011 due to a decrease in sales to franchisees
in the home sector as a result of an increase of competition in this segment and an increase in the provisions for doubtful accounts.



In the Real
Estate segment, the transition from operating loss of NIS 4.8 million in 2010 to operating profit of NIS 15.4 million in 2011 was
due to an increase in leased premises and a decrease in selling administrative and general expenses.



Changes in fair value of investment
property. In 2011, the Company recorded profit from the increase in the value of investment property in the amount of NIS 41.9
million in 2011 compared to NIS 32.9 million in 2010. The increase in the value was primarily due to the revaluation of property
in Kiryat Hasharon, Netanya in the amount of NIS 18.4 million and from the revaluation of "Hadar mall" in Jerusalem in
the amount of NIS 7.5 million.



103







Other gains and losses, net. The
Company recorded other losses, net of NIS 16.9 million in 2011 as compared to other losses, net of NIS 20.7 million in 2010. These
expenses in 2011 included costs relating to the relocation of part of the Bee Group companies to the new logistic center in Be'er
Tuvia and disposal and impairment of property and equipment in the supermarket segment.



Operating profit before finance costs.
Operating profit before finance costs amounted to NIS 317.0 million (2.6% of revenues) in 2011 as compared to operating profit
of NIS 255.9 million (3.1% of revenues) in 2010. Without Dor Alon, the operating profit of the other three segments decreased by
NIS 53.8 million.



Net finance costs. Net finance costs
amounted to NIS 171.9 million in 2011 as compared to net finance costs of NIS 147.3 million in 2010. Without Dor Alon, the finance
expenses of the other three segments decreased by NIS 22.2 million. The decrease was mainly a result of finance income from the
revaluation of the option to purchase shares of Diners and capitalization of borrowing costs of projects under construction in
the real estate segment that were partially offset by an increase in the Company's indebtedness following the purchase of Dor Alon
and the increase of the Israeli CPI (the CPI increased in 2011 by 2.55% compared to wn increase of 2.28% in 2010).



Taxes on income. Taxes on income
totaled NIS 48.5 million (an effective tax rate of 32% as compared to the statutory tax rate of 24%) in 2011 as compared to NIS
38.6 million (an effective tax rate of 35.7% as compared to the statutory rate of 25%) in 2010. The increase in tax expenses resulted
mainly from an increase in the tax rates following the Trachtenburg Committee and from losses at the Company's subsidiaries in
respect of which no deferred taxes were recorded and was partly offset by the recordation a liability for deferred taxes in the
statements of income.



Net income from continuing operations.
Net income from continuing operations amounted to NIS 102.3 million in 2011 as compared to net income of NIS 69.4 million in 2010.
The increase in net income in this period compared to the corresponding period the previous year principally derived from the inclusion
a full year of Dor Alon's results in 2011, the impact of the option revaluation of Diners and tax benefit on exercising the option.
The net income from continuing operations in 2011 attributable to equity holders of the Company amounted to NIS 59.5 million, or
NIS 1.18 per share, and the part attributable to the non-controlling interests amounted to NIS 24.2 million.



Net loss from discontinued operations.In 2011, net loss from discontinued operations amounted to NIS 18.6 million or NIS 0.28 per share, compared to a loss of NIS
6.8 million in 2010, or NIS 0.14, per share attributed in its entirety to the company's shareholders.



104







Segment Information Analysis

Segment Information Analysis for the
year 2011



Fueling and Commercial Sites segment



|                                                                    |  | For the year      |       |  |      | 
|------------------------------------------------------------------- |  | ----------------- | ----- |  | ---- | 
|                                                                    |  | ended December 31 |       |  |      | 
|                                                                    |  | 2011              |       |  | 2010 | 
|                                                                    |  | NIS in millions   |       |  |      | 
|Segment Revenues                                                    |  |                   | 5,302 |  |      | 
|Segment operating profit                                            |  |                   | 173.6 |  |      | 
|Segment operating profit (loss) as a percentage of segment revenues |  |                   | 3.3%  |  |      | 



Operating profit for the fueling and commercial
sites segment in the year 2011 amounted to NIS 173.6 million (3.3% of segment revenues) compared to the segment operating profit
of NIS 39.3 million (3.4% of segment revenues) in the corresponding period in 2010. The increase in the segment operating profit
derived mainly from the inclusion of Dor Alon's results for a full year in 2011.



Supermarkets Segment



|                                                             |  | For the year ended December 31 |       |  |      | 
|------------------------------------------------------------ |  | ------------------------------ | ----- |  | ---- | 
|                                                             |  | 2011                           |       |  | 2010 | 
|                                                             |  | NIS in millions                |       |  |      | 
|Segment Revenues                                             |  |                                | 6,724 |  |      | 
|Segment operating profit                                     |  |                                | 170   |  |      | 
|                                                             |  |                                |       |  |      | 
|Segment operating profit as a percentage of segment revenues |  |                                | 2.5%  |  |      | 



|                                           |  | For the year ended
December 31 |        
|------------------------------------------ |  | ------------------------------ | -------
|                                           |  | 2011                           |        
|                                           |  | NIS                            |        
|                                           |  | (Unaudited)                    |        
|Decrease in same store sales*              |  |                                | (2.7%) 
|                                           |  |                                |        
|Number of stores at end of period          |  |                                | 211    
|Stores opened during the period            |  |                                | 6      
|Stores closed during the period            |  |                                | 1      
|                                           |  |                                |        
|Total square meters at end of period       |  |                                | 377,650
|                                           |  |                                |        
|Square meters added during the period, net |  |                                | 9,660  
|                                           |  |                                |        
|Sales per square meter                     |  |                                | 18,090 
|                                           |  |                                |        
|Sales per employee (in thousands)          |  |                                | 965    

* Compared with the same period in the
prior fiscal year.



105







Operating profit for the Supermarkets segment
in the year 2011 decreased by 27.2% to NIS 170 million (2.5% of segment revenues) compared to segment operating profit of NIS 233
million (3.4% of segment revenues) in the corresponding period last year. The decrease in the segment operating profit was due
to the effects of the public protest in Israel that commenced at the end of the second quarter of 2011 which caused a decrease
in selling prices to consumers, a decrease in demand and an acceleration of competition in the sector which impaired the sales



Non Food Retail and Wholesale Segment



|                                                 |  | For the year ended December 31 |         |  | %    | 
|------------------------------------------------ |  | ------------------------------ | ------- |  | ---- | 
|                                                 |  | 2011                           |         |  | 2010 | 
|                                                 |  | NIS in millions                |         |  |      | 
|Segment Revenues                                 |  |                                | 289     |  |      | 
|Segment operating loss                           |  |                                | (29)    |  |      | 
|Segment loss as a percentage of segment revenues |  |                                | (10.0%) |  |      | 



The operating loss for the Non Food Retail
and Wholesale segment in the year 2011 amounted to NIS 29 million (10.0% of segment revenues) compared to the segment operating
loss of NIS 13 million (4.7% of segment revenues) in the corresponding period in 2010. The increase in the segment operating loss
was due to a decrease in sales to franchisees in the home sector resulting from increased competition and from the increase in
the impairment of trade receivables.



Real Estate Segment



|                                                             |  | For the year ended December 31 |      |  |      | 
|------------------------------------------------------------ |  | ------------------------------ | ---- |  | ---- | 
|                                                             |  | 2011                           |      |  | 2010 | 
|                                                             |  | NIS in millions                |      |  |      | 
|Segment Revenues                                             |  |                                | 31   |  |      | 
|Appreciation of Investment Property                          |  |                                | 42   |  |      | 
|Segment operating profit                                     |  |                                | 57   |  |      | 
|Segment operating profit as a percentage of segment revenues |  |                                | 184% |  |      | 





In the year
2011, the Real Estate segment recorded a gain from appreciation of investment property in the amount
of NIS 41.9 million, including NIS 18.4 million from the revaluation of property in Kiryat Hasharon, Netanya, half of which was
sold, and NIS 7.5 million from the revaluation of "Hadar Mall" in Jerusalem, compared to NIS 33 million in the corresponding
period of the previous year.



Operating profit for the Real Estate segment
in the year 2011 increased by 27% to NIS 57 million (U.S. $15 million) compared to the segment operating profit of NIS 28 million
in the corresponding period. The increase in the segment operating profit was due to the increase in leased premises and a decrease
in selling administrative and general expenses net of the gain from appreciation, as described above.



106







Discontinued Operations



The following are the operating results
of discontinued operations for the years ended December 31, 2011 and 2010.



|                                      |  | Year ended     |       
|------------------------------------- |  | -------------- | ------
|                                      |  | December 31    |       
|                                      |  | 2011           |       
|                                      |  | NIS in million |       
|Revenues                              |  |                | 136.8 
|Gross profit                          |  |                | 11.9  
|Operating loss                        |  |                | (15.1)
|Net loss from discontinued operations |  |                | (18.6)



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 supermarkets and in
our "Naaman", "Vardinon" and "Sheshet" 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.



The following table
sets forth certain quarterly information.



|               |  | Net revenues   |            |  | Operating profit before other gains and losses and changes in fair value of investment property | 
|-------------- |  | -------------- | ---------- |  | ----------------------------------------------------------------------------------------------- | 
|               |  | NIS            |            |  | Percentage of  Full Year                                                                        | 
|               |  | (In thousands) |            |  |                                                                                                 | 
|2012           |  |                | 12,850,385 |  |                                                                                                 | 
|First quarter  |  |                | 3,152,014  |  |                                                                                                 | 
|Second quarter |  |                | 3,309,770  |  |                                                                                                 | 
|Third quarter  |  |                | 3,273,845  |  |                                                                                                 | 
|Fourth quarter |  |                | 3,114,756  |  |                                                                                                 | 
|               |  |                |            |  |                                                                                                 | 
|2011           |  |                | 12,345,776 |  |                                                                                                 | 
|First quarter  |  |                | 2,966,721  |  |                                                                                                 | 
|Second quarter |  |                | 3,172,745  |  |                                                                                                 | 
|Third quarter  |  |                | 3,185,493  |  |                                                                                                 | 
|Fourth quarter |  |                | 3,020,817  |  |                                                                                                 | 



107







Exchange Rates



At December 31, 2012,
the representative rate of exchange of the NIS to the dollar, as published by The Bank of Israel, was NIS 3.733= $1.00. On April
19, 2013, the representative rate of exchange of the NIS to the dollar, as published by The Bank of Israel, was NIS 3.629 = $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, 2008 through 2012:



|Year EndedDecember 31, |  | Period End |         |  | Average
    Rate(1) |  |      | High |  |  | Low  | 
|---------------------- |  | ---------- | ------- |  | ------------------- |  | ---- | ---- |  |  | ---- | 
|                       |  |            |         |  | (NIS per $1.00)     |  |      |      |  |  |      | 
|                       |  |            |         |  |                     |  |      |      |  |  |      | 
|2008                   |  |            | 3.80(2) |  |                     |  | 3.59 |      |  |  | 4.02 | 
|2009                   |  |            | 3.77(2) |  |                     |  | 3.92 |      |  |  | 4.26 | 
|2010                   |  |            | 3.55(2) |  |                     |  | 3.73 |      |  |  | 3.89 | 
|2011                   |  |            | 3.82(2) |  |                     |  | 3.58 |      |  |  | 3.82 | 
|2012                   |  |            | 3.73(2) |  |                     |  | 3.86 |      |  |  | 4.08 | 



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

(2)
During 2008, 2009, 2010, 2011 and 2012, the US dollar depreciated in value vis-à-vis the NIS by 1.2%, 0.7%, 6%, (7.6)%
and 2.3%, 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 2012 through March 2013:



|Month    |  | Period End |      |  | Average
    Rate(1) |  |      | High |  |  | Low  | 
|-------- |  | ---------- | ---- |  | ------------------- |  | ---- | ---- |  |  | ---- | 
|         |  |            |      |  | (NIS per $1.00)     |  |      |      |  |  |      | 
|October  |  |            | 3.88 |  |                     |  | 3.85 |      |  |  | 3.90 | 
|November |  |            | 3.81 |  |                     |  | 3.89 |      |  |  | 3.95 | 
|December |  |            | 3.73 |  |                     |  | 3.78 |      |  |  | 3.84 | 
|January  |  |            | 3.73 |  |                     |  | 3.74 |      |  |  | 3.79 | 
|February |  |            | 3.71 |  |                     |  | 3.69 |      |  |  | 3.73 | 
|March    |  |            | 3.65 |  |                     |  | 3.69 |      |  |  | 3.73 | 



(1)  The average of the daily exchange
rates.



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 - Impact of inflation may adversely affect our financial expenses and operating income," “-Related to Our
Business As a Whole - Currency fluctuations might affect our operating results and translation of operating results," and
“Risks Related to Dor Alon - Dor Alon is exposed to fluctuations in the foreign exchange rate, interest rates and the consumer
price index, which could materially adversely affect its financial results.”



108







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 non-food products at our Bee Group 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 non-food retail business because a higher proportion of the goods
that we sell in our Bee Group 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 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.



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.



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. During the winter of 2012, Israel was engaged in an armed conflict with Hamas,
a militia group and political party operating in the Gaza Strip. This conflict involved missile strikes against civilian targets
in various parts of Israel and negatively affected business conditions in Israel. In addition, deterioration in the security situation
causes a decrease in the consumption of petroleum products in Israel and airlines’ volume of activity, which could adversely
affect Dor Alon’s results of operations. We cannot predict the effect on our business if hostilities are renewed or the security
situation deteriorates in any part of the country.



109







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 Palastinians 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, causes investor concerns in a reduction
in the value of the shekel, our expenses in non-shekel currencies may increase, with a material adverse affect on our financial
results.



Most of Bee Group's
imports during 2011 and 2012 were from suppliers located in China. Because most of the products sold by the Bee Group 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 the Bee Group 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 Bee Group stores is during the holidays, disruptions in the ports during or adjacent to
such holiday seasons may adversely affect our sales and financial results.



Economic Conditions



All of our supermarket
sales are made in Israel and we acquire a substantial majority of the goods that we sell from Israeli suppliers. Consequently,
our financial performance is dependent to a significant extent on the economy of Israel. During 2010 and 2011, Israel's Gross Domestic
Product rose by 4.8% and 4.6%, respectively. Reports of the Israeli Central Bureau of Statistics indicate that during 2012 Israel's
Gross Domestic Product rose by 3.1% as a result of an increase in exports. We believe that, despite the economic growth in
2011 and in 2012, our customers continue to be cautious in their buying patterns and continue to choose to make their purchases
at low-price and hard discount stores, which have a lower profit margin. As a result, we have continued to expand our low-price
and hard discount store formats.



The global economic
instability and uncertainty have also affected our non-food retail business by causing a slowdown in the growth of private consumption,
which could affect the growth of our houseware, home textile and baby and young children accessories businesses. Beginning in the
second quarter of 2009, the Israeli economy began to recover, and in 2010 and 2011 continued to recover; however, in 2012 there
was a slowdown in the improvement in the growth of private consumption. We cannot predict whether the global economic instability,
especially in Europe, and the uncertainty in the global economy in general and in Israel in particular, may have a negative impact
on us.



110







In addition, the
global economic instability has also reduced the availability of credit, increased the costs of financing and the terms under which
banks, in Israel and abroad, agree to provide financing. Such conditions are worsening during the beginning of 2012 in light of
the Banks' Inspector Instructions which limit the availability of credit, specially in the real estate sector. These developments
may reduce the sales of our businesses, increase our costs of borrowing and reduce our profitability.



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 since 2010, 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. In recent years, Israel
has established commercial and trade relations with a number of other nations, including China, India, Russia, Turkey and other
nations in Eastern Europe and Asia.



Corporate Tax Rate



We and our subsidiaries
are subject to corporate tax in Israel at a flat rate of 25% in 2012 (25% in 2010 and 24% in 2011). Prior to the enactment of the
Law for Changing the Tax Burden in Israel (the "Tax Change Law"), the corporate tax rates were scheduled to be
reduced to 23% in 2012 and ultimately to 18% by 2016. This scheduled gradual reduction in corporate tax rates was repealed. Instead,
on December 5, 2011, the Knesset approved an amendment to the Law for Changing the Tax Burden in Israel (Legislation Amendments)
(the "New Tax Change Law") as a result of the recommendations of the Trachtenburg Committee. Pursuant to the New
Tax Change Law, the tax reduction determined in the Law for Economic Efficiency is cancelled, and the corporate tax rate will be
increased to 25% as of 2012. Due to the New Tax Change Law, we recognized one-time income tax expenses for 2011 in the amount of
NIS 34.4 million based on updating deferred taxes as of the date of the approval the New Tax Change Law.



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



111







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 4 to the 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 financial statements because they involve the most
difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.



Impairment of non financial
assets



We review at each statement
of financial position date whether any events have occurred or changes in circumstances have taken place which might indicate that
there has been an impairment of property and equipment and identifiable intangibles. When such indicators of impairment are present,
we evaluate whether the carrying value of the asset in our accounts can be recovered from the cash flows anticipated from that
asset, and, if necessary, record an impairment provision necessary to adjust the carrying amount to the recoverable amount.



When it is not possible
to assess whether an impairment provision is required for an individual asset which does not generate independent cash flows, the
need for such a provision is assessed in relation to the recoverable value of the cash-generating unit to which that asset belongs.
For a cash-generating unit to which goodwill has been allocated, any impairment loss relating to that unit initially reduces the
goodwill and the balance reduces the carrying amount of the other assets.



We evaluate impairment
separately for each store or the cash-generating unit to which the store belongs when the cash inflows of one store are dependent
on the cash inflows of another store in the same geographic area. In evaluating impairment, we consider corporate assets relating
to the stores or other cash-generating units as well as indirect costs that are directly attributable, or that can be reasonably
and consistently allocated, to the stores or cash generating units.



The recoverable amount
of an asset is the higher of the net selling price of the asset's fair value less cost to sell and its value in use. These calculations
require the use of estimates. In calculating the impairment for the reported years, based on discounted expected future cash flows,
we used a discount rate before tax for each cash-generating unit (CGU). For discount rates used by the Company, see note 9b to
the Consolidated Financial Statements.



112







In 2012, there were
no impairment provisions. In 2011, we recorded impairment provisions resulting in the net amount of NIS 6.1 million. In 2010, we
recorded impairment provisions resulting in the net amount of NIS 0.5 million. Impairment provisions or the reversal of such provisions
are included in the income statement within Other gain or losses.



Application of alternative
assumptions and definitions, such as reviewing long-lived assets for impairment at a different organizational level, could produce
significantly different results.



Goodwill



Goodwill is tested
annually for impairment and when circumstances indicate that the carrying value may be impaired, goodwill is carried at cost less
any accumulated impairment losses. Impairment losses on goodwill are not reversed.



Goodwill is allocated
to cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which
the goodwill arose.



Goodwill is allocated
to six identified groups of cash-generating units ("CGUs"). Those groups of CGUs are embedded within three reportable
segments – Supermarkets (1 group of CGUs), Non-Food Retail and Wholesale (two groups of CGUs), and Fueling and Commercial
Sites (three CGUs).



The amounts of goodwill
allocated to the CGU are as follows:



|                                        |  | December 31      |        
|--------------------------------------- |  | ---------------- | -------
|                                        |  | 2011             |        
|                                        |  | NIS in thousands |        
|Supermarkets                            |  |                  | 160,993
|Non - Food retail and wholesale:        |  |                  |        
|Houseware                               |  |                  | 111,179
|Leisure(1)                              |  |                  | 23,506 
|Fueling and Commercial Sites:           |  |                  |        
|Filling Stations and Convenience Stores |  |                  | 621,945
|Direct Marketing                        |  |                  | 18,000 
|Jet Fuel                                |  |                  | 14,000 
|                                        |  |                  | 949,623



| | (1) | As of December 31, 2012, the goodwill is included in group of assets held for sale, and the recoverable
amounts are an examined for all the group assets.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



113









The recoverable amount
of a CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial
budgets approved by management and management estimation covering a five-year period. Cash flows beyond the five-year period are
extrapolated using the estimated growth rates stated below. The growth rate does not exceed the long-term average growth rate
for the business in which the CGU operates.



The key assumptions
used for value in-use calculations are as follows:



|Segment               |  | Supermarkets |      |  | Non - Food retail
    and wholesale | 
|--------------------- |  | ------------ | ---- |  | ----------------------------------- | 
|CGU                   |  | Supermarkets |      |  | Houseware                           | 
|                      |  | %            |     
|December 31, 2012:    |  |              |      |  |                                     | 
|Expected gross margin |  |              | 27.0 |  |                                     | 
|Growth rate (1)       |  |              | 0.25 |  |                                     | 
|Discount rate (2)     |  |              | 9.7  |  |                                     | 
|                      |  |              |      |  |                                     | 
|December 31, 2011:    |  |              |      |  |                                     | 
|Expected gross margin |  |              | 27.7 |  |                                     | 
|Growth rate (1)       |  |              | 1.0  |  |                                     | 
|Discount rate (2)     |  |              | 11.7 |  |                                     | 



|Segment                   |  | Fueling and commercial sites  |     
|------------------------- |  | ----------------------------- | ----
|CGU                       |  | Filling and convenience sites |     
|                          |  | %                             |     
|December 31, 2012:        |  |                               |     
|Expected operating profit |  |                               | 3.6 
|Growth rate (1)           |  |                               | 2.0 
|Discount rate (2)         |  |                               | 9.4 
|                          |  |                               |     
|December 31, 2011:        |  |                               |     
|Expected operating profit |  |                               | 4.0 
|Growth rate (1)           |  |                               | 2.2 
|Discount rate (2)         |  |                               | 10.4



| | (1) | Weighted average growth rate used
                                                            to extrapolate cash flows beyond the budget management estimates covering
                                                            a five-year period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Pre-tax discount rate applied to cash
                                                            flow projections.
| | --- | -------------------------------------------------------------------------------------------------------------------



These assumptions
have been used for the analysis of each CGU.



The key assumptions
used for the sensitivity analysis regarding the impairment testing were the discount rate, utilizing the weighted average cost
of capital (WACC) and the growth rate of the CGU. The WACC for each CGU was determined based on the data derived from a number
of public Israeli companies that are active in those fields (fuel selling, supermarkets and non food) including the cost of capital
and debt-raising relevant for each kind of activity. The growth rate was determined based on historical growth rate within the
industries and based on the Company's own history, taking into account the growth of the Israeli population.



The annual impairment
review requires the extensive use of accounting judgments and financial estimates. Application of alternative assumptions
and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different
results.  Similar to our policy on impairment of long-lived assets, the cash flow projections embedded in our goodwill impairment
reviews can be affected by several items, such as inflation, business valuations in the market, the economy and market competition.



114









We performed a sensitivity
analysis for the key assumption used in our annual goodwill impairment test and determined that an increase in the pre-tax discount
rate of 1.0% would result in the estimated recoverable amount of Houseware CGU falling below its carrying amount by NIS 6 million.
The recoverable amount of our other CGUs are substantially higher than the carrying value.





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.



Investment property under development, designated for future
use as investment property, is also measured at fair value, provided that fair value can be reliably measured. However, when fair
value is not reliably determinable, such property is measured at cost, less any impairment losses, if any, until either development
is completed, or its fair value becomes reliably determinable, whichever is earlier. The cost of investment property under development
includes the cost of land, as well as borrowing costs used to finance construction, direct incremental planning and construction
costs, as well as brokerage fees relating to agreements to lease the property and other lease-up costs. As of December 31, 2012,
substantially all of our investment property under development was measured at fair value.



Fair value of investment property was determined by independent
appraisers for the year ended December 31, 2012. Fair value of investment property and investment property under development, is
determined by the appraisers and based on market conditions using either



| | (1) | The Comparative Method (i.e. based on comparison data for similar properties in the vicinity with similar uses, including required
adjustments for location, size or quality),
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The Discounted Cash Flow Method (less cost to complete and developer profit in the case of investment property under development,
also referred to as Residual Method) or
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The Income Capitalization Method.
| | --- | ---------------------------------



When using the Comparative Method we and the external valuation
experts rely on market prices, applying necessary adjustments, to the extent that such information is available. However, when
such information is not available, we use valuation techniques (DCF including Residual Method, or Income Capitalization) based
on current market yields to which necessary adjustments are applied. In order to estimate future cash flows and the appropriate
discount rate, the Discounted Cash Flow Method requires assumptions regarding the required yield rates on our properties, future
rental prices, occupancy levels, renewal of leases, probability of lease of vacant space, property operating expenses, the financial
strength of tenants and any cash outflow that would be expected in respect of future maintenance. Changes in the assumptions that
are used to measure the investment property may lead to a change in the fair value. See Note 4(2) to our audited 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.







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



Income taxes and deferred
taxes



There are many transactions
and calculations for which the ultimate tax determination is uncertain. We recognize liabilities for anticipated tax issues based
on estimates as to 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.
If we are unable to generate sufficient future taxable income or actual results differ from our other assumptions, we might be
required to reduce our deferred tax assets or to increase our deferred tax liabilities, which will increase our effective tax
rate, and negatively affect our results.



115







Provision for doubtful
debts



The provision for
doubtful debts is recognized according to management's judgment whenever there are objective indications that the Company will
not be able to recover all amounts owing to it under the original terms of the debt, due to material financial difficulties of
the customer, a reasonable expectation that the customer will become insolvent or will undergo a reorganization and will be unable
to repay its debts, or a delay in the repayments.



Property, plant and
equipment



Property, plant and
equipment also represent a significant proportion of the Company’s total assets. Therefore the estimates and assumptions
made to determine their carrying value and related depreciation are critical to the Company’s financial position and performance.



The charge in respect
of periodic depreciation is derived after determining an estimate of an asset's expected useful life and the expected residual
value at the end of its life. Increasing an asset's expected life or its residual value would result in a reduced depreciation
charge in the income statement.



The useful lives of
the Company's assets are determined by management at the time the asset is acquired and reviewed at least annually for appropriateness.
The lives are based on historical experience with similar assets as well as anticipation of future events, which may impact their
life, such as changes in technology.



Recently
issued accounting pronouncements



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



Liquidity and Capital
Resources



Sources and Uses
of Cash



Sources.



Our principal source
of liquidity is the cash generated by our operations. Both Alon Blue Square and its significant subsidiaries have generally generated
sufficient cash from their operations to satisfy their respective operating requirements. The available cash resources of Mega
Retail, Dor Alon, BSRE, Bee Group and their subsidiaries have historically been used, and are expected to continue to be used,
to finance the expansion of these companies. We believe our working capital is sufficient for our present requirements.



116









Cash generated by
operations was approximately NIS 286.1 million, or $76.7 million, in 2012, a decrease of 54.4% compared with approximately NIS
627.6 million in 2011. The decrease in cash flows from operating activities was mainly due to the purchase of real estate inventory
by BSRE of NIS 249.1 million (U.S $66.7 million), the decrease in operating profit of approximately NIS 107.8 million (U.S $28.9
million) and an increase in working capital needs that was partly offset by tax returns received, net amounting to NIS 16.6 million
(U.S $4.5 million) in 2012 compared to tax paid, net amounting to NIS 79.4 million last year.



In 2012, approximately
36% of our sales were paid for with cash, checks and gift certificates issued by the Company at the point-of-sale, and approximately
64% of our sales were paid for with credit cards.



During 2012, the average
time period that we held inventory was 26 days and the average time period within which our accounts receivable were paid was
38 days. By contrast, as of such date the average time period for payment of our accounts payable was 41 days. Accordingly, increased
capital resources are not required to support an increase in our receivables or inventories because we generally sell our products
before we pay our suppliers.



Other sources of
liquidity are long-term and short-term borrowing from banks, issuance of debentures and others. During 2012, we received long-term
loans from banks in the amount of NIS 594.3 million, or $159.2 million, short-term borrowings, net, of NIS 205.4 million, or $55.0
million, and issuance of debentures of NIS 504.1 million or $135.0 million. For information regarding outstanding balances and
repayment information see " – Long-Term Loans from Banks and other Financial Institutions" and " –
Debentures."



The principle sources
of liquidity of Alon Blue Square are dividends from subsidiaries and inter company balances with subsidiaries, management fees
received from subsidiaries in consideration for management services performed by Alon Blue Square, long-term and short-term borrowing
from banks, issuance of debentures and others. During 2012, Alon Blue Square received short-term borrowing, net, of NIS 237.8
million, or $63.7 million, and issuance of debentures of NIS 35 million or $9.4 million.



Uses.



During 2012, we
repaid long-term loans in the amount of NIS 350.4 million, or $93.9 million, debentures in the amount of NIS 209.3 million, or
$56.1 million, and interest in the amount of NIS 258.8 million, or $69.3 million.



117







In recent years, we
funded our renovation, remodeling and expansion programs primarily mainly from cash generated by our operations and from long
and short-term loans from banks, issuance of debentures and others. During 2012, we invested approximately NIS 460.4 million,
or $123.3 million, in property and equipment, intangible assets, investment property and payments on account of real estate, a
26.0% increase from our 2011 investment of NIS 356.5 million. Of our investment in property and equipment, intangible assets
and investment property in 2012, we invested NIS 243.7 million, or $65.3 million, in land and buildings, including land that
we leased and investment property, as compared with NIS 193.4 million in 2011. During 2013 and 2014, we intend to open approximately
nine to 13 filling stations at a cost of approximately NIS 4 million to NIS 5 million per filling station. We intend to finance
our store development, renovation, modeling, expansion and acquisitions mainly from cash generated by our operations and from
borrowings from banks and others.



Business combinations



In November 2008,
pursuant to a cash tender offer, we completed the acquisition of the Mega Retail shares that were not previously held by us, for
the aggregate consideration of NIS 150.7 million, or $40.2 million (at that time). We currently own 100% of the shares of Mega
Retail, and Mega Retail's shares are no longer traded on the Tel-Aviv Stock Exchange.



In September 2008,
we acquired an additional 25% of the shares of Bee Group for the aggregate consideration of NIS 35.4 million, or $9.8 million
(at that time), increasing our holdings in Bee Group to 85%. Subsequently, in October 2010, we acquired the remaining 15% of the
shares of Bee Group for the aggregate consideration of approximately NIS 24.5 million, or $6.8 million (at that time), increasing
our holdings in Bee Group to 100%.



In November 2011,
Bee Group issued a full tender offer to purchase 4.8 million shares of Naaman that were not held by the group for NIS 6.53 ($1.8)
per share. Bee Group received acceptance notices for 1.48 million shares (10.2%) in return for NIS 9.7 million ($2.6 million).



As of March 29, 2013,
Bee Group held approximately 77.03% of the outstanding shares of Naaman, and Naaman held 100% of the outstanding shares of Vardinon.



Dividends



The following table
sets forth dividends paid by the Company from January 1, 2008 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)  
|October 18, 2010  |  | NIS 12.31 ($3.39) |  | NIS 800 million (approximately $220.5 million)
|February 25, 2010 |  | NIS 1.70 ($0.45)  |  | NIS 75 million (approximately $19.8 million)  
|October 7, 2008   |  | NIS 3.46 ($0.99)  |  | NIS 150 million (approximately $42.82 million)



118







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







The financial covenants
in our subsidiaries' loan agreements do not restrict our subsidiaries from transferring funds to Alon Blue Square in the form
of cash dividends, loans or advances, subject to any legal limitations, except for Bee Group, which is restricted from transferring
funds to the Company in the form of dividends. Bee Group is not a significant entity and as of December 31, 2012 did not have
any earnings to distribute as a dividend.



In connection with
our issuance of NIS 400 million in aggregate principal amount of unsecured 5.9% convertible and nonconvertible debentures in August
2003, Alon Blue Square's board of directors resolved that Alon Blue Square would not distribute dividends in any quarter if the
ratio of our net financial obligations (as defined then by S&P-Maalot, an Israeli rating agency owned by S&P) to EBITDA
for any quarter exceeds 3.5 until June 30, 2006 or exceeds 3.0 thereafter. 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 financial statements to financial obligations (as defined then by S&P-Maalot)
for any quarter is below 120%.



On January 14, 2010,
Alon Blue Square's board of directors decided that in view of the changes and development of Alon Blue Square since 2003, including
the transfer of Alon Blue Square's and Mega Retail's real estate properties to BSRE (which operates under financial obligations
to EBITDA ratios appropriate for real estate companies and currently holds a major part of the consolidated debt), the purchase
of Bee Group (a Non Food retailer), and the reorganization of Alon Blue Square's food retail activities in its subsidiary, Mega
Retail Ltd., that 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). Due to the acquisition of Dor Alon, in October 2010, increase
in the fuel prices which increase our capital needs, the Company's then investment plan to open additional Mega Retail stores,
the entrance of BSRE to additional new projects and the launching of Alon Cellular, our board of directors further resolved that
Alon Blue Square would not distribute dividends in any quarter if the ratio of the net financial obligations (calculated in accordance
with the deduction described above) to EBITDA for any quarter exceeds 6. On December 31, 2012, the net financial obligations to
EBITDA (calculated in accordance with the deduction described above) is less than 6.



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



In November 2008,
BSRE's board of directors approved a decision to extend the BSRE's policy that existed for the years 2006-2008, according to which
BSRE will distribute dividends in the amount of no less than 25% of the net profits of BSRE in each year, to 2008-2010. In March
2011, the Board of Directors approved a decision to adopt a policy for the years 2011 and 2012. In March 2013, the Board of Directors
approved a decision to adopt a policy for the years 2013 and 2014, 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.



119







The following table
sets forth dividends paid by BSRE from January 1, 2008 until the date of this Annual Report:



|Date of payment   |  | Amount per share |  | Total amount(1) (2)                           
|----------------- |  | ---------------- |  | ----------------------------------------------
|April 4, 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)
|March 31, 2010    |  | NIS 4.6  ($1.3)  |  | NIS 57.6 million (approximately $15.5 million)
|April 20, 2009    |  | NIS 1.35 ($0.32) |  | NIS 16.8 million (approximately $4.0 million) 
|April 28, 2008    |  | NIS 1.58 ($0.46) |  | NIS 19.7 million (approximately $5.7 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
                                                                              80%.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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)                         
|----------------- |  | ---------------- |  | --------------------------------------------
|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
                                                                              80%.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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      |          
|------------------------------------- |  | ---------------- | ---------
|                                      |  | 2011             |          
|                                      |  | NIS in thousands |          
|                                      |  |                  |          
|Bank overdrafts                       |  |                  | 2,701    
|Bank loans                            |  |                  | 994,727  
|Commercial paper                      |  |                  | 39,500   
|Current maturities of long-term loans |  |                  | 311,642  
|                                      |  |                  | 1,348,570



120







The
short term credit described in the table above includes NIS 237.9 million of short term credit undertaken by the Alon Blue Square
in the aggregate amount of NIS 255.3 million as of December 31, 2012 and NIS 107.6 million as of December 31, 2011.



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 | 
|---------------------------------------------------------- |  | ---------------- | --------- |  | ------ | 
|                                                           |  | 2011             |           |  | 2012   | 
|                                                           |  | NIS in thousands |           |  | %      | 
|In Israeli currency:                                       |  |                  |           |  |        | 
|Linked to the Israeli CPI bearing a fixed interest rate    |  |                  | 665,149   |  |        | 
|Linked to the Israeli CPI bearing a variable interest rate |  |                  | 225,385   |  |        | 
|Unlinked and bearing a fixed interest rate                 |  |                  | 120,806   |  |        | 
|Unlinked and bearing a variable  interest rate             |  |                  | 540,789   |  |        | 
|                                                           |  |                  |           |  |        | 
|Total                                                      |  |                  | 1,552,129 |  |        | 
|                                                           |  |                  |           |  |        | 
|Less - current maturities                                  |  |                  | 311,642   |  |        | 
|                                                           |  |                  | 1,240,487 |  |        | 



(1)Weighted average rate as of December 31, 2012.



121







The loans described
in the table above include loans undertaken by Alon Blue Square in the aggregate amount of approximately NIS 174.0 million, loans
undertaken by Mega Retail and its subsidiaries in the aggregate amount of approximately NIS 268.7 million, loans undertaken by
BSRE in an aggregate amount of NIS 527.8 million, loans undertaken by Bee Group and its subsidiaries in an aggregate amount of
approximately NIS 93 million, and loans undertaken by Dor Alon in an aggregate amount of NIS 456.5 million. These loan agreements
contain undertakings by Bee Group and its subsidiaries, Dor Alon and its subsidiaries and BSRE to meet certain financial covenants.
The financial covenants in Bee Group's loan agreements include a limitation on Bee Group and its subsidiaries' ability to distribute
dividends to Alon Blue Square. As of December 31, 2012, except for a loan balance of NIS 58 million, for which a waiver from a
bank lender had been received, Bee Group and the rest of its subsidiaries met the financial covenants in their loan agreements.
The financial covenants in Dor Alon's loan agreements in the amount of NIS 103.6 million include a requirement that the equity
of Dor Alon's subsidiary will not be less than NIS 46 million, that the annual EBITDA of its subsidiary will not be less than
NIS 19 million and that the ratio between the financial debt and the EBITDA will be less than NIS 5 million. BSRE's loan agreements
in the amount of NIS 210.8 million include a financial covenant that the maximum ratio between the outstanding debt and the rent
income from BSRE's charged properties does not exceed 7.7. As of December 31, 2012, Dor Alon and BSRE had met these financial
covenants contained in their loan agreements.



Debentures



The following table
summarizes debentures outstanding as of December 31, 2011 and 2012 issued by (i) the Company, (ii) BSRE, of which we owned 78.22%
of the shares as of March 29, 2013, and (iii) Dor Alon, of which we owned 78.43% of the shares as of March 29, 2013:



|                            |  | December 31      |          
|--------------------------- |  | ---------------- | ---------
|                            |  | 2011             |          
|                            |  | NIS in thousands |          
|Convertible debentures:     |  |                  |          
|Issued by BSRE              |  |                  | 118,826  
|Less - current maturities   |  |                  | -        
|                            |  |                  | 118,826  
|                            |  |                  |          
|Non-convertible debentures: |  |                  |          
|Issued by the Company       |  |                  | 320,534  
|Issued by BSRE              |  |                  | 1,274,216
|Issued by Dor Alon          |  |                  | 651,940  
|                            |  |                  | 2,246,690
|                            |  |                  |          
|Less - current maturities   |  |                  | 212,643  
|                            |  |                  | 2,034,047



122







In addition, as
of December 31, 2011, Naaman, our subsidiary through Bee Group, had outstanding convertible debentures with principal balances
of NIS 83,000, of which NIS 83,000 were current maturities. As of December 31, 2012, the debentures were fully repaid.



Alon Blue Square
Debentures



In August 2003,
we issued to institutional investors NIS 400 million in aggregate principal amount of unsecured 5.9% debentures, half of which
(Series B) were convertible into our ordinary shares and were fully converted or repaid until August 2011. 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.



Alon Blue Square
Series A Debentures



The principal of
the Series A Debentures is repayable in three equal annual installments on August 5 of each of the years 2012 to 2014, and the
interest is payable semi-annually. Notwithstanding the above, under the terms of the Debentures, on August 5 of each of the years
2006, 2008 and 2010, the holders of the Series A Debentures were entitled to early redemption of the principal provided that on
each of such dates we do not repay more than one third of the par value of the Series A Debentures outstanding as of that date.



Other terms of
the Alon Blue Square Series A Debentures



The terms of the
Series A debentures provide that in the event that our ordinary shares are delisted from trading on the Tel Aviv Stock Exchange,
or TASE, and/or in the event that our ordinary shares are no longer held by the public and/or in the event that S&P-Maalot
reduces our rating to BBB or lower, then within three months from one of the abovementioned events we, subject to the then prevailing
law, will offer to acquire the debentures at a price equivalent to the price of debentures of the same type reflecting a return
of 2.5% in excess of the return on Israeli Government debentures with an average life similar to the remaining average life of
the debentures of that series as of the date of the offer, but in no event will the price exceed the adjusted carrying value of
the debentures of that series.



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.



123







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.



Ratings of Alon
Blue Square Debentures



On
January 25, 2012, Midroog, an Israeli rating agency and 51% subsidiary of Moody's Investors Services Inc., decreasedthe
rating of Series A and C Debenturesfrom "A1" rating to "A2/Stable". In addition,
Midroog applied the rating of "A2/Stable" for potential future issuances of up to NIS 200 million Series C Debentures
by way of expansion of the current Series C Debentures.



BSRE Debentures



In August 2006,
BRSE 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 BRSE ordinary shares, and NIS 650 million par value of registered BRSE
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. 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.
On January 4, 2012, BSRE completed the issuance of an additional NIS 150 million in principal amount of Series D debentures to
institutional investors in Israel, in consideration for 98.5% of its par value, reflecting proceeds of 5.8%. The terms of these
debentures are identical to the terms of the Series D debentures issued by BSRE on May 20, 2009. On August 28, 2012, BSRE completed
the issuance of an additional NIS 49 million in principal amount of Series D debentures to institutional investors in Israel in
consideration for 98.0% of its par value, reflecting proceeds of 6.0%. The terms of these debentures are identical to the terms
of the Series D debentures issued by BSRE on May 20, 2009. On November 19, 2012, BSRE completed the issuance of an additional
NIS 110 million in principal amount of Series D debentures to institutional investors in Israel in consideration for 107% of its
par value, reflecting proceeds of 4.8%. The terms of these debentures are identical to the terms of the Series D debentures issued
by BSRE on May 20, 2009.



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; since that date and through August 16,
2016, the conversion rate is NIS 239.18 par value of registered Series A debentures (following adjustments due to distributions
of cash dividends) for each ordinary share of NIS 1 par value.



124







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 Ltd. 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.



125







Rating of BSRE
Debentures



On August 10, 2011,
Midroog reapproved the rating of BSRE's debentures (Series A, Series B and Series C) to "A1/Negative".



On January 5, 2012,
Midroog approved an "A1/Negative" rating to the additional Series D debentures.



As at December 31,
2012 BSRE's (Series A, B, C and D) debentures were rated by Midroog at A1 with a negative outlook.



Dor Alon Debentures



In October 2004
a subsidiary of Dor Alon, Dor Energy Debenture Issue 1 Ltd. ("Dor Debenture"), issued debentures with a principal amount
of NIS 74 million to institutional investors at their par value. In May 2005, a subsidiary of Dor Alon, Dorgas Batuchot Ltd. issued
debentures with a par value of NIS 98 million. During 2005, Dor Alon issued approximately NIS 325 million principal amount of
Series A convertible debentures and NIS 200 million principal amount of Series B debentures. During 2006, Dor Alon issued an additional
issuance of NIS 385 million principal amount of Series B debentures, which represented an increase of the Series B issue, and
its terms are identical to the terms of the original Series B issue listed on the Tel Aviv stock exchange. In September 2009,
Dor Alon completed a public issuance of a principal amount of NIS 81 million (before issuance costs) of Series C debentures and
of a principal amount of NIS 139 million (before issuance costs) of Series D debentures.



On February 15,
2012, Dor Alon completed the issuance of an additional NIS 119.9 million in principal amount of Series D debentures to institutional
investors in Israel in consideration for 100.95% of its par value, reflecting proceeds of 6.9%. On August 20, 2012, Dor Alon completed
the issuance of an additional NIS 46 million in principal amount of Series D debentures to institutional investors in Israel in
consideration for 101.08% of its par value, reflecting proceeds of 6.9%. On January 31, 2013, Dor Alon completed the issuance
of an additional NIS 129 million in principal amount of Series D debentures to institutional investors in Israel, in consideration
for 103.8% of its par value, reflecting proceeds of 5.2%. The terms of all these debentures are identical to the terms of the
Series D debentures issued by Dor Alon in September 2009. On January 31, 2013, Dor Alon completed the issuance of an additional
NIS 21 million in principal amount of Series C debentures to institutional investors in Israel, in consideration for 97.95% of
its par value, reflecting proceeds of 5.3%. The terms of these debentures are identical to the terms of the Series C debentures
issued by Dor Alon in September 2009.



Dor Alon Series
A Debentures



The Series A Convertible
Debentures were redeemed in full in May 2011. Such debentures were linked to the Israeli CPI (both principal and interest), bore
an annual interest of 5%, and were convertible into registered shares of NIS 1 par value of Dor Alon.



126









Dor Alon Series
B Debentures



The Dor Alon Series
B Debentures are linked (principal and interest) to the Israeli CPI. The interest of 5% per annum is repayable in semi-annual
installments on May 31 and November 30 until May 2015.



The difference between
the consideration that was related to the liability component at the time of issue, after the reduction of issue costs and the
principal amount of the issue, reflecting the discount, is amortized over the term of the debentures using the effective interest
rate basis. The total issue costs for the debentures amounted to NIS 8,034 thousand. The effective interest rate of the debentures,
taking the above issue costs into account, is an annual rate of 6.65%.



Dor Alon Series
C Debentures



The Dor Alon Series
C Debentures bear the interest rate of Israeli government bonds (No. 817) plus 2.25%. The interest is paid in quarterly installments
up to December 2017. The principal is repayable in semi-annual installments on June 1 and December 1 over five years starting
2013.



Dor Alon
Series D Debentures



Dor Alon Series
D Debentures bear a fixed annual interest rate of 6.65%, payable in quarterly installments up to December 2016. The principal
is repayable in equal semi-annual payments on June 1 and December 1 from 2013 to 2016.



Dorgas Batuchot
Ltd. Debentures



These debentures
with a par value at the date of issue of NIS 98 million are linked (principal and interest to the Israeli CPI). The debentures
bear a fixed rate of annual interest of 4.95%. The interest and principal is repayable in quarterly installments up to June 2020.
Dorgas Batuchot debentures include a financial covenant requiring that the ratio between adjusted net income over the last 12
months from the liquefied petroleum gas activity and the quarterly payments of principal and interest on the debentures will be
less than 1.05. As of December 31, 2012, Dor Debentures Dorgas Batuchot met the financial covenants relating to these debentures.



Dor Debentures



Dor Debentures issued
two series of debentures to institutional investors:



Series 1 with a
par value at the date of issue of NIS 13 million, which are are linked (principal and interest) to the Israeli CPI. The debentures
bear a fixed rate of annual interest of 6.45%. The interest and principal repaid in semi-annual equal payments on April 20 and
October 20 up to 2016 (inclusive). As of December 31, 2012, Dor Debentures did not meet the financial covenants relating to the
series 1 debenture. As a result, a liability amounting to NIS 6.6 million was classified as current liabilities as of December
31, 2012.



127







Series 2 with a
par value at the date of issue of NIS 62 million are linked (principal and interest) to the Israeli CPI. The debentures bear a
fixed rate of annual interest of 6.45% for a period of 15 years, of which NIS 27 million in principal amount is payable in 15
annual payments on April 20 in the years 2005 to 2019 (inclusive) and the balance of NIS 35 million in principal amount is payable
in one payment on October 20, 2019. The interest on the principal amount of NIS 27 million is payable annually in the years 2005
to 2019 (inclusive) on April 20, and interest on the principal amount of NIS 35 million is payable semi-annually on April 20 and
October 20 for the years 2005 to 2019 (inclusive). Dor Debentures series 2 debentures include financial covenants requiring that
(i) the ratio between the EBITDA of 17 joint ventures and their financial expenses will not be less than 1.1, (ii) the ratio between
adjusted net cash flow of 17filling stations held by joint ventures and the financial expenses on loans from parent companies
will not be less than 1.2, and (iii) the ratio between income of the Dor Debentures and the annual payments of principal and interest
on the debentures will not be less than 1.09. As of December 31, 2012, Dor Debentures met the financial covenants relating to
the series 2 debenture.



Rating of Dor Alon
Debentures



As of December 31,
2012, Dor Alon's Series B Debentures were unrated and Series C and D Debentures were rated A2 with a stable outlook, Dorgas Batuchot
Debentures were rated Aa2, and the Dor Debentures were rated A-.



For additional information
on charges pertaining to the collateralized long-term loans, see note 34 to our consolidated financial statements.



Commitments for Capital Expenditures



As of December 31,
2012, we had entered into agreements for investments in real estate, investment property, land and buildings, constructions work,
fixtures, equipment and leasehold improvements in the total amount of approximately NIS 399 million, or $107 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.
| | -- | ------------------



Based on data published
by the Israeli Central Bureau of Statistics of the retail sales of food, drinks and tobacco in Israel, we estimate that approximately
32.1% of the total retail sales of food, beverages and tobacco in Israel in 2012 was made by the two large chains and approximately
31.1% of the estimated retail sales made by supermarkets, groceries and mini-markets in Israel in 2012 was made by the two large
chains.



128







The food retailing
industry has been subject to increased competition in recent years. We estimate that our market share of the total retail market
of food, beverages and tobacco decreased to 11.94% in 2012 from 12.8% in 2011. The market share of our largest competitor, Shufersal,
based on its financial reports, was approximately 20.2% of the total retail market of food, beverages, and tobacco in 2012, compared
to 20.9% in 2011 (this calculation is based on the estimate of the Central Bureau of Statistics of the total retail market for
food, beverages and tobacco, and our estimate for market growth of 3.1% in 2012). In 2012, very low-priced smaller supermarket
chains continued to aggressively increase their market share and expand their presence in selected areas in Israel, often geographically
beyond their original location. The increased competition has led to increased downward pressure on prices.



The global economic
uncertainty and the resulting slowdown in the Israeli economy has impacted the food retail market by affecting the buying patterns
of our customers, as more customers have shifted their purchases to low-price and hard discount stores, which have a lower profit
margin. In response to these trends, in August 2007, we launched our Mega In Town store format to offer discount prices in neighborhood
stores. In addition, in December 2008 we launched our Mega Bool heavy discount store format as well as our "Mega" line
of private label goods that are sold in our "Mega Bool" and "Mega In Town" stores. We are looking to increase
our "Mega@Internet" sales and our private label product "Mega" in 2013 in order to compete effectively and
increase our market share.



In addition, during
2009, we launched a new membership card and a new "You" Diners Club and MasterCard credit card as part of our "You"
loyalty club, which is designed to increase consumer traffic and encourage customers to patronage our stores. During 2013, the
Company intends to increase the number of the You loyalty club customers.



In the past few
years, we have witnessed a global trend of supermarkets specializing in organic and health products. In response to this trend,
we purchased Eden Teva in October 2007, which operates a leading supermarket chain in Israel offering organic/health products.
We are implementing our strategy to establish our Eden Teva format as the leader in Israel's organic/health food market, and as
of December 31, 2012, Eden Teva operated 20 (including nine Eden Stores within Mega) supermarket stores.



In order to compete
effectively in the food retailing market we believe we must identify new store locations and opportunities to expand and improve
existing store locations. However, sales in new stores or in expanded or improved existing stores may increase at the expense
of sales in other existing stores of ours due to geographical proximity. As the supermarket industry grows, the likelihood that
sales of one store will adversely affect the sales of a nearby store increases.



In 2012, we opened
10 new stores to compete in selective areas in which we did not believe we had sufficient market presence and closed nine unprofitable
stores. In addition, we plan to continue to remodel some of our supermarkets to give them a more “upscale” orientation,
offering improved product selection and increased focus on customer service.



129







In 2013, we plan
to open approximately three additional supermarkets, totaling approximately 2,700 square meters of store space, in localities
whose populations are currently under-served by supermarkets or in localities in which we do not have sufficient market presence.



In 2013, we are
taking action to further increase our market share of “Non-Food” and “Near-Food” products and to offer
a wider selection of these products to consumers in our stores with the goal of increasing the portion of our customers’
overall shopping needs that are addressed in our stores. In addition, we intend to continue our expansion into the stand alone
Non Food stores market by opening approximately 10 additional stores that are self-operating stores and to capitalize on potential
synergies and an internal reorganization in order to improve our operating efficiency. Twenty five stores that had been operated
by a franchisee became self-operating stores during 2013.



Dor Alon anticipates
opening and operating an additional nine to 13 commercial and filling stations during 2013 and 2014. 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.



In 2013, in order
to improve our market share, we are looking to further broaden the variety of products offered under our private label and to
improve our distribution capabilities by investing in a new distribution center, which should begin working at the end of 2013.



| | 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:



|                                                             |  | Expected Maturity (NIS in thousands) |          
|------------------------------------------------------------ |  | ------------------------------------ | ---------
|                                                             |  | 2013                                 |          
|                                                             |  |                                      |          
|Long term loans from  banks (1)                              |  |                                      | 251,463  
|Non Convertible Debentures issued by the Company (2)
    (3) |  |                                      | 91,781   
|Non-Convertible Debentures issued by
    BSRE  (4)           |  |                                      | 247,975  
|Convertible Debentures issued by BSRE (4)                    |  |                                      | 29,158   
|Non-Convertible Debentures issued by Dor Alon (5)            |  |                                      | 179,713  
|Loan from related party                                      |  |                                      | -        
|Loan from others                                             |  |                                      | -        
|Short term credit from banks (6)                             |  |                                      | 1,081,392
|Commercial paper (7)                                         |  |                                      | 87,837   
|Purchase Obligations                                         |  |                                      | 81,255   
|Purchase Obligations – BSRE                                  |  |                                      | 313,128  
|Non-cancelable Long term leases
    (8)                      |  |                                      | 354,004  
|Total contractual cash obligations                           |  |                                      | 2,717,705



130







| | (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, 2012
                                                               (4.5% per annum), interest payments on the long-term loans (in
                                                               thousands) would be NIS 71,522 in 2013, NIS 59,428 in 2014, NIS
                                                               43,574 in 2015, NIS 35,219 in 2016, NIS 28,462 in 2017, NIS 22,874
                                                               in 2018 and NIS 19,350 in 2019 and beyond.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | These debentures bear interest
                                                               at an annual rate of 5.9% 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 9,211
                                                               in 2013 and NIS 4,446 in 2014. 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | 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 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 2,674
                                                               in 2013, NIS 2,391 in 2014, NIS 2,133 in 2015, NIS 1,872 in 2016,
                                                               NIS 1,608 in 2017, NIS 1,343 in 2018 and NIS 4,027 in 2019 and
                                                               beyond. 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. The principal is repayable in twelve
                                                               equal annual installments on November 4 of each of the years 2011
                                                               to 2022 (inclusive).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | The Non-Convertible Debentures
                                                               and the Convertible Debentures (Series A, Series B Series C and
                                                               D) bear interest at an annual rate of 6.25%, 4.7%, 4.2% and 4.5
                                                               %, 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 72,362 in
                                                               2013, NIS 60,734 in 2014, NIS 49,397 in 2015, NIS 38,035 in 2016,
                                                               NIS 26,698 in 2017, NIS 18,225 in 2018 and NIS 9,753 in 2019 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, 2012 and assuming no additional conversion of
                                                               debentures, interest payments on the Convertible Debentures (in
                                                               thousands) would be NIS 7,472 in 2013, NIS 5,650 in 2014, and NIS
                                                               3,828 in 2015 and NIS 2,005 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | The Non-Convertible Debentures
                                                               and the Convertible Debentures (Series B, Series C, Series D, DorGaz
                                                               and Dor Debentures) bear interest at an annual rate of 5%, 4.1%,
                                                               6.65%, 4.95% and 6.45%, respectively, and Series B 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
                                                               and Series C bears interest of government bonds+2.25%. Without
                                                               taking into account any changes to the Israeli CPI and interest
                                                               of government bonds, interest payments on the Non-Convertible Debentures
                                                               (in thousands) would be NIS 41,719 in 2013, NIS 31,474 in 2014,
                                                               NIS 21,648 in 2015, NIS 11,812 in 2016, NIS 5,514 in 2017, NIS
                                                               4,274 in 2018 and NIS 3,387 in 2019 beyond.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



131







| | (6) | The table above does not include
                                                               interest on our short term credit from banks (2012: 3.9%- per year).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (7) | On June 30, 2009, the Company
                                                                   issued commercial paper to institutional investors in an amount
                                                                   of NIS 40 million for a period of four years. The commercial
                                                                   paper bears annual interest at a variable rate equal to the
                                                                   Bank of Israel Interest Rate plus 1.5%, payable semi-annually
                                                                   beginning on December 30, 2009. The average annual interest
                                                                   rate for the six months ended December 31, 2012 was 3.67%.
                                                                   Therefore, the table above does not include the amount of interest
                                                                   on commercial paper. The principal of the commercial paper
                                                                   is repayable every six months at the demand of the holders,
                                                                   but in any event, the last repayment date of the principal
                                                                   will be June 28, 2013. In addition, in August 2012 the Company
                                                                   issued commercial paper to institutional investors in an amount
                                                                   of NIS 71 million for a period of five years. The commercial
                                                                   paper bears annual interest at a variable rate equal to the
                                                                   Bank of Israel Interest Rate plus 1.85%, payable quarter-annually
                                                                   beginning on November 2012. The average annual interest rate
                                                                   for the three months ended December 31, 2012 was 4.1%. Therefore,
                                                                   the table above does not include the amount of interest on
                                                                   commercial paper. The principal of the commercial paper is
                                                                   redeemable every three months at the demand of one of the parties,
                                                                   but in any event, the last redemption date of the principal
                                                                   will be July 2012.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (8) | Includes mainly apartment lease
                                                                   arrangements.
| | --- | ----------------------------------------------------------------------------------------------------------------



| | * | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | The table above does not include
                                                              a provision for uncertain tax positions in the amount of 9.4 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



132







| | ITEM 6. | DIRECTORS,
                                                                                                                                SENIOR
                                                                                                                                MANAGEMENT
                                                                                                                                AND
                                                                                                                                EMPLOYEES
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | A. | 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 April 30, 2013.



|Name                     |  | Age |  | Position                                                                                             
|------------------------ |  | --- |  | -----------------------------------------------------------------------------------------------------
|Yitzhak Bader            |  | 66  |  | Chairman of the Board of Directors and Director                                                      
|David Wiessman (1)       |  | 58  |  | Chief Executive Officer, Chief Operating Decision Maker (CODM)
    and Director                      
|Limor Ganot              |  | 40  |  | Co- Chief Executive Officer                                                                          
|Shlomo Even              |  | 56  |  | Director                                                                                             
|Diana Bogoslavsky        |  | 54  |  | Director                                                                                             
|David Alphandary (2) (3) |  | 77  |  | Director                                                                                             
|Uzi Baram (1) (2) (3)    |  | 75  |  | Director                                                                                             
|Avraham Meron (2)        |  | 73  |  | Director                                                                                             
|Mordehay Ventura         |  | 58  |  | Director                                                                                             
|Dror Moran               |  | 45  |  | Vice President and Chief Financial Officer of Alon Blue Square
    and  General Manager of "You" Club
|Ortal Klein              |  | 45  |  | Corporate Secretary                                                                                  
|Asher Ben-Shoshan        |  | 51  |  | Head of Human Resources Division                                                                     
|Daniel Garabagi          |  | 49  |  | Head of Information Technology Division                                                              
|Motti Keren              |  | 49  |  | Chief Executive Officer of Mega Retail                                                               
|Zeév Stein               |  | 59  |  | Chief Executive Officer of Blue Square Real Estate Ltd.                                              
|Israel Yaniv             |  | 66  |  | Chief Executive Officer of Dor Alon                                                                  
|Raviv Brookmayer         |  | 56  |  | Chief Executive Officer of Naaman Group                                                              



(1)  Member of the Compensation
Committee.

(2)  Member of the Audit Committee.

(3)  External directors.



Yitzhak Baderhas served as our Chairman of our Board of Directors since January 2013 and as a director since June 2003. Mr. Bader is currently
Chief Executive Officer of Granot, a purchasing organization of the kibbutzim. He is also Chairman of the board of directors of
Alon Israel Oil Company Ltd. and Joint Chairman of Dor-Alon Energy In Israel (1988) LTD., and a director in the following companies:
Alon Retail, Mega Retail, Alon Natural Explorations Ltd., Dor Alon Retail Sites Management Ltd., Dor Alon Gas Technologies Ltd.,
Alon USA Energy, Inc., Alon USA Operating, Inc., Alon USA GP, LLC, Alon USA Capital Inc., Alon Assets Inc., Alon USA Inc., BSRE,
Pri-Gat Ltd., Rimon Counseling and Management of Services Ltd., Meiram Water and Infrastructures Ltd., various entities under
control of Granot, One Technologies Software (ASD) Ltd., Gat Givat Haim Cooperative Society for Preservation of Agricultural Products
Ltd., and Tnuva Central Cooperative for the Marketing of Agriculture Produce in Israel Ltd.



133







David
Wiessman has served as our Chief Executive Officer since January 2013 and as CODM since April 2011. Mr. Wiessman served as
our Executive Chairman of the Board of Directors from November 2005 until January 2013. Mr. Wiessman is also the Chairman of the
board of directors of Mega Retail since March 12, 2007 and the Chairman of the board of directors of BSRE since December 21, 2005.
In addition, Mr. Wiessman is currently the President and Chief Executive Officer of Alon Israel Oil Company Ltd. and President
and Active Joint Chairman of the Board of Directors of Dor-Alon Energy In Israel (1988) LTD., Chief Executive Officer of Bielsol
Investments (1987) Ltd., Chairman of the board of directors of Alon
Retail, Executive Chairman of Alon U.S.A. Energy, Inc. and Alon USA Partners GP, LLC, Director of Alon Natural Gas Explorations
Ltd and Rosebud Real Estate Ltd., and holds director and/or officer positions in other companies affiliated with the foregoing
Alon entities, both in Israel and the United States. In addition, Mr. Wiessman also serves as a director in other companies not
affiliated with Alon Israel Oil Company Ltd., or with Alon USA Inc. Mr. Wiessman is a member of the Compensation Committee of
Alon Blue Square.



Limor Ganothas
served as our Co-Chief Executive Officer since April 2013. Pursuant to her employment agreement with Alon Israel Oil Company Ltd.,
Ms. Ganot is to spend two-thirds of her working time as Co-CEO of Alon Blue Square and one-third of her time working with other
companies in the Alon Group.Ms. Ganot has served in different positions in Alon Israel Oil
Company Ltd., from 2004, and in her last position served as Vice President Business Development and Merger Acquisitions at Alon
Israel Oil Company Ltd.  Ms. Ganot holds a BA in Accounting and Economics from the Tel Aviv University and is a certified
accountant. Ms Ganot serves as a director in Mega Retail Ltd., Dor Alon Retail Sites Management Ltd., Bee Group Retail Ltd., Naaman
Group (N.V.) Ltd., Diners Club Israel Ltd. (pending approval by the Bank of Israel), several subsidiaries of Blue Square Real Estate
Ltd. related to the Tel Aviv Wholesale Market project, and the Givon Parking Lot project, and other companies in the Alon Blue
Square group. Ms Ganot serves as chairman of the board of Alon Cellular Ltd., and as a director in Sheshet Chain of Stores for
Household Utensils Ltd., and Kfar Hasha’ashuim Toy Chain Stores Ltd.



Shlomo Even
has served as our director since June 2003. Mr. Even is currently a certified accountant and partner of the accounting firm of
Tiroshi Even, and a director of the following companies: Super Sol Bielsol Investments Ltd., Alon Israel Oil Company Ltd., Dor-Alon
Energy In Israel (1988) LTD., Rosebud Real Estate Ltd., Dor Alon Retail Sites Management Ltd., Alon USA Energy Inc., Alon USA
Operating Inc., Alon USA GP LLC, Alon USA Capital Inc., Alon Assets Inc. and Alon USA Inc. Mr. Even holds a B.A. degree in Accounting
and Economics from Bar-Ilan University.



Diana Bogoslavskyhas served as our director since March 2006. She has served as the Chief Executive Officer of Mishkei Emek Hayarden and the
Regional Plants since 2005. From 1996 to 2004, Ms. Bogoslavsky served as Manager of the Economic Department of Brit Hapikuach
(the Supervision Alliance). From 2000 to 2004, Ms. Bogoslavsky also served as a member of the management of Brit Hapikuach and
as the Chairman of the board of directors of Jenny Company, a subsidiary of Brit Hapikuach. From 1993 to 1996, Ms. Bogoslavsky
served as Bank Mizrahi representative in Argentina. Ms. Bogoslavsky currently serves as a director in the Union of the Kibbutzim
Industry, in Dor-Alon Energy In Israel (1988) LTD, Dor Alon Retail Sites Management Ltd. and Alon Natural Gas Explorations Ltd.
and in several others companies. Ms. Bogoslavsky holds a Masters degree in Economics and Business Management (specializing in
financing) and B.A. in Economics and Administration from Midreshet Rupin in the Hefer Valley in Israel.



134







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.



Mordehay Venturahas served as our director since March 22, 2012. Mr. Ventura has served as Chief Executive Officer of the Mishkey Hadarom
Aguda Haklait Shitufit Ltd. (Mishkey Hadarom) since 2004, and currently serves as a director in Oil Holdings (Founded by the Kibbutzim
Organizations) Ltd., Alon Israel Oil Company Ltd., Dor Alon Energy in Israel (1988) Ltd., Dor Alon Retail Sites Management Ltd.,
Gan Smuel Mazon Ltd., Ganir (1992) Ltd., Hadarey Nitzanim Aguda Haklait Shitufit Ltd., Sivey Hadarom (S.D.) Ltd., Hanegev Aguda
Haklait Shitufit Transport Company Ltd., Megadley Drom Yehuda Aguda Haklait Shitufit Ltd., Shkedey Drom Yehuda Aguda Haklait Shitufit
Ltd., Zeitey Drom Yehuda Aguda Haklait Shitufit Ltd., Hazera (1939) Ltd., Megadley Zraim Ltd., the Egg and Poultry Board, Amal
Darom Aguda Haklait Shitufit Ltd., Marbek Services and assets (2002) Ltd., Mishkey Dan Partnership, Dana Finance Services Ltd.,
Amber Machon Letaarovet Aguda Haklait Shitufit Merkazit Ltd., Alon USA Partners LP and Tnuva Holdings. Mr. Ventura holds a B.A.
degree in Economics and Business Administration from the Rupin Academic Center in the Hefer Valley in Israel.



135







Dror Moran
has served as our Vice President and Chief Financial Officer since July 2006, and the General Manager of "You" Club,
since June 2009. Mr. Moran is a CPA and received a Bachelor of Business, Accounting and Finance from the College of Management
Academic Studies in Tel Aviv.



Ortal Klein,
Adv.has served as our Corporate Secretary since March 2011. Ms. Klein has also served as the General Counsel and
Corporate Secretary of Alon Israel Oil Company since May 1997 and the General Counsel and Corporate Secretary of Dor Alonand
its subsidiaries since 2000. Ms. Klein holds a LLB from Tel Aviv University and a LLM in commercial Law from Bar Ilan University.



Asher Ben-Shoshanhas served as our head of the Human Resources Division since May 2012. Mr. Ben-Shoshan served as Vice President of Human Resources
and Administration in the Tel-Aviv Municipality from 2003 until 2012. Prior to that, he served as the head of the Human Resources
Department of the Tel-Aviv Municipality from 1999 to 2003. Mr. Ben-Shoshan holds a B. Tech in industrial engineering from Ariel
University Center and an MA in public policy from the Tel Aviv University.



Daniel Garabagihas served as our Vice President and head of the Information Technology Division since April 2012. Mr. Garabagi served as
Vice President of Information Technology in Strauss Group, one of the largest food companies in Israel, from 2004 to 2012. Prior
to that, he served as manager of Information Technology in Strauss Group from 2000 to 2004. Mr. Garabagi holds a B.A. in Mathematics
and Computer Science from the Haifa University.



Motti Keren
has served as the Chief Executive Officer of Mega Retail since January 2013. From 2011to 2012, Mr. Keren served as the President
of Unilever Central Europe. From 2005 to 2010, Mr. Keren served as the CEO and Chairman of Unilever Israel, and from 2001 to 2004
Mr. Keren served as the Supply VP of Unilever Israel. Mr. Keren holds a BA in Economics and an MBA from Tel Aviv University in
marketing and finance.



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. Until December 2004, Mr. Stein served as Vice President of Planning and Development in Alon Israel
Oil Company Ltd. 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.



Israel Yanivhas served as the Chief Executive Officer of Dor Alon since 2000. From 1997 until 2000 Mr. Yaniv served as Chief Executive
Officer of SuperGaz Ltd. Mr. Yaniv holds a BSc and MSc in Chemical Engineering from the Technion in Haifa.



Raviv Brookmayerhas served as the Chief Executive Officer of Naaman Group since, September2012. Mr. Brookmayer served asChief 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.



136







Arrangements for the Election of
Directors



As of March 29, 2013,
Alon, directly and indirectly through Alon Retail, owned approximately 72.19% 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 Alon Blue
Square directors, other than Alon Blue Square's 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 following table
sets forth the aggregate compensation we paid or accrued on behalf of all persons who served as Alon Blue Square directors or
senior management for services they rendered Alon Blue Square and its subsidiaries, for the year ended December 31, 2012. The
table also includes compensation to individuals who ceased to serve as directors or executive officers during the year.



|                                                                    |  |  | Salaries, fees, expenses, directors’ |                     |  | Pension, retirement  | 
|------------------------------------------------------------------- |  |  | ------------------------------------ | ------------------- |  | -------------------- | 
|                                                                    |  |  | fees, commissions and bonuses        |                     |  | and similar benefits | 
|                                                                    |  |  | (in thousands)                       |                     |  | (in thousands)       | 
|All directors, senior management
    and Acting Chairman as a group |  |  |                                      | $4,749 (NIS 17,727) |  |                      | 



We recorded net income
of approximately NIS 0.7 million, or $0.2 million, in 2012 related to the options granted to our senior management under
our share option plan in previous years and cancelled during 2012.



In April 2008, we agreed
to pay to each director (including our external directors and expert external directors) other than the Chief Executive Officer,
the sum of NIS 97,500 per year and a meeting attendance fee of NIS 3,660, 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.



137







We also agreed to
pay David Wiessman, our Chief Executive Officer,Chief Operating Decision Maker and a director
and our former Executive Chairman of the Board, a monthly payment of NIS 42,497 plus VAT commencing from November 15, 2005, the
date Mr. Wiessman became Executive Chairman of the board of directors. The compensation is linked to changes in Israel’s
CPI since November 2005, and is updated every three months (therefore the currently monthly amount is NIS 49,000). No additional
fees are paid to Mr. Wiessman for attending meetings of the board of directors or any committee of the board of directors. Mr.
Wiessman is also entitled to reimbursement of actual expenses (upon submission of receipts) incurred by him in connection with
his service as Executive Chairman of the board of directors. In February 2006, our audit committee, board of directors and shareholder
meeting approved this arrangement and this arrangement was approved by our audit committee, board of directors and shareholders
meeting for additional three years commencing on February 2,2012.



BSRE paid to its CEO,
Mr. Zeev Stein, for the year 2012 a salary of approximately NIS 2,144,000 (including a severance payment payable by Dor Alon in
connection with his former employment with Dor Alon) plus an annual bonus of NIS 532,668 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 hold 0.21% of BSRE's issued and outstanding shares, following the exercise of options granted to him under BSRE's option
plan.



Dor Alon paid to its
CEO, Mr. Israel Yaniv, for the year 2012 a salary of approximately NIS 1,783,000 plus an annual bonus of NIS 508,000 on account
of 2011. Under his employment agreement, Mr. Yaniv is entitled to an annual bonus equal to no more than eight monthly salaries,
at the discretion of Dor Alon's board of directors. In the event of termination of Mr. Yaniv's employment with Dor Alon, he is
entitled to a notice period of 10 months and to a severance package equal to one and a half months' salaries for every year of
employment, other than in those situations where Dor Alon would not be required to pay severance under the law.



Naaman Group agreed
to pay its CEO, Mr. Raviv Brookmayer a monthly payment of NIS 83,000 plus an extra monthly salary to be paid in 2013. 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 equal to no more than NIS 850,000 for every calendar year of employment and subject to Naaman Group financial results.
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 nine months of "garden leave," subject to the terms and conditions set forth in his employment agreement.



138







As of March 31 2013,
the Company had outstanding 6,667 options to executive officers with an exercise price of NIS 40.98 (unlinked) per share and 63,833
options to managers with an exercise price of NIS 40.98 (unlinked) per share. The vesting periods for the options are 66.7% at
the end of two years from the date of grant and the remaining 33.3% at the end of three years from the date of grant. The options
granted to executive officers and managers may be exercised during the six month period from the end of the vesting period and
options granted to managers may be exercised during one month period. Options not exercised during this period will expire.



In January 2010,
our controlling shareholder, Alon, granted an option to D.B.W Investments Ltd. a company controlled by Mr. David Wiessman, our
Chief Executive Officer,Chief Operating Decision Maker and a director and our former Executive
Chairman of the Board, to purchase 766,020 of our shares held by Alon, representing approximately 1.16% of our outstanding shares,
as of March 29, 2013. 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 holds approximately 1.06% of the outstanding shares of Alon Blue
Square as of March 29, 2013.



| | 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 his 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 (s)he possess all of the required qualifications
to serve as a director (and lists such qualifications in such declaration) and that he has the ability to dedicate an appropriate
amount of time for the performance of his duties as a director of the Company.



139







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 office,
including exculpation, indemnification or insurance, requires the approval of the audit committee, the board of directors and
the shareholders of the Company.



The appointment and
terms of office of all our officers, other than directors and the general manager (Chief Executive Officer), are determined by
the general manager, subject to the approval of our board of directors, audit committee and/or compensation committee.



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



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 himself 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
who is already serving as a director may be appointed as a substitute director for a committee of the board of directors so long
as (s)he is not already serving as a member of such committee, and if the substitute director is to replace an external director,
(s)he 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 (s)he 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 the
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 Minister of Justice has adopted regulations exempting companies,
like Alon Blue Square, whose shares are traded outside of Israel, from some provisions of the Israeli Companies Law.



140







Under the Israeli
Companies Law, 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 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 , 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 any field as of the date of the person’s appointment. The term “affiliation”
includes:



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



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 is subordinated directly or indirectly or any entity under the person’s control has business or professional
relationship with an entity which an affiliation with is prohibited as detailed above, even if such relationship are 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 “affiliation” with the public company for which (s)he serves, or is a candidate for serving as an external
director.



141







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 him 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 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.



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 other 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.



142







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. External director may be removed only in a general meeting, by the
same percentage of shareholders as is required for their election, or by a court, and in both cases only if the external directors
cease to meet the statutory qualifications for their appointment, if they violate their duty of loyalty to us.  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 is required to include all of the 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.



New York Stock Exchange
Requirements



See below “-
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, comprised of at least three directors
including all of the external directors.



The 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. 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 its income from the controlling shareholder.



143







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.



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; and 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.



New York Stock Exchange
Requirements



Under New York Stock
Exchange rules, Alon Blue Square is 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.



The Securities and
Exchange Commission (“SEC”) 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 to 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.



144







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 his
                                                                                                              approval or performed
                                                                                                              by him by virtue
                                                                                                              of his 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:



| | · | refrain
                                                                                                              from any action
                                                                                                              involving conflict
                                                                                                              of interest between
                                                                                                              the performance
                                                                                                              of his duties in
                                                                                                              the company and
                                                                                                              his personal affairs;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | refrain
                                                                                                              from any activity
                                                                                                              that is competitive
                                                                                                              with the company's
                                                                                                              business;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | refrain
                                                                                                              from usurping any
                                                                                                              business opportunity
                                                                                                              of the company to
                                                                                                              receive a personal
                                                                                                              gain for himself
                                                                                                              or others; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



145







Under the Israeli
Companies Law, directors’ compensation arrangements require audit 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 he may have and all related material fact or document known to him,
in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes a personal
interest of his relative, of a company in which the office holder or his 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 his behalf – all whether the discretion 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:



| | · | other
                                                                                                              than in the ordinary
                                                                                                              course of business;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | other
                                                                                                              than on market terms;
                                                                                                              or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | that
                                                                                                              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.
Subject to certain exceptions, the audit committee and the board of directors must approve the conditions and term of office of
an office holder (which is not a director).



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 the shareholder
approval.

146







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 derives 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 from the controlling shareholder, 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,
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 – 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.



147







The Israeli Companies
Law further provides that an acquisition of shares 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.



Regulations under
the Israeli Companies Law provide that the Israeli Companies Law’s tender offer rules do not apply to a company whose shares
are publicly traded outside of Israel, if, pursuant to the applicable foreign laws or stock exchange rules, there is a restriction
on the acquisition of any level of control of the company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders. It is the view of the Israeli Securities Authority, that U.S.
securities laws and stock exchange rules do not impose the required restriction on the acquisition of any level of control of
a company, and therefore the Israeli Companies Law’s special tender offer rules would apply to a company whose shares are
publicly traded in the United States.



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
his 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.



148







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.



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



149







Pursuant to resolutions
adopted by our shareholders, we participate in a directors’ and officers’ liability insurance policy acquired by Alon.
The extension of the directors' and officers' liability insurance was approved by our Audit Committee on February 12, 2013, and
by the Board of directors On March 21, 2013. As extended, the insurance policy is for a period beginning on January 1, 2013, and
ending on December 31, 2013 covering the Company and affiliated entities, including Dor Alon and its subsidiaries, BSRE 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).



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 him as a result
of an act performed in his 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 him 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 him or instituted
                                                                                                             on behalf of the
                                                                                                             company or by another
                                                                                                             person, or in a criminal
                                                                                                             charge from which
                                                                                                             he was acquitted,
                                                                                                             or a criminal charge
                                                                                                             in which he was convicted
                                                                                                             for a criminal offense
                                                                                                             that does not require
                                                                                                             proof of criminal
                                                                                                             intent;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



150







| | · | 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 him 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 him financial
                                                                                                             obligation in lieu
                                                                                                             of a criminal proceeding,
                                                                                                             or that resulted
                                                                                                             without filing an
                                                                                                             indictment against
                                                                                                             him but with imposing
                                                                                                             on him 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
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 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 him as a result
of an act done in his 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 his 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 his duty
                                                                                                             of care if the breach
                                                                                                             was done intentionally
                                                                                                             or recklessly (except
                                                                                                             if the breach was
                                                                                                             solely as a result
                                                                                                             of negligence);
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



151







| | · | 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 audit committee and board of directors and, in specified circumstances, by our shareholders.



Letters of Indemnification



Our audit committee,
board of directors and general shareholders meeting approved in February 2001 the grant of indemnification and exemption
letters to our directors and officers, including those directors and officers whose term of service ended on or after September 1,
2000. In April 2002, the general shareholders meeting approved the grant of a new letter of indemnification and exemption to the
officers and directors of the Company. The aggregate amount of the indemnification (in addition to any insurance proceeds received)
may not exceed 25% of our shareholders’ equity (in US dollars) as stated in our consolidated financial statements for the
year ended December 31, 2000, for all persons and events. Under the indemnification and exemption letters, we agreed to indemnify
these directors and officers, retroactively with respect to events occurring after February 1, 2000, the date on which the
Israeli Companies Law became effective and prospectively, in connection with specified issues.



On June 12, 2008,
following approval of our audit committee and board of directors, our shareholders approved the grant of new indemnification 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 new indemnification
letter, 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. See above "- Indemnification of Office Holders".



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



152







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



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



153







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



Pursuant to the
new indemnification letter, upon issuance of the new letter, all previous indemnification letters previously issued to each director
or officer by the Company will be 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 that were 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 a compensation committee and an audit committee.



Compensation
Committee



Under a recent amendment
to the Companies Law, the board of directors of a public company must establish a compensation committee consisting 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. 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.



154







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.



Our compensation committee,
which consists of David Wiessman and Uzi Baram, administers issues relating to employee compensation for senior management.



Audit Committee



Our audit committee,
which consists of David Alphandary, Uzi Baram 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.”



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



As of December 31,
2012, Mega employed 7,240 employees (including employees of Eden Teva), counting multiple employees sharing a single position
as a single employee, including 2,539 temporary employees. 746 of our employees were employed in central management and administration
and in our logistics center and 6,494 in our stores.



As of December 31,
2012, Dor Alon employed 2,628 employees, counting multiple employees sharing a single position as a single employee, 107 of Dor
Alon’s employees were employed in central management and administration and in Dor Alon’s logistics center and 2,521
in Dor Alon’s direct marketing sector and filling stations and convenience stores.



As of December 31,
2012, our non-food segment employed 935 employees, counting multiple employees sharing a single position as a single employee,
344 of our non-food segment’s employees were employed in central management and administration and in its logistics center
and 501 in our non-food stores.



As of December 31,
2012, BSRE employed ten employees.



As of December 31,
2012, Alon Cellular employed 33 employees.



As of December 31,
2011, Mega employed 6,630 employees (including employees of Eden Teva), counting multiple employees sharing a single position
as a single employee, including 3,104 temporary employees. 740 of our employees were employed in central management and administration
and in our logistics center and 5,890 in our stores.



155







As of December 31,
2011, Dor Alon employed 2,518 employees, counting multiple employees sharing a single position as a single employee, 111 of Dor
Alon’s employees were employed in central management and administration and in Dor Alon’s logistics center and 2,407
in Dor Alon’s direct marketing sector and filling stations and convenience stores.



As of December 31,
2011, our non-food segment employed 736 employees, counting multiple employees sharing a single position as a single employee,
403 of our non-food segment’s employees were employed in central management and administration and in its logistics center
and 333 in our non-food segment’s stores.



As of December 31,
2011, BSRE employed ten 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.



156







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



As of March 29, 2013
other than indirect ownership through Alon or Alon Retail and David Wiessman's ownership of 1.06%, none of our directors or officers
owned more than 1% of our outstanding equity securities.



On January 21, 2008,
we adopted a share option plan (the "Plan") for officers and employees of Alon Blue Square and/or its subsidiaries and/or
affiliated companies. Under the terms of the Plan no further options may be granted. The exercise price of each option was at the fair market value per share on the date of grant, and all exercises of options
under the plan are to be on a cashless basis. As of December 31, 2012, an aggregate of 63,833 options granted to employees under
the Plan were outstanding, with exercise prices of NIS 40.98 per share (adjusted for 50% of the dividends paid), and 26,667 and
6,667 options granted to executive officers and managers under the Plan were outstanding with exercise prices of NIS 29.76 and
NIS 40.98 per share (adjusted for 50% of the dividends paid), respectively.



The vesting periods
for the options granted are 66.7% at the end of two years from the date of grant and the remaining 33.3% at the end of three years
from the date of grant. The options issued to executive officers and managers may be exercised during the six month period from
the end of the vesting period, and options not exercised during this period will expire. The options issued to employees may be
exercised during the 30 days from the end of the vesting period, and options not exercised during this period will expire.



The plan expired in
March 2011, and the Company is currently considering a new option plan. Since its expiration, no new options have been or may
be granted.



| | 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 29, 2013, 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 OrdinaryShares BeneficiallyOwned |            |  | Percentage ofOutstanding OrdinaryShares(1) | 
|---------------------------------- |  | ------------------------------------------ | ---------- |  | ------------------------------------------ | 
|Alon Israel Oil Company Ltd.(2)(3) |  |                                            | 47,614,391 |  |                                            | 
|                                   |  |                                            |            |  |                                            | 
|Alon Retail Ltd.(3)                |  |                                            | 30,604,303 |  |                                            | 
|                                   |  |                                            |            |  |                                            | 
|Menorah Mivtachim Holdings Ltd.(4) |  |                                            | 5,480,477  |  |                                            | 
|                                   |  |                                            |            |  |                                            | 
|David Wiessman (5)                 |  |                                            | 699,117    |  |                                            | 



157







---





| | (1) | The percentage of outstanding ordinary
                                                             shares is based on 65,954,427 ordinary shares outstanding as of April
                                                             23, 2013 (excluding 207,433 ordinary shares held by Alon Blue Square
                                                             as treasury shares).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Alon Israel Oil Company Ltd. (“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 together by Bielsol Investments (1987)
                                                             Ltd. and Mr. David Wiessman. 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, where all voting rights have been granted to Advocate
                                                             Biran), holding 79.4% of the capital and voting rights of Bielsol
                                                             Investments, D.B.W Investments Ltd. (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
                                                             controlled by David Wiessman (25%)), holding 0.8% of the capital
                                                             and voting rights of Bielsol Investments.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Includes shares held by the subsidiaries
                                                             of Menora Mivtachim Holdings Ltd. (“Menora Holdings”),
                                                             as follows: Menora Mivtachim Insurance Ltd., Menora Mivtachim Pensions
                                                             Ltd., Shomera Insurance Company Ltd., Menora Mivtachim Gemel Ltd.,
                                                             and Menora Mivtachim Mutual Funds Ltd. To the Company’s best
                                                             knowledge, Menora Holdings is an Israeli publicly traded company
                                                             (listed on the Tel Aviv Stock Exchange). Approximately 61.9% of Menora
                                                             Holdings outstanding shares are held by Najaden Establishment and
                                                             Palamas Establishment, foreign corporations incorporated in Vaduz,
                                                             Liechtenstein.These corporations are held in trust and Mr. Menachem
                                                             Gurevitch is the sole beneficiary. The remaining of the outstanding
                                                             shares are held by the public. Menora Mivtachim Insurance Ltd., Menora
                                                             Mivtachim Pensions Ltd., and Menora Mivtachim Finance Ltd., and Shomera
                                                             Insurance Company Ltd. are wholly owned subsidiaries of Menora Holdings.
                                                             Menora Mivtachim Gemel Ltd. and Menora Mivtachim Mutual Funds Ltd.
                                                             are wholly owned subsidiaries of Menora Mivtachim Finance Ltd. (wholly
                                                             owned by Menora Holdings).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Part of the shares reported are owned
                                                          by Menora Holdings via Menora Mivtachim Insurance, Menora Mivtachim
                                                          Pensions Ltd., Menora Gemel Ltd. and Menora Mutual Funds Ltd., on behalf
                                                          of members of the public (customers which the above-mentioned companies
                                                          are investing on their behalf) through various financial instruments,
                                                          such as, among others, provident funds, mutual funds, pension funds
                                                          and insurance policies, each of the above-mentioned companies makes
                                                          independent voting and investment decisions.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As of March 29, 2013, the shareholdings
                                                          of Menora Holdings are held through the following: (i) Trust Funds -
                                                          6,108 ordinary shares; (ii) Pension and Provident Funds- 4,531,266 ordinary
                                                          shares; and (iii) Insurance Policies – 943,103 ordinary shares.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Does not include the option granted
                                                             by our controlling shareholder Alon to D.B.W Investments Ltd., a
                                                             company controlled by Mr. David Wiessman, to purchase 766,020 of
                                                             our shares held by Alon, representing approximately 1.16% of our
                                                             outstanding shares, as of March 29, 2013. 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.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



158







As of March 29, 2013,
Alon Blue Square had approximately 45 shareholders of record with a United States address. As of March 29, 2013, these United
States record holders held approximately 2,292,642 ordinary shares in the form of ADSs, representing approximately 3.48% of our
then outstanding share capital.



In October 2010, following
the sale by Alon of its approximately 80% interest in Dor Alon to Alon Blue Square, Alon’s direct and indirect ownership
in Alon Blue Square increased to approximately 78.35% of the outstanding share capital of Alon Blue Square from approximately
68.62% of the outstanding share capital of Alon Blue Square.



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



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, 2012, BSRE owned 49.5% of the company that owns the residential
building rights and 50% 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. In addition, our director, Yitzhak Bader, also serves as a director on the board
of directors 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 buildings complex and a shopping mall (the "Project").  The Property consists of building rights
of approximately 97,460 square meters, of which approximately 62,640 square meters are designated for residential use, approximately
10,320 square meters are designated for mixed use (including for residential, office and/or retirement home use), and approximately
24,500 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.



159







The Purchasers plan
to build (i) 10 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) 37,000
square meters leased space for commercial use. As of December 18, 2012 the building permits for 652 of the residential units has
been granted, whilst the permits for the additional 70 residential units are still being processed. (collectively, the "Public
Buildings").  The Sellers are to bear the expense of building the Public Buildings 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 Project on an area of nine dunam, which would remain under the exclusive ownership
of the municipality of Tel Aviv.



Gindi is to provide
management services for the Project in exchange for a management fee to be paid by the Purchasers and calculated as 16% of the
profits from the 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 project were completed and the performance of skeleton work commenced.
On July 3, 2012, the Purchasers signed an agreement with a contractor to perform all skeleton work of the parking lots, the commercial
part, public structures and other finishing work. The Purchasers will pay the contractor for the work an estimated amount of NIS
286 million, with BSRE's portion amounting to NIS 143 million.



As of March 13, 2013,
619 sale agreements had been signed and advance payments in the aggregate amount of NIS 702 million (including VAT) had been received
from the purchasers.



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. BSRE purchased the property
through a wholly owned special purpose entity, BSRE Point Wells, LP, which had 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 is controlled by our indirect controlling shareholder, Alon Israel Oil Co. Ltd. For more information on the purchase
and development agreements, see "Item 4. Information On The Company – B. Business Overview – Real Estate."



160







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.



Under the terms of
the Share Purchase Agreement, 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 (as opposed to approximately
68.62% of the outstanding shares immediately prior to the Acquisition), and all other Alon Blue Square shareholders owned approximately
21.56% of the outstanding ordinary shares of Alon Blue Square (as opposed to approximately 31.38% of the outstanding ordinary
shares immediately prior to the Acquisition). 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.



161







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).



Arrangements between Alon Blue Square
and various subsidiaries



Arrangements
with Dor Alon



Management Services
Agreement with Alon



In December 2010,
Alon and Dor Alon entered into a 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.



As consideration
for the Services, since 2011, 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 1,517 thousand on a quarterly
basis, linked to the consumer price index. In both 2011 and 2012, Alon received approximately NIS 5.9 million for the Services.



The agreement will
terminate in December 2015, subject to any required approvals pursuant to the Companies Law.



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, 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







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 agreement between Mega Retail and Dor Alon Management, we agreed to procure products that will be supplied to the
convenience stores, either directly from suppliers or from our distribution center. In consideration of the procurement of products,
Dor Alon Management has agreed to pay Mega Retail (i) for products sent directly from suppliers, an amount equal to the cost of
such products to Mega Retail as determined under the Procurement Agreement plus 2%, and (ii) for products sent from Mega Retail
distribution center, an amount equal to the cost of such products to Mega Retail as determined under Procurement Agreement plus
2.75% plus distribution costs, in each case plus VAT. The cost of the products to Mega Retail will be audited by our independent
public accountants. In the event that Mega Retail's revenues generated from the Procurement Agreement minus related expenses from
the sale of products to Dor Alon Management is less than NIS 1 million linked to the Israeli consumer price index in any year
without VAT, Dor Alon Management will pay Mega Retail additional amounts in order that Mega Retail's income from such year will
reach such NIS 1 million amount. To secure Dor Alon Station’s payment and other obligations to us under the Procurement
Agreement, Dor Alon agreed to provide Mega Retail with a floating lien or pledge, unlimited in amount, on all inventory in the
convenience stores, subject to any legal prevention, and Dor-Alon and Alon Israel Oil Company Ltd, the controlling shareholders
of Dor Alon Management, will guarantee all obligations of Dor Alon Management under the agreement.



The term of the Procurement
Agreement is for five years commencing from May 1, 2004, and will automatically be 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 or such year, as the case may be.



In addition, with
respect to convenience stores located in Dor Alon fuel service stations that are operated by third parties, Mega Retail have agreed
that upon Dor Alon’s request, it may enter into separate agreements with respect to such stores with the third party operators
of such stores on substantially similar terms as the Procurement Agreement described above. Dor-Alon and Alon Israel Oil Company
Ltd. would also guarantee the obligations of such third party operators and Dor Alon Stations, under these related separate agreements.



163







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 Club Israel Ltd. (“Diners Israel”) from Credit Cards for Israel Ltd. (“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, he Company and Dor Alon exercised their option to
purchase the shares and repaid the loan to CAL.



Arrangements
with Bee Group



Supply Agreement
with Bee Group



Mega
Retail is a party to a supply agreement with Bee Group, Kfar Hasha’ashuim Toy Chain Stores Ltd., (f/k/a All For a Dollar
Ltd.), Sheshet Houseware Stores Ltd. and Fifo Babies Ltd. (collectively, the "Supplier") through January 2, 2015. Pursuant
to the agreement, Mega Retail purchases the Supplier's products, including, among others, toys, houseware, electrical appliances
and market the products in Alon Blue Square stores. The Supplier sells its products to Mega Retail at a discount to the list price
of such products. Pursuant to the recent amendment to the Israeli Companies Law, on November 10, 2011, the audit committee of
Naaman determined that the period of this agreement (ten years from January 3, 2005 to January 2, 2015) is reasonable under the
specific circumstances.



164







Arrangements
between Alon Blue Square and BSRE



On March 23, 2011,
the shareholders of BSRE approved the participation in the directors’ and officers’ liability insurance policy acquired
by Alon for a period beginning on January 1, 2012, and ending on December 31, 2012, which has since been extended for one year
as described in "Item 6. Directors, Senior Management and Employees – C. Board Practiced – Office Holder Insurance".



Pursuant to the
Transfer Agreement and Split Agreement entered into by the Company and BSRE, as described in “Item 4. Information on The
Company - B. Business Overview - Real Estate”, Alon Blue Square transferred assets with a total book value as of December
31, 2005 of approximately NIS 1.1 billion and liabilities with a total book value as of December 31, 2005 of approximately NIS
759.3 million. In consideration, BSRE issued to the Company 22,642 ordinary shares.



In addition, in
connection with the transfer of Company real estate assets to BSRE, and in addition to the agreements between the Company and
BSRE, the Company and BSRE also entered into the following agreements:



Agreements with
Respect to Properties Operated by the Company.



The Company and
BSRE entered into a lease agreement on August 13, 2006 (effective as of January 1, 2006) with respect to the 52 supermarket stores
that were operated directly by the Company prior to December 31, 2005 (plus one property for offices purposes). Under this agreement,
the Company leases from BSRE these properties for an initial period of at least 10 years beginning as of January 1, 2006. The
agreement will automatically be extended for an additional five-year term unless terminated by the Company no less than 24 months
prior to the end of the initial term. The annual rent for the initial period will be equal to the higher of 2% of the annual turnover
of that store or 9% of the amount invested in that store by the Company (as calculated in accordance with the agreement), which
amount is linked to changes in Israel’s consumer price index from the date of such investment. The agreement provides for
these additional provisions:



| | · | Upon
                                                                                                                 12 months' notice,
                                                                                                                 at the time of
                                                                                                                 the extension
                                                                                                                 of the agreement
                                                                                                                 the Company may
                                                                                                                 reduce the number
                                                                                                                 of the leased
                                                                                                                 properties, provided
                                                                                                                 that the rental
                                                                                                                 payments for
                                                                                                                 such properties
                                                                                                                 (according to
                                                                                                                 the average rental
                                                                                                                 payments for
                                                                                                                 the two years
                                                                                                                 preceding the
                                                                                                                 extension date)
                                                                                                                 does not exceed
                                                                                                                 15% of the total
                                                                                                                 rent payments
                                                                                                                 for all leased
                                                                                                                 properties on
                                                                                                                 average for the
                                                                                                                 two years preceding
                                                                                                                 the extension
                                                                                                                 date.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Additional
                                                                                                                 properties may
                                                                                                                 be leased by
                                                                                                                 the Company under
                                                                                                                 the same terms
                                                                                                                 and conditions
                                                                                                                 under the lease
                                                                                                                 agreement provided
                                                                                                                 that (i) the
                                                                                                                 term of any such
                                                                                                                 new lease agreement
                                                                                                                 entered into
                                                                                                                 during the initial
                                                                                                                 ten-year period
                                                                                                                 commencing on
                                                                                                                 January 1, 2006
                                                                                                                 will be for up
                                                                                                                 to 10 years from
                                                                                                                 the date such
                                                                                                                 new leased property
                                                                                                                 is open for business
                                                                                                                 to the public,
                                                                                                                 and (ii) the
                                                                                                                 aggregate properties
                                                                                                                 that BSRE leases
                                                                                                                 to the Company
                                                                                                                 may not exceed
                                                                                                                 60,000 square
                                                                                                                 meters. Additional
                                                                                                                 properties added
                                                                                                                 may not be included
                                                                                                                 in the leased
                                                                                                                 properties reduced
                                                                                                                 in the manner
                                                                                                                 described in
                                                                                                                 the preceding
                                                                                                                 paragraph.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



165







| | · | The
                                                                                                                 Company may terminate
                                                                                                                 the lease of
                                                                                                                 some of the leased
                                                                                                                 properties prior
                                                                                                                 to the end of
                                                                                                                 the lease term
                                                                                                                 by giving 12
                                                                                                                 months' prior
                                                                                                                 notice; however,
                                                                                                                 such termination
                                                                                                                 is limited to
                                                                                                                 a number of leased
                                                                                                                 properties which
                                                                                                                 have an aggregate
                                                                                                                 area of no more
                                                                                                                 than 5% of the
                                                                                                                 total area of
                                                                                                                 the properties
                                                                                                                 that were leased
                                                                                                                 as of January
                                                                                                                 1, 2006.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | BSRE
                                                                                                                 may shorten or
                                                                                                                 temporarily stop
                                                                                                                 (suspend) the
                                                                                                                 lease of three
                                                                                                                 properties identified
                                                                                                                 in the agreement
                                                                                                                 to the extent
                                                                                                                 required to develop
                                                                                                                 or build on the
                                                                                                                 land where such
                                                                                                                 properties are
                                                                                                                 located by giving
                                                                                                                 12 months' prior
                                                                                                                 notice and subject
                                                                                                                 to obtaining
                                                                                                                 a building permit
                                                                                                                 for such development
                                                                                                                 or building at
                                                                                                                 the time the
                                                                                                                 Company must
                                                                                                                 vacate the premises.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | BSRE
                                                                                                               may shorten or
                                                                                                               temporarily stop
                                                                                                               (suspend) the lease
                                                                                                               of any seven additional
                                                                                                               properties (five
                                                                                                               during the lease
                                                                                                               term and two during
                                                                                                               the extension term)
                                                                                                               to the extent required
                                                                                                               to develop or build
                                                                                                               on the land where
                                                                                                               such properties
                                                                                                               are located by
                                                                                                               giving 12 months'
                                                                                                               prior notice and
                                                                                                               subject to obtaining
                                                                                                               a building permit
                                                                                                               for such development
                                                                                                               or building at
                                                                                                               the time the Company
                                                                                                               must vacate the
                                                                                                               premises and on
                                                                                                               the condition that
                                                                                                               BSRE must bear
                                                                                                               the costs of vacating
                                                                                                               the premises and
                                                                                                               provide a substitute
                                                                                                               store at the location
                                                                                                               with similar characteristics
                                                                                                               at its own expense
                                                                                                               within 24 months
                                                                                                               of the Company
                                                                                                               vacating the premises.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On January 1, 2009,
as part of the reorganization of the Company's supermarket retail activities, the Company transferred all of its supermarket retail
activities to Mega Retail and assigned all of its rights and obligations under this agreement to Mega Retail.



As a result of the
transfer by Mega Retail of the real estate that it holds to BSRE, the lease agreement was extended to a term of up to ten years
commencing on March 31, 2009. In addition, at the end of the term there is an option to extend for an additional term of five
years under the same terms. Due to the recent amendment to the Companies Law, on November 16, 2011, the audit committee of BSRE
determined that the period of the lease agreement, which exceeds three years, is reasonable under circumstances and in light of
the nature of the transaction. See "Item 4. Information on the Company – D. Our Real Estate".



Agreements with
Respect to Properties Operated by Mega Retail.



On June 23,
2006, the Company entered into a lease agreement with Mega Retail pursuant to the lease agreement provisions of the general
services framework and expenses allotment agreement which the Company entered into with Mega Retail on October 11, 2005 (the
"Lease Agreement"). The Company assigned to BSRE all of its rights and obligations under the Lease Agreement. The
underlying properties (23 supermarket stores) were also transferred by the Company to BSRE. See below – "Transfer
of Real Estate Assets from Mega Retail to BSRE".



166







The Lease Agreement
provided that the annual rent for property used for stores is to be equal to the higher of 2% of the annual turnover of that store
or 9% of the amount invested in that store (as calculated in accordance with the agreement), which amount is linked to changes
in Israel’s consumer price index from the date of such investment. The annual rent for property not used for stores is 9%
of the amount invested by the Company which amount is linked to changes in Israel’s consumer price index from the date of
such investment. The term is for up to ten (10) years from September 1, 2005, and rent payments are charged on an annual basis.



Under the Lease Agreement,
new lease agreements by Mega Retail are to be entered into on the basis of the terms set forth above, provided that (i) the audit
committee and the board of directors will approve each new lease agreement, (ii) the term of any such new lease agreement entered
into within the ten year period commencing on September 1, 2005 will be for a period of up to 10 years from the date such new
lease agreement is executed for a particular property, and (iii) the aggregate properties that BSRE leases to Mega Retail may
not exceed 80,000 square meters.



The forgoing lease
agreements are "net lease" that is, the lessee pays all applicable payments and charges for the possession of the leased
property and the usage during the lease period.



At BSRE's request
to clarify the implementation of lease agreements dated June 23, 2006 and August 13, 2006 between Mega Retail and BSRE, Mega Retail
confirmed that in the event of a sale or lien of any of the transferred assets, the following would apply:



(i)          BSRE would assign
to the buyer all of BSRE's rights and commitments towards Mega Retail under the lease agreements and the following would apply:



| | · | Mega
                                                                                                               Retail would enter
                                                                                                               into a separate
                                                                                                               lease agreement
                                                                                                               with the buyer
                                                                                                               of the transferred
                                                                                                               asset, the terms
                                                                                                               of which would
                                                                                                               reflect the terms
                                                                                                               that appear in
                                                                                                               the BSRE-Mega Retail
                                                                                                               lease agreements,
                                                                                                               with the necessary
                                                                                                               adjustments.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                               base rent ascribed
                                                                                                               to the transferred
                                                                                                               asset in the separate
                                                                                                               lease agreement
                                                                                                               will be in the
                                                                                                               amount that was
                                                                                                               determined by BSRE,
                                                                                                               as recommended
                                                                                                               by an independent
                                                                                                               assessor, linked
                                                                                                               to the CPI from
                                                                                                               January 1, 2006,
                                                                                                               plus 9% of the
                                                                                                               amount invested
                                                                                                               by BSRE in the
                                                                                                               transferred asset
                                                                                                               from January 1,
                                                                                                               2006 and thereafter.
                                                                                                               The rent paid by
                                                                                                               Mega Retail to
                                                                                                               the buyer would
                                                                                                               be deducted from
                                                                                                               the lease payment
                                                                                                               paid by Mega Retail
                                                                                                               to BSRE under their
                                                                                                               lease agreement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(ii)          The
rent paid for the transferred asset would be deducted (commencing from the day of initial payment to the buyer) from the rent
paid by Mega Retail to BSRE for all leased properties by Mega Retail prior to any of sale or lien of assets in a manner that as
a result of any sale or lien of an asset, there would be no change in the amount of the rent paid by Mega Retail for all assets
leased to Mega Retail.



167







Transfer of Real
Estate Assets from Mega Retail to BSRE



In September 2009,
Alon Blue Square reorganized its real estate activities pursuant to which Mega Retail transferred all of the real estate held
by it to BSRE. The transfer was completed on September 13, 2009, and, pursuant to the approval of the Israeli Tax Authority, the
transfer was effective as of March 31, 2009.



As part of the transaction,
all real estate property (and related leases) held by Mega Retail and Mega Retail's subsidiaries were transferred to BSRE. All
real estate property owned by Mega Retail prior to the transfer was leased back by BSRE to Mega Retail for its retail activities
under terms similar to existing lease agreements between BSRE and Mega Retail and existing lease agreements between BSRE and Alon
Blue Square for properties that were previously transferred to Mega Retail, as described below. The periods of the existing lease
agreements were extended to match the period of the new lease agreement, i.e., 10 years from the effective date of the transfer
of the Mega Retail real estate assets to BSRE, with an additional option period of five years exercisable by Mega Retail.



The lease agreements
between BSRE and Mega Retail after the September 2009 transfer contain terms similar to the other lease agreements between BSRE
and Mega Retail, which provide for annual rent for property used for supermarkets to be the higher of 2% of the annual turnover
of that store or 9% of the amount paid by BSRE to purchase the underlying real estate of that store (excluding consideration paid
for certain unused building rights), plus amounts invested by BSRE in the asset, reduced by certain costs and payments and increased
according  to Israel’s CPI. The annual rent for property not used for stores is equal to 9% of the amount paid
by BSRE, linked to increases in Israel’s CPI. Due to the recent amendment to the Companies Law, on November 16, 2011, the
audit committee of BSRE determined that the period of the Lease Agreement, which exceeds three years, is reasonable under the
circumstances.



The sale of Mega
Retail's real estate property (and related leases) to BSRE was for an aggregate consideration of approximately NIS 463 million.
As part of the consideration for the transaction, BSRE assumed Mega Retail's financial liabilities to a bank in an amount of approximately
NIS 390 million that were attributed to the transferred properties and paid the Company the balance of NIS 68 million, representing
the difference between the value of the transferred properties (less certain expenses associated with the transfer) and the assumed
liabilities. BSRE financed the assumption of the liabilities by paying a bank NIS 140 million and entering into a loan agreement
with the bank for a 15-year loan for the remaining amount of NIS 250 million. Pursuant to the loan agreement, BSRE must comply
with certain financial terms and covenants. As of March 29, 2013, BSRE met these covenants. In addition, BSRE has pledged 13 of
the transferred properties (including income from the lease agreements with Mega Retail) as collateral for the loan, and agreed
that it will not grant any floating charge on its assets without prior consent from the bank.



168







Service
Agreement



Pursuant to an agreement
entered in August 2006, effective as of January 1, 2006, and extended on December 27, 2010, effective as of January 1, 2011, 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), computer management and maintenance service, legal consulting
and corporate secretary services, office space and related office services, and internal audit services. In consideration for
these services, BSRE will pay the Company an annual amount of NIS 4.2 million. In the event of the appointment of a Chairman of
the board of directors of BSRE which is not an office holder of the Company, BSRE will bear the related cost, and the consideration
payable under the agreement will be reduced to NIS 3.6 million. In addition, BSRE may request maintenance services and will pay
additional consideration for such services in the amount of the direct costs to the Company plus 2%.



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 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.



The agreement is for
an initial term of five years (as of January 1, 2006) and will be extended from time to time upon the parties' consent for additional
five-year terms (or such other period agreed to by the parties at the extension date). The Company may terminate the agreement
during the agreement term upon six months' prior notice. The agreement was extended for an additional five-year term, commencing
January 1, 2011, after having been approved by the shareholders of BSRE. Pursuant to a recent amendment to the Israeli Companies
Law, this agreement is subject to the approval of the audit committee, the board and the shareholders of the Company each three
years. In 2012, the Company received approximately NIS 4.3 million for the services.



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 a recent 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 and does not have a material influence on the Company's profitability, and therefore reapproved this agreement for additional
three years.



169







Deposit of Cash
Balances Agreement



Pursuant to the agreement
entered in August 2006, and has subsequently been extended until February 28, 2014, 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 200 million at any time. Under the agreement no collateral
is granted in exchange for the deposited funds. 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 term of the agreement was two years from its approval by the shareholders of BSRE (February
28, 2007), and was extended for an additional term until the end of February 2014. The agreement may be terminated by either party
upon a one day, prior notice.



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



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.



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
between Mega Retail and BSRE



In connection with
the reorganization of the Company's real estate activities, the Company's wholly-owned subsidiary, Mega Retail, transferred all
of the real estate property (and related leases) held by it and its subsidiaries to BSRE (the "Real Estate Transfer")
on September 13, 2009 and, pursuant to the approval of the Israeli Tax Authority, was effective as of March 31, 2009. The Real
Estate Transfer was approved by BSRE's shareholders at BSRE's extraordinary general shareholder meeting held on February 18, 2009.
Following discussions between Mega Retail and BSRE and the Israeli Tax Authority regarding the structure of the real estate
reorganization, the Israeli Tax Authority granted an approval pursuant to which the transaction would be performed as a split
pursuant to Section 105 of the Israel Income Tax Ordinance. Under such approval, Mega Retail transferred to BSRE the real estate
properties for an aggregate consideration of approximately NIS 463 million, based on an appraisal by an independent appraiser,
and as part of the consideration for the transaction, BSRE assumed Mega Retail's financial liabilities to a bank in an amount
of approximately NIS 390 million that were attributed to the transferred properties and paid us in cash the balance of NIS 68
million, representing the difference between the value of the transferred properties (less certain expenses associated with the
transfer) and the assumed liabilities.



170







BSRE financed the
assumption of the liabilities by paying the bank NIS 140 million and entering into a loan agreement with the bank for a 15-year
loan for the remaining amount of NIS 250 million. Pursuant to the loan agreement, BSRE must comply with certain financial terms
and covenants. The principal of the loan will be repaid at a rate of 6.5% of the principal per year. The interest on the loan
for the first five years is at a rate of 4.8% per year and the interest on the loan for the next five years will be calculated
based on the weighted average rate of return on government bonds (as defined in BSRE's agreement with the bank) plus a margin
of 4.4%. The interest payable on the loan after ten years will be determined by agreement between BSRE and the bank, or if no
such agreement is reached, based on the standard interest rate for a loan of the type this type for a company like BSRE. In addition,
BSRE has pledged 15 of the transferred properties (including income from the lease agreements with Mega Retail) as collateral
for the loan and agreed that it will not grant any floating charge on its assets without prior consent from the bank.



Pursuant to the terms
of the Real Estate Transfer, BSRE purchased from Mega Retail 17 of the Company's supermarket stores, 50% of a commercial center
in Be'er Sheva that is leased to third parties, the Company's distribution and logistics center and warehouses and an office building
used by the Company, which includes one supermarket store.



BSRE purchased the
real estate from Mega Retail "as is" at the date of the closing, with no representations or warranties made by Mega
Retail, other than limited exceptions. In addition, Mega Retail agreed to obtain any third party consents, to the extent necessary
in order to complete the transaction.



Mega Retail agreed
to pay any tax or levy in connection with the sale of the properties, and BSRE agreed to pay the purchase tax and any other tax
or levy in connection with the purchase of the properties. Pursuant to the Tax Authority approval, the purchase tax is 0.5% of
the purchase price, or approximately NIS 2.5 million. However, if the purchase tax is above 0.5% of the purchase price, then BSRE
and Mega Retail agreed to each pay half of the purchase tax in excess of 0.5%. In any event, the portion paid by BSRE will not
exceed NIS 14 million.



Pursuant to the Israeli
Tax Authority approval, the cost basis and the purchase date of the transferred assets by BSRE will be as they had been prior
to the split in the possession of Mega Retail. Therefore, and contrary to the terms of the transaction as originally contemplated
by BSRE and Mega Retail, the entire fair value of the assets transferred to BSRE will not be recognized as a cost basis for tax
purposes. As a result, BSRE and Mega Retail entered into an indemnification agreement pursuant to which Mega Retail agreed to
compensate and indemnify BSRE for the tax effect of the difference between the actual cost of the assets transferred and the cost
of such assets for tax purposes, such that the tax liabilities and tax benefits to BSRE (with regard to the sale of the transferred
assets and with regard to the depreciation component of the transferred assets) would be the same as if the entire fair value
of the transferred assets had been recognized as a cost for tax purposes by BSRE. The tax component for the above mentioned difference
is estimated at approximately NIS 32 million, calculated based on the assumption that all the transferred assets would be sold
close to the date on which the transfer of the assets was completed (although there is no certainty if and when such assets would
be sold) in accordance with the current tax rates.



171







Pursuant to the indemnification
agreement, (a) Mega Retail will pay BSRE in cash once a year and no later than at the end of each taxable year, an amount equal
to the net tax component for that year, for the depreciation with respect to the difference between the assessment of the fair
value of the transferred assets for the purpose of the transaction, and the actual cost to BSRE of such assets for tax purposes
on the date on which the transferred assets were transferred; and (b) in the event that one of the transferred assets is sold
by BSRE, then, no later than on the date on which the tax for such sale is due by BSRE, Mega Retail will pay BSRE in cash an amount
equal to the difference between the actual tax that is due for the sale of the asset and the tax that would have been due had
the value of the transferred asset sold (less the depreciation for which indemnification was actually provided by Mega Retail
according to (a) above) been recognized as cost to BSRE for tax purposes on the date on which the transferred assets were transferred.
The calculation of the difference described in clause (b) will not take into account the effect of deductible expenses that were
incurred by BSRE. Mega Retail has not provided any security to guarantee its indemnification obligations under the indemnification
agreement.



In addition, in connection
with the transfer of Mega Retail's real estate assets to BSRE, Mega Retail and BSRE also entered into the following agreements:



Kibbutz
Eyal



BSRE and Eyal Hasharon,
an agriculture cooperative society Ltd. ("Eyal Hasharon"), signed an agreement for the development of a 57 dunam property
for storage and logistics usage. Pursuant to the agreement, BSRE and Eyal Hasharon jointly hold in equal parts a new company,
Eyal Baribua Ltd. ("Eyal Baribua"), to which Kibbutz Eyal transfered the property. In addition, pursuant to this agreement
BSRE transfered 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'e 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. For
more information, see “Item 4. Information of the Company – B. Business Overview – Real Estate – Logistics
Areas.”



Agreements with
Respect to Properties Operated by Mega Retail



As part of the Real
Estate Transfer, all of the real estate property used by Mega Retail prior to the Real Estate Transfer is leased back by BSRE
to Mega Retail for Mega Retail's retail activities under terms similar to existing lease agreements between BSRE and Mega Retail
and existing lease agreements between BSRE and Alon Blue Square that were previously transferred to Mega Retail.



172







Pursuant to the
agreement, Mega Retail leases from BSRE 16 supermarket stores, the Company's distribution and logistics center and warehouses
in Rishon Letzion and an office building used by the Company, which includes one supermarket store (the "Properties").
Mega Retail leases the Properties for an initial period (the "Initial Lease Period") of at least 10 years commencing
on March 31, 2009. The agreement will automatically be extended for an additional five-year term unless terminated by written
notice, by Mega Retail, no less than 24 months prior to the end of the Initial Lease Period. Due to the recent amendment to the
Companies Law, on November 16, 2011, the audit committee of BSRE determined that the period of the lease agreement, which exceeds
three years, is reasonable under circumstances and in light of the nature of the transaction. The annual rent for the Initial
Lease Period of the supermarkets will be equal to the higher of 2% of the annual turnover of that store or 9% of the amount invested
in that store by BSRE (as calculated in accordance with the agreement) (the "Amount of the Investment"), which amount
will be linked to changes in Israel’s consumer price index. The annual rent during the Initial Lease Period for assets that
are not used for supermarkets will be 9% of the amount invested in the property by BSRE which amount will be linked to changes
in Israel’s consumer price index.



The agreement provides for these additional
provisions:



| | · | Upon
                                                                                                                 12 months' notice,
                                                                                                                 at the time of
                                                                                                                 the extension
                                                                                                                 of the agreement,
                                                                                                                 Mega Retail may
                                                                                                                 reduce the number
                                                                                                                 of the Properties
                                                                                                                 subject to the
                                                                                                                 agreement, provided
                                                                                                                 that the rental
                                                                                                                 payments for
                                                                                                                 such properties
                                                                                                                 (according to
                                                                                                                 the average rental
                                                                                                                 payments for
                                                                                                                 the two years
                                                                                                                 preceding the
                                                                                                                 extension date)
                                                                                                                 does not exceed
                                                                                                                 15% of the total
                                                                                                                 rent payments
                                                                                                                 for all leased
                                                                                                                 properties.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Upon
                                                                                                                 12 months' notice,
                                                                                                                 Mega Retail may
                                                                                                                 terminate the
                                                                                                                 lease of some
                                                                                                                 of the leased
                                                                                                                 properties prior
                                                                                                                 to the end of
                                                                                                                 the Initial Lease
                                                                                                                 Period, provided
                                                                                                                 that the aggregate
                                                                                                                 area of such
                                                                                                                 properties does
                                                                                                                 not exceed 5%
                                                                                                                 of the total
                                                                                                                 area of the properties
                                                                                                                 that were leased
                                                                                                                 to Mega Retail
                                                                                                                 as of the beginning
                                                                                                                 of the Initial
                                                                                                                 Lease Period.
                                                                                                                 However, in any
                                                                                                                 event, such right
                                                                                                                 of termination
                                                                                                                 does not include
                                                                                                                 the right to
                                                                                                                 terminate the
                                                                                                                 lease agreement
                                                                                                                 of the distribution
                                                                                                                 and logistics
                                                                                                                 center and warehouses
                                                                                                                 in Rishon Letzion.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Upon
                                                                                                                 12 months' prior
                                                                                                                 notice, BSRE
                                                                                                                 may shorten or
                                                                                                                 temporarily suspend
                                                                                                                 the lease of
                                                                                                                 certain Properties
                                                                                                                 (specified in
                                                                                                                 the agreement)
                                                                                                                 to the extent
                                                                                                                 required to develop
                                                                                                                 or build on the
                                                                                                                 land on which
                                                                                                                 such Properties
                                                                                                                 are located,
                                                                                                                 or to the extent
                                                                                                                 required to sell
                                                                                                                 the land on which
                                                                                                                 such Properties
                                                                                                                 are located.
                                                                                                                 Such right to
                                                                                                                 shorten or temporarily
                                                                                                                 suspend the lease
                                                                                                                 of such Properties
                                                                                                                 is subject to
                                                                                                                 the condition
                                                                                                                 that, as of the
                                                                                                                 date on which
                                                                                                                 Mega Retail must
                                                                                                                 vacate the premises,
                                                                                                                 BSRE must have
                                                                                                                 obtained a building
                                                                                                                 permit for such
                                                                                                                 development or
                                                                                                                 building and/or
                                                                                                                 BSRE must have
                                                                                                                 signed an agreement
                                                                                                                 to sell such
                                                                                                                 property, as
                                                                                                                 the case may
                                                                                                                 be.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



173







| | · | Upon
                                                                                                               12 months' prior
                                                                                                               notice, BSRE may
                                                                                                               shorten or temporarily
                                                                                                               suspend the lease
                                                                                                               of any four Properties
                                                                                                               (three during the
                                                                                                               Initial Lease Period
                                                                                                               and one during
                                                                                                               the extension term)
                                                                                                               to the extent required
                                                                                                               to develop or build
                                                                                                               on the land on
                                                                                                               which such Properties
                                                                                                               are located, subject
                                                                                                               to the conditions
                                                                                                               that (i) as of
                                                                                                               the date on which
                                                                                                               Mega Retail must
                                                                                                               vacate the premises,
                                                                                                               BSRE must have
                                                                                                               obtained a building
                                                                                                               permit for such
                                                                                                               development or
                                                                                                               building, and that
                                                                                                               (ii) BSRE must
                                                                                                               bear the costs
                                                                                                               of vacating the
                                                                                                               premises and provide
                                                                                                               a substitute store,
                                                                                                               at the same location,
                                                                                                               with similar characteristics
                                                                                                               at its own expense
                                                                                                               within 24 months
                                                                                                               of Mega Retail
                                                                                                               vacating the premises.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Mega
                                                                                                               Retail will be
                                                                                                               entitled to sub-lease
                                                                                                               any of the Properties,
                                                                                                               subject to the
                                                                                                               condition that
                                                                                                               Mega Retail will
                                                                                                               remain liable for
                                                                                                               the fulfillment
                                                                                                               of all the provisions
                                                                                                               of the agreement,
                                                                                                               jointly and severally
                                                                                                               with the substitute
                                                                                                               tenant.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | BSRE
                                                                                                               is entitled to
                                                                                                               add building areas
                                                                                                               on each of the
                                                                                                               Properties to the
                                                                                                               extent permitted
                                                                                                               by the town planning
                                                                                                               schemes which apply
                                                                                                               and/or may apply
                                                                                                               in the future.
                                                                                                               In the event that,
                                                                                                               pursuant to this
                                                                                                               provision, BSRE
                                                                                                               plans to add building
                                                                                                               areas on the property
                                                                                                               on which the Company's
                                                                                                               distribution and
                                                                                                               logistics center
                                                                                                               in Rishon Letzion
                                                                                                               is located, such
                                                                                                               additional building
                                                                                                               is subject to the
                                                                                                               prior consent of
                                                                                                               Mega Retail. In
                                                                                                               addition, in the
                                                                                                               event that BSRE
                                                                                                               adds buildings
                                                                                                               to the property
                                                                                                               on which the Company's
                                                                                                               offices in Rosh
                                                                                                               Ha'ayin are located,
                                                                                                               then, upon six
                                                                                                               months' notice
                                                                                                               from the date on
                                                                                                               which it receives
                                                                                                               notice from BSRE
                                                                                                               about BSRE's intention
                                                                                                               to build on such
                                                                                                               property, Mega
                                                                                                               Retail may notify
                                                                                                               BSRE of Mega Retail's
                                                                                                               intention to lease
                                                                                                               the additional
                                                                                                               buildings under
                                                                                                               the same terms
                                                                                                               as the existing
                                                                                                               lease agreement,
                                                                                                               with the ten year
                                                                                                               term beginning
                                                                                                               on the date on
                                                                                                               which the new buildings
                                                                                                               are transferred
                                                                                                               to Mega Retail's
                                                                                                               possession.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Mega
                                                                                                               Retail is solely
                                                                                                               responsible for
                                                                                                               obtaining any permits
                                                                                                               or licenses required
                                                                                                               under law to operate
                                                                                                               the Properties.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Unless
                                                                                                               otherwise agreed
                                                                                                               by the parties,
                                                                                                               the lease agreement
                                                                                                               will be a "net
                                                                                                               lease" such that Mega Retail shall
bear any and all payments and costs that arise in connection with the possession and use of the Properties during the lease period.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On December 31, 2010, a BSRE
subsidiary had a loan in an amount of NIS 74.5 million to finance the establishment of a logistics center in Beer Tuvia. A first
ranking lien on the property and the accompanying rights was registered in favor of the bank.



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, from until August 14, 2014. 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.



174







Arrangements
between Mega Retail and Eden Teva and Naaman



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



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, including among others,
Dor Gas Search Limited Partnership, which is under the control of Alon Natural Gas Exploration Ltd., a subsidiary of Dor Alon,
for the operation of existing facilities and a 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) in accordance with the terms of the Supply Agreement. For more information, see "Item 4. Information on the Company
– B. Business Overview – Fueling and Commercial Sites – Marketing – Other Activities – Establishment
of a Power Plant."



Arrangements with Tnuva



We
purchase most of our 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, hold23%
of the shares of Tnuva. In addition, our director, Yitzhak Bader, also serves as a director on the board of directors of Tnuva. 
In 2012, Tnuva’s products accounted for approximately15.2%
of all the products sold at our supermarkets. These arrangements are in the ordinary course of our business, and the terms and
conditions of these arrangements are at "arm's-length".



Arrangements with David Wiessman, our
Chief Executive Officer



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



175







Employment Agreement with Moran Wiessman



Beginning
in January 2009, Ms. Moran Wiessman has been employed by our wholly-owned subsidiary Bee Group as the manager of the Bee Group
internet sites. Ms. Wiessman is the daughter of Mr. David Wiessman, our Chief Executive Officer. As of December 31, 2012, Ms.
Wiessman receives a monthly salary of NIS16,000,
a cell phone at the expense of Bee Group, and Bee Group assigned a car to Ms. Wiessman as is customary in Bee Group for employees
at the same level. In addition, Ms. Wiessman is entitled to standard social allocations by Bee Group (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.



Salary
increases or bonuses shall be granted as is customary in Bee Group based on the professional performance of Ms. Wiessman. Ms.
Wiessman's monthly salary may be increased by Bee Group management up to 20% annually. Bee Group management is entitled to grant
Ms. Wiessman an annual bonus as is customary in Bee Group of only up to six monthly salaries a year. The grant requires the approval
of our audit committee that will confirm that the bonus was given according to the grant's policy in Bee Group.



| | 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



In
connection with our issuance of NIS 400 million in aggregate principal amount of unsecured 5.9% convertible and non-convertible
debentures in August 2003, AlonBlue Square'sboard of directors resolved that AlonBlue Squarewould not distribute
dividends in any quarter if the ratio of our net financial obligations (as then defined by S&P-Maalot, an Israeli rating agency
owned by S&P) to EBITDA for any quarter exceeds 3.5 until June 30, 2006 or exceeds 3.0 thereafter. AlonBlue Square'sboard
of directors also resolved that AlonBlue Squarewould 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 financial statements to financial obligations (as then defined by S&P-Maalot) for any quarter is below 120%.



176







On
January 14, 2010, AlonBlue Square'sboard
of directors decided that in view of the changes and development of AlonBlue Squaresince 2003, including the transfer of AlonBlue Squareand Mega Retail's
real estate properties to BSRE (which operates under financial obligations to EBITDA ratios appropriate for real estate companies
and currently holds a major part of the consolidated debt), the purchase of Bee Group (a Non Food retailer), and the reorganization
of AlonBlue Squarefood retail activities in its subsidiary, Mega Retail
Ltd., that the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations
AlonBlue Square'sdebt which is related by the company to real estate
that is not in use by AlonBlue Square(which is equal to 75% of the
investment property as recorded on the balance sheet).Due to the acquisition of Dor Alon in October 2010, the increase
in fuel prices which increased our capital needs, the Company's then investment plan to open additional Mega Retail stores, the
entrance of BSRE to additional new projects and the launching of Alon Cellular, our
board of directors further resolved that AlonBlue Squarewould not distribute
dividends in any quarter if the ratio of our net financial obligations (calculated in accordance with the deduction described
above) to EBITDA for any quarter exceeds 6. On December 31, 2012, the
net financial obligations to EBITDA (calculated in accordance with the deduction described above) is less than6 (taking
into account Dor Alon’s financial obligations as of December 31, 2012).



Legal Proceedings



Governmental Proceedings



We are subject
to legal proceedings in connection with tax assessments.



In July 2005, the
Income Tax Authority issued a notice of a deduction assessment for the years 2001- 2004 to the Company. The amount claimed under
these assessments totaled NIS 34 million, and primarily relates to certain benefits granted to employees in the Company’s
stores. In November 2005, several senior employees were questioned under warning, with respect to these benefits. Following these
assessments and after the rejection of the Company's position on the matter, the Income Tax Authority issued to the Company deduction
assessment orders for the years 2001- 2004 in the amount of approximately NIS 44 million. The Company filed appeals with the District
Court contesting these assessment orders which as of the date of this Annual Report are still pending. During 2011, the Company
received deduction assessment for the years 2005-2008 and the amount claimed under this assessment totaled NIS 32 million.



In July 2007, the
Israeli Tax Authority issued to the Company Value Added Tax assessments for the years 2002- 2006 in the amounts of approximately
NIS 22 million in connection with the subject matter of the foregoing deduction assessments. The Israeli Tax Authority did not
accept most of the Company's position, although it agreed to deduct the total amount to approximately NIS 16.3 million. In February
2009, the Company filed an appeal with the District Court. Following negotiations held between the Company and the Israeli Tax
Authorities, a settlement agreement was approved by the court in November 2012, in terms of which the Company agreed to pay NIS
21 million. In January 2013, the Company signed an agreement with the Income Tax Authority regarding deduction assessments for
the years 2005-2008.



177







During 2011 the Company
received a demand from the National Insurance for additional payments based on the Income Tax Authority assessment, related to
such certain benefits granted to employees in the Company’s stores in the amount of NIS 27.5 million for the years 2001-2004.
The Company's appeal was rejected by the National Insurance. The Company received in January 2013, a demand to produce documents
for the years 2005-2008 regarding this matter. The Company intends to appeal this demand with the labor court. In the opinion
of the Company, based on the opinion of its legal advisers, the chances that the Company's position will be accepted are higher
than them of being rejected. Accordingly, the Company did not make any provision in its financial statements for the years 2001-2005,
and in the opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient
to cover the potential liabilities for the years 2006-2008.



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 amounted to approximately NIS 17 million. Dor Alon appealed the Council's Municipal Tax claims.
Based on information received from Dor Alon's management, the Company believes that the chances that the claim will be allowed
are less than 50%, and therefore Dor Alon did not make a provision in its financial statements.



Restrictive
Trade Practices Inquiry



On January 5, 2005,
the Commissioner of the Israeli Antitrust Authority issued his final position regarding “commercial restrictive practices
between the dominant food suppliers and the major supermarket chains.” In August 2006, the Restrictive Trade Practices Court
approved a consent decree reached between the Commissioner and certain food suppliers. The consent decree is directed at the food
suppliers listed therein and stipulates various prohibitions, conditions and restrictions that apply to these suppliers with regard
to certain practices. In January 2013, the Commissioner granted an exemption from approval of the restrictive arrangement for
a limited period. The exemption is until the end of March 2013 with respect arrangement of soft drinks, until the end of September
2013 with respect to the arrangement of milk products and until the end of 2013 with respect to the arrangement of "van sale"
products (such as ice cream, newspapers and bread products). Please see “Item 4. Information on Alon Blue Square - B. Business
Overview - Government Regulation”.



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.



178







Legal Proceedings Related to our
Supermarkets



In December 2010,
we were served with a claim and a request for approval as a class action (the "Claim"), in connection with the sale
of various cheese and dairy products in our supermarket chains operated by Mega Retail Ltd. The plaintiff has alleged that we
sell in our supermarkets various cheese and butter substitute products while presenting them as cheese products and butter and
that the customers are mislead by our alleged representations regarding such products. The plaintiffs have requested to certify
the claim as a class action representing all the customers who bought such products in the seven years prior to the filing of
the claim. The plaintiff's personal claim is estimated to be approximately NIS 700, and if the claim is certified as a class
action, the approximate claim against us is estimated by the plaintiff at approximately NIS 456 million. 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.



In November 2010,
a claim and a request to recognize it as a class action was filed against YOU, claiming that discounts for filling the car with
diesel at DorAlon petrol stations, which the club supposedly promised as well as wrongly advertised were not given in reality.
If the claim were to be accepted as a class action, the claimant assesses his claim at NIS 54 million. 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.



In December 2010,
a claim and a request to recognize it as a class action was filed against the YOU customer club, claiming that discounts for filling
the car with petrol at Dor Alon petrol stations, which the club supposedly promised were not given. If the claim were to be accepted
as a class action, the claimant assesses his claim at NIS 894 million. 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.



In August 2010, the
Company and some of its subsidiaries were served with a claim in which they are being sued by a former supplier of fruits
and vegetables claiming that the company breached the agreements between the parties regarding the supply of fruits and vegetables,
a breach that allegedly resulted in damages assessed by the plaintiff at approximately NIS 178 million. As mentioned in the claim,
due to court fees, it was filed for the sum of NIS 100 million. The Company has denied all the above allegations. The Company
believes it acted according to all binding agreements and is not liable to any damages claimed. The Company further denies that
any damages were at all caused to the plaintiff. In the opinion of the Company, based on the opinion of its legal advisers, the
possibility that the claim will be rejected exceeds 50%. Accordingly, the Company did not make any provision for this claim in
its financial statements.



179







In September 2011,
a lawsuit was filed against Mega Retail and Shufersal along with a request to be approved as a class action in relation to the
issuance and sale of purchase vouchers. The action consists of two claims: 1. The designation of an expiration date to the vouchers
constitutes a "depriving condition" in a standard contract and is therefore invalid; and 2. The voucher provision that
a consumer who uses vouchers to pay for his purchase can be given change only in vouchers redeemable in the same store constitutes
a "depriving condition" and is therefore invalid. The claimant asked for declaratory relief that these provisions are
invalid, as well as for damages calculated by the court, taking into account all holders of vouchers and/or shoppers who have
used the vouchers over the past seven years. Mega, Shefersal and the plaintiff have agreed to enter into a mediation process,
which as of the date of thie report is still pending. In the opinion of the Company, based on the opinion of its legal advisers,
the possibility that the claim will be rejected exceeds 50%. However, the Company has agreed to enter into a mediation process,
which as of the date of this Annual Report is still pending. If the mediation will be successful, the impact on the Company's
profit or loss will be immaterial. In the opinion of the Company and its advisors, the Company
has made sufficient provisions in its financial statements for this mediation.



In October 2011, a
letter of claim and a motion for approval of action as a class action was filed against the Company, alleging that the Company
does not deduct the weight of the package in which it sells different products, such as various meat and poultry products, fruit
and vegetables. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately
NIS 181 million. 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.



In November 2011,
a letter of claim and a motion for approval of action as a class action was filed against Mega Retail, alleging that Mega Retail
is misleading its "YOU" card holder customers, by charging prices higher than advertised for products offered within
its customers' loyalty plan. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at
approximately NIS 10 million. In the opinion of the Company, should it be obligated to pay any amount with regard to this matter,
it is not expected to be a material sum. In the opinion of the Company and its advisors, the provisions included in the Company's
financial statements are sufficient to cover the potential liabilities.



In March 2012, a letter
of claim and a motion for approval of action as a class action was filed against the Company, alleging that it misleads its customers
in special sales it holds regarding food products that are sliced or cut to the customers request, and are priced per weight.
The plaintiff claims that the Company does not provide full and correct details regarding the terms of the special sales, violating
requirements of the law in connection with products marking and price display. The plaintiff claims, among other, that customers
choosing to buy such products under special sales with accordance to the Company's advertisements are required to purchase not
willingly an extra weight of the product, for the full price. If the Claim is approved as a class action, the approximate claim
is estimated by the plaintiff at approximately NIS 72 million. The plaintiff further requests the court to issue a decree ordering
the Company to fulfill the requirements of the law. 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.



180







On July 26, 2012,
a letter of claim and motion for approval as a class action was filed against Mega, for an aggregate amount of approximately NIS
18 million. The Plaintiff claims that Mega failed to properly mark certain delicatessen and bakery products, which are baked and
packed prior to sale within Mega's supermarket stores, with information regarding their ingredients, nutrition facts, expiry date,
etc. In the opinion of the Company, based on the opinion of its legal advisers, the possibility that the claim will be rejected
exceeds 50%. Accordingly, the Company did not make any provision for this claim in its financial statements.



On September 24,
2012, a letter of claim and motion for approval as a class action was filed against a subsidiary of Mega Dr. Baby Marketing and
Distribution (888) Ltd., Company's subsidiary Bee Group Retail Ltd, and a manufacturer of baby products, for an aggregate amount
of approximately NIS 135 million. The plaintiff claims that baby mattresses sold by the defendants as bearing a safety certificate
issued by the Standards Institution of Israel, never received any such approval. In the opinion of the Company, based on the opinion
of its legal advisers, the possibility that the claim will be rejected exceeds 50%. Accordingly, the Company did not make any
provision for this claim in its financial statements.



On November 1, 2012,
a letter of claim and motion for approval as a class action was filed against Mega, the You Customer Club, Diners Club Israel
Ltd., and Credit Cards for Israel Ltd., for an aggregate amount of approximately NIS 120 million. The Plaintiff claims that
the defendants mislead the holders of a certain You credit card named "CalChoice". The You credit card "CalChoice"
enables its holders to obtain extra credit by way of charging a minimum of NIS 200 for every NIS 5,000 spent. The remaining balance
is postponed and is charged in the next month, while the holder of the card can provide each month the amount he would like to
pay out of such balance. The Plaintiff alleges that the defendants do not properly notify the client of the interest rate to be
charged, and that such interest rate is significantly higher than interest rates charged at bank accounts or other competing credit
cards. The plaintiff further claims that the defendants did not properly notify the card holder of his option to determine the
amount to be charged each month, whilst automatically charging the minimum required.  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.



181







In
January 2013, a letter of claim and motion for approval as a class action was filed against Mega Retail for an aggregate amount
of approximately NIS 9 million. The Plaintiff alleges that the description of certain products sold at Mega's internet site
for online shopping, containing words such as "Fresh", "Natural" and/or "Without Sugar" is misleading
and does not meet standards required by law. In the opinion of the Company, based on the opinion of its legal advisers, the possibility
that the claim will be rejected exceeds 50%. Accordingly, the Company did not make any provision for this claim in its financial
statements.



In March 2013, a letter
of claim and motion for approval as a class action was filed against Mega Retail, alleging that Mega charged sums exceeding the
maximum sums permitted by law for certain butter, milk and sour cream products. The claim does not state the amount sought. The
Company is currently reviewing the Claim and denying all allegations. However, at this time, given this matter is preliminary
in nature, our financial statements currently do not provide for any amount. We will continue to assess this matter as the request
for the class action develops.



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. As of December 31, 2012, some of
the Company's supermarket stores have no valid business permits/license. 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. 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
which ended prior to the date of this annual report



In September 2011,
a lawsuit was filed against Mega Retail along with a request to be approved as a class action in regard to the sale of products
which, as argued by the claimant, are subject to the Product and Service Price Regulation Order (Maximum Prices for Milk and Milk
Products) (the "Order") . The law suit claims that since the products carry special kosher certifications they are offered
at prices higher than the maximum prices allowed according to the Order. The claim was also filed against Tnuva and two competing
supermarket chains. The damages sought from Mega Retail are NIS 6 million. In December 2012, a settlement between the parties
was approved by the court.



182







In July 2011, a
letter of claim and a motion for approval of action as class action was filed against Mega Retail, claiming that Mega Retail charged
higher prices than it should have charged on packs that contain two boxes of "Ski" soft white cheese produced by Strauss
and sold in cardboard packs, and contrary to its promise that the discount would account to 20% of the price of "Ski"
boxes of 500 grams, granted an actual discount of only 3%, causing the consumers to pay NIS 3.73 more than they should for each
pack. The appellant claims that as a result of not being given the discount by Mega Retail the damage incurred by the class members
is approximately NIS 19 million per month. The court was also asked to issue an affirmative order to instruct the respondent to
grant to the consumers who buy the larger packages a significant discount of at least 20% relative to the price per unit of the
product in the smaller package. In March 2013, a request to withdraw the claim was approved by the court.



In December 2011,
a letter of claim and a motion for approval of action as a class action was filed against the Company's 51% subsidiary, Eden Briut
Teva Market Ltd. ("Eden") and additional food supplier, alleging that Eden and the additional food supplier are violating
the Public Health (Food) Order [new version], 5643-1983 and its regulations, according to which certain products must be marked
with a choking hazard warning. If the claim is approved as a class action, the plaintiff claims it should apply to all Eden customers
that purchased products which should be marked as aforementioned, including any customer who had bought such products by way of
bulk. If the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 10
million. In June 2012, a mutual request to withdraw the claim was approved by the court.



On July 1, 2012,
a letter of claim and motion for approval as a class action was filed against Mega and Din Marketing and Roasting Ltd., at an
aggregate amount of approximately NIS 3 million of monetary damages and approximately NIS 2.5 non-monetary damages. The plaintiff
claims that thedefendants sell sugared fruit products with food
coloring as "dried fruits", and therefore are in breach of a standard forbidding adding food coloring to dried fruits
and in breach of the Consumer Protection Law. The abovementioned products are sold under the private label of Mega. In December
2012, a mutual request to withdraw the claim was approved by the court.



On July 15, 2012,
a letter of claim and motion for approval as a class action was filed against the Company and Mega, for an aggregate amount of
approximately NIS 314 million. The Plaintiff claims that the defendants failed to properly mark prices per weight unit of certain
food products that are saturated with fluids. It is claimed that the net weight of the product should be marked after reducing
the weight of the fluids, and that by not reducing the fluids it is impossible to compare the price per weight unit of different
types of the product (for example canned products compared to frozen or fresh products of the same type). In February 2013, a
request to withdraw the claim was approved by the court.



183







On September 13,
2012, a letter of claim and motion for approval as a class action was filed against Mega, Shufersal Ltd. and certain food suppliers,
for an aggregate amount of approximately NIS 12 million. The Plaintiffs claim that the defendants, who produce, import and/or
market egg-noodle products, failed to properly mark these products with required information regarding the quantity of eggs they
contain. It is claimed that the products do not contain the minimum required quantity of eggs for them to be labeled as "Egg-Noodles",
as required by the applicable Israeli formal standard. It is further claimed that the information regarding the ingredients
of such products is per 100 gram dry product, when it should be made per 100 gram cooked product. In December 2012, a mutual request
to withdraw the claim was approved by the court.



On October 11, 2012,
a letter of claim and motion for approval as a class action was filed against Mega and a certain food supplier, for an aggregate
amount of approximately NIS 86 million. The Plaintiff claims that several food products sold at Mega supermarkets are not marked
properly to reflect the content percentage of the significant ingredient of the product, such as the percentage of fish in "fish
burgers", the percentage of corn in "corn schnitzel", etc. In addition to the compensation sought, the plaintiff's
request is that the court would issue a declaratory relief and a mandatory order to mark the products as required by law. In March
2013, a request to withdraw the claim was approved by the court.



On November 4, 2012,
a letter of claim and motion for approval as a class action was filed against Mega and a manufacturer and supplier of ready-made
cakes and cookies products for an aggregate amount of approximately NIS 5 million.  The Plaintiff claims that the defendants
failed to properly mark certain products sold by them which contain artificial food colorings with the Hebrew name of such food
colorings on the product's label, as required by law. In November 2012, the plaintiff's request to withdraw the claim was approved
by the court.



In January 2012,
a claim and a request to recognize it as a class action were filed aginst Eden Teva, regarding the alleged violation of the Consumer
Protection Law and regulations, by not marking the price per weight unit of certain products which are packed by Eden Teva. If
the claim is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 5 million. The
Company and the claimant settled the claim as a result of which the Company paid an immaterial amount to the claimant. The settlement
has been approved by the court.



On May 25, 2012,
a letter of claim and motion for approval as a class action was filed against Mega Retail Ltd. ("Mega"), claiming that
Mega is in breach of regulations of the Consumer Protection Law with respect to the font size of the terms of sale in written
advertisements. The appellant argues that the financial damage incurred by all class members is NIS 15 million.  In March
2013, the claim was dismissed by the court.



On November 25,
2012 a letter of claim and motion for approval as a class action was filed against Mega Retail for an aggregate amount of approximately
NIS 2.8 million. The Plaintiff claims that the defendant failed to properly mark products sold by it with the price per unit
of measure, in addition to the total price of the product. On April 8, 2013 the court accepted the plaintiff's request to withdraw
the claim.



184







In July 2011, a letter
of claim and a motion for approval of action as class action was filed against Mega Retail, claiming that Mega Retail misleads
its consumers to think that the 500 gram and 750 gram white cheese packages manufactured by Strauss and Tnuva which are labeled
as "Economy Packs" are sold at a discount compared to 250-gram packages. The appellant argues that the damage incurred
by all members of the class totals approximately NIS 28 million. It has also requested to issue an affirmative order to instruct
Mega Retail to provide its clients, who buy the larger packages, a significant discount of at least 20% compared to the price
per unit of the product in the smaller package. In the opinion of the Company, should it be obligated to pay any amount with regard
to this matter, it is not expected to be a material sum. In April 2013, the court approved a settlement agreement entered into
between the parties.



In July 2011, a letter
of claim and a motion for approval of action as class action was filed against Mega Retail, claiming that Mega Retail has unjustly
enriched itself at the expense of the consumers by selling large packages of goods which are labeled as "economy packs",
but has not lowered the price of the larger package, thus forcing the consumers to buy a more expensive product instead of sufficing
for an ordinary package. The appellant argues that the financial damage incurred by all class members is NIS 15 million. The appellant
further argues that the class suffered a non-monetary damage which it did not quantify. The court was also asked to issue an affirmative
order to instruct the respondent to price its products according to the labeling as an "economy package". In April 2013,
the court approved a settlement agreement entered into between the parties.



A request for municipal
taxes, including an increase of annual taxes, for approximately NIS 3.2 million and a retroactive request for NIS 12 million,
together with linkage and interest differences, were issued relating to the logistics center in Rishon Letzion owned by Mega Retail.
On July 2012, the parties reached a settlement pursuant to which Mega Retail paid the municipality of Rishon Letzion, a nonsignificant
amount.



Legal Proceedings
related to our Fueling and Commercial 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 compromise agreement that was submitted to Court's approval. However, the Court rejected the
two compromise agreements and therefore the legal procedures continue. 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.



185







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 debit 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 Company's opinion, 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.



In December 2010 an
indictment was issued in the local court in Tel Aviv against Dor Alon, a subsidiary of Dor Alon, two officers of Dor Alon and
an employee a claim by the Environment Ministry claiming they did not perform checks of the leakage of fuel tanks and pipes in
a number of Dor Alon's filling stations and claiming that they did not pass the results of their waterproofness checks to the
person in charge of the prevention of water contamination by fuels in the Environment Ministry, claiming omission of reporting
of an oil leak, non-treatment of a facility that was not waterproof and the non-installation of a piezometer, in accordance with
1959 Water Law and the 1977 (prevention of water contamination regulations)(filling stations) Regulations. The relevant period
for performing the waterproofing checks in the indictment was between 2000 and 2004. In the Company's opinion, based on the opinion
of its legal advisers, the chances that the claim will be rejected exceed 50%.



In February 2011 a
claim and an application for approval of the claim as a class action was filed against Dor Alon, and other fuel companies. The
issue in the claim is differences between the temperature of the LPG and the energy it provides as a result of burning. 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.



186







On June 27, 2010,
a statement of claim and a request to approve the claim as a class action and as a derivative claim was filed against Dor Alon,
members of the Board of Directors of Dor Alon and Alon. The claim was lodged by holders of Series A debentures of Dor Alon that
wish to represent the holders of Series A Dor Alon debentures as of February 7, 2010, who did not convert the debentures into
Dor Alon shares. In their claim, the plaintiffs claim that the distribution (on February 9, 2010) of the shares of Alon Natural
Gas Exploration Ltd. to Dor Alon's shareholders was an unlawful distribution. The plaintiffs also claim that Dor Alon should have
adjusted the Series A debentures' conversion rate following the distribution of shares as above. The plaintiffs request that the
Court would oblige Alon and the members of Dor Alon's Board of Directors to return to Dor Alon the shares that were distributed
as above; alternatively, the plaintiffs request that Dor Alon will be required to adjust the conversion rate of the debentures
to the "Ex rate" subsequent to the distribution; alternatively, the plaintiffs seek damages for non adjustment of the
conversion rate. 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.



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 financial statements.



On June 24, 2012,
a letter of claim and motion for approval as a class action was filed against New Dorgaz Ltd., a subsidiary of Dor Alon ("Dorgaz"),
at an aggregate amount of approximately NIS 42 million. The plaintiff claims that Dorgaz is in breach of the Arrangements in the
State Economy Regulations that require that at the time of termination of a contract between a gas supplier and a client that
the deposit payments be returned linked to the Israeli Consumer Prices Index.  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.



On September 3, 2012,
a letter of claim and motion for approval as a class action was filed against Dor Alon and a subsidiary of Dor Alon, for an aggregate
amount of NIS 50 million. The plaintiff claims that Dor Alon failed to comply with law requirements regarding sanitarian standards
of lavatories at its petrol stations, particularly cleaning requirements and intactness of facilities. 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.



187







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 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



On September 13, 2012,
a letter of claim and motion for approval as a class action was filed against a subsidiary of Dor Alon and other defendants, for
an aggregate amount of NIS 77 million. The letter of claim states that the defendants have breached the provisions of the product
and service regulation order (maximum prices in filling stations – 2002 (herein, "the Order") as regards conditions
for collection of extra charge on full service, nighttime service and rest days service, as well as the provisions of article
3(D) of the of the product and service regulation order (maximum prices in filling stations) (amendment) – 2006 (herein,
"the Amended Order") as regards the signage of self-service fuelling pumps. The claimants argue that the order has set
criteria for a minimum rate of self-service pumps in the filling stations out of the total number of pumps in the filling station,
and that whenever the criterion is not met, it is prohibited to collect service fee in that station. The claimants further allege
that according to the Amended order, whenever a pump is not marked in accordance with the Order, it cannot be regarded as a self-service
pump. As a result, the Defendants did not meet the criterion stipulated in the Order in certain stations and are therefore prohibited
from collecting service fee in those filling stations. 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 class action was
lodged against Dor Alon and other fuel companies in December 2007. The total amount of the claim is NIS 132 million (the subsidiary's
share in this amount is NIS 8.8 million). The claimant asserts that the defendants charged each customer NIS 2 for filling on
Saturdays and on holidays. In February 2013, the claim was dismissed by the court and on April 14, 2013, the claimant appealed
to the court. 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.



In April 2012, an
administrative appeal against the Municipality of Tel-Aviv (and against Dor Alon's subsidiary and additional defendants) was filed
with the Supreme Court, concerning the obligating the Municipality of Tel-Aviv to enforce laws against business in Tel Aviv operating
during the night and on holidays. Dor Alon's subsidiary's convenience stores are amongst them. The petition was dismissed in February
2012 and is currently at the appeal stage. In the opinion of the Company, based on the opinion of its legal advisers, the chances
that the claim will be rejected exceed 50%.



188







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 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.



Several bills of indictment
and verdicts are pending against Dor Alon and its subsidiaries for operating filling stations or convenience stores without a
business license and non-compliance with permits. In addition, closing orders have been issued regarding public filling 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. In the opinion of Dor Alon, 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.



Legal proceedings
which ended prior to the date of this annual report



On November 3, 2010,
a claim and a request to approve the claim as a class action was issued against a subsidiary of Dor Alon and other gas companies
(the share of Dor Alon's subsidiary was estimated at NIS 4 million). The issue in the claim is the alleged cooperation between
the gas companies and apartment builders which requires tenants to enter into contracts with a certain gas supplier in a way the
tenant allegedly overpays the gas company. In February 2013, the claim was dismissed by the court.



In December 2010,
a claim and an application for approval of the claim as a class action was filed with the District Court in Tel Aviv against Dor
Alon, a subsidiary of Dor Alon and the three largest fuel companies in the total amount of approximately NIS 200 million. The
claim was filed arguing that liquid oil in the pipes and petrol tanks caused the contamination of ground water. According to the
claimants the fuel companies did not adhere to the guidelines of the Environment Ministry and did not check the filling installations
were waterproof. In November 2012, a request to withdraw the claim was approved by the court.



In December 2010,
a claim and an application for approval of the claim as a class action was filed with the District Court in Tel Aviv against Dor
Alon, and other fuel companies in the total amount of approximately NIS 197 million. The issue in the claim is differences in
temperature of the petrol between the moment it is acquired by the fuel companies and the moment it is sold to the customers,
in a way that misstates the amount of energy sold to the customers and this way, according to the claimant, the fuel companies
profit millions of NIS per annum. In November 2012, the court accepted the plaintiff's request to withdraw the claim.



189







On March 22, 2009,
a class action was filed against a subsidiary of Dor Alon and other gas companies; the amount of the claim is NIS 821 million
(Dor Alon's subsidiary's share in the said amount is NIS 32 million). In the statement of claim it is asserted that when the defendants
replace a gas container to the consumer the container still contains a certain volume of gas, which is later used by the defendants.
According to the claimants, the defendants fully charge the claimants for the gas in the container but the consumers do not use
all of the gas they pay for, since some of the gas is taken back by the defendants. In March 2013, a settlement between the parties
was approved by the court.



On August 10, 2011,
Dor Alon received a letter of claim and a motion for approval of action as class action against a subsidiary of Dor Alon and its
subsidiary for a total amount of NIS 2.5 thousand. The letter of claim argued that pursuant to the Consumer Protection Law, 1981,
the defendants are obligated to provide their customers free phone services for a call in connection with complaints about products
or services provided by the defendants. The Company and the claimant settled the claim pursuant to which the Company will pay
an immaterial amount to the claimant. In January 2013, the settlement was approved by court.



On October 23, 2011,
Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon and a subsidiary of Dor
Alon for a total amount of NIS 6 million. The letter of claim argued that pursuant to the Consumer Protection Regulation (Price
per unit of measure), 2008, the subsidiary is obligated to label the products in Alonit stores with a price per unit of measure
in addition to the total price. In August 2012, the court accepted the plaintiff's request to withdraw the claim.



On April 15, 2012,
Dor Alon received a letter of claim and a motion for approval of action as class action against a subsidiary of Dor Alon and third
parties for a total amount of approximately NIS 4.4 million. The letter of claim argued that the defendants violated the provisions
of the Parking for Disabled People Law, 1993-5753 and the Equality for People with Disabilities Law, 1998-5758, by not providing
free parking to disabled people in the parking lot of "City Windows" in Haifa. The plaintiff argued that pursuant to
the Law, the defendants are obligated to provide free parking in public parking lots and in public places that the only access
to them is through parking in such public places. In November 2012, the court accepted the plaintiff's request to withdraw the
claim.



On August 11, 2011,
Dor Alon received a letter of claim and a motion for approval of action as class action against Dor Alon, a subsidiary of Dor
Alon and others for a total amount of NIS 33 million. The letter of claim argued that the defendants violated the provisions of
the law which prohibits selling tobacco products to minors by placing automatic cigarette vending machines in the filling stations
operated by the defendants even though the automatic vending machines are not owned and/or operated by Dor Alon or its subsidiary.
In February 2013, the court accepted the plaintiff's request to withdraw the claim.



Legal Proceedings
related to our Non-Food Segment



In May 2011, a claim
and a request to recognize the claim as a class action was filed against the Company regarding special sales held at "Kfar
Hasha'ashuim" brand toy stores operated by the Company's 100% wholly owned subsidiary, Bee Group Retail Ltd. According to
the claimant, the toy stores misled their customers by not presenting the prices charged for products prior to the special sales,
as required by law, in addition to the special sales prices. The claimant estimates the damage to the group of claimants for the
purposes of the claim at NIS 30 million. We will continue to assess this matter as the request for the class action develops.
In November 2012, the plaintiff's request to withdraw the claim was accepted by the court.



190







In January 2012, a
letter of claim and a motion for approval of action as a class action was filed against the Company regarding the sale of toy
and other products by its "Kfar Hashashuim" chain of stores.  The Claim alleges that the company fails to mark
in Hebrew required details such as identifying details of the importer of the products, the manufacturer, supplier, country of
manufacturing, as well as the range of ages the product is designated for, and certain warnings required by law. If the Claim
is approved as a class action, the approximate claim is estimated by the plaintiff at approximately NIS 18 million. The plaintiff
further requested the court to issue a decree ordering the Company to fulfill the requirements of the law and mark its products
accordingly. 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 has not made any provision for this claim in its financial statements.



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



On February 12, 2013,
Alon Blue Square's shareholders approved the reappointment of Kesselman & Kesselman as our auditors for the year ending December
31, 2012. Kesselman & Kesselman has 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, 2012.



| | 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.



191







|Year |  | High  |  |  | Low  | 
|---- |  | ----- |  |  | ---- | 
|     |  |       |  |  |      | 
|2008 |  | $14.4 |  |  | $5.6 | 
|2009 |  | $11.2 |  |  | $5.3 | 
|2010 |  | $14.9 |  |  | $8.1 | 
|2011 |  | $10.6 |  |  | $4.0 | 
|2012 |  | $4.3  |  |  | $1.8 | 



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.



|Year                            |  | High  |  |  | Low  | 
|------------------------------- |  | ----- |  |  | ---- | 
|                                |  |       |  |  |      | 
|2011                            |  |       |  |  |      | 
|First quarter                   |  | $10.6 |  |  | $8.5 | 
|Second quarter                  |  | $10.5 |  |  | $7.7 | 
|Third quarter                   |  | $8.5  |  |  | $4.6 | 
|Fourth quarter                  |  | $6.1  |  |  | $4.0 | 
|                                |  |       |  |  |      | 
|2012                            |  |       |  |  |      | 
|First quarter                   |  | $4.3  |  |  | $3.3 | 
|Second quarter                  |  | $3.9  |  |  | $2.1 | 
|Third quarter                   |  | $2.3  |  |  | $1.8 | 
|Fourth quarter                  |  | $3.0  |  |  | $2.0 | 
|                                |  |       |  |  |      | 
|2013                            |  |       |  |  |      | 
|First quarter                   |  | $3.2  |  |  | $2.5 | 
|Second quarter (until April 19) |  | $3.5  |  |  | $3.0 | 



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.



192







|2012                         |  | High |      |  | Low  | 
|---------------------------- |  | ---- | ---- |  | ---- | 
|                             |  |      |      |  |      | 
|October                      |  | $3.0 |      |  | $2.0 | 
|November                     |  | $2.8 |      |  | $2.2 | 
|December                     |  | $3.4 |      |  | $2.3 | 
|                             |  |      |      |  |      | 
|2013                         |  |      | High |  |      | 
|                             |  |      |      |  |      | 
|January                      |  | $2.7 |      |  | $2.5 | 
|February                     |  | $3.2 |      |  | $2.5 | 
|March                        |  | $3.0 |      |  | $2.8 | 
|April (until April 19, 2013) |  | $3.5 |      |  | $3.0 | 



Ordinary Shares



The following table
sets forth the annual high and low closing prices for Alon Blue Square's ordinary shares for the years 2008 to 2012 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  |      |  | $   | 
|     |  |      |      |  |     | 
|2008 |  |      | 52.4 |  |     | 
|2009 |  |      | 42.9 |  |     | 
|2010 |  |      | 50.1 |  |     | 
|2011 |  |      | 36.5 |  |     | 
|2012 |  |      | 16.2 |  |     | 



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 | 
|---------------------------- |  | ---- | ---- |  | --- | 
|2011                         |  | NIS  |      |  | $   | 
|First Quarter                |  |      | 36.5 |  |     | 
|Second Quarter               |  |      | 35.1 |  |     | 
|Third Quarter                |  |      | 28.9 |  |     | 
|Fourth Quarter               |  |      | 22.2 |  |     | 
|                             |  |      |      |  |     | 
|2012                         |  |      |      |  |     | 
|First Quarter                |  |      | 16.2 |  |     | 
|Second Quarter               |  |      | 14.6 |  |     | 
|Third Quarter                |  |      | 8.9  |  |     | 
|Fourth Quarter               |  |      | 10.7 |  |     | 
|                             |  |      |      |  |     | 
|2013                         |  |      |      |  |     | 
|First Quarter                |  |      | 11.6 |  |     | 
|April (until April 20, 2013) |  |      | 12.7 |  |     | 



193







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.





|2012                         |  | High |  |  | Low | 
|---------------------------- |  | ---- |  |  | --- | 
|                             |  | NIS  |  |  | $   | 
|                             |  |      |  |  |     | 
|October                      |  | 10.7 |  |  | 2.8 | 
|November                     |  | 10.4 |  |  | 2.7 | 
|December                     |  | 10.2 |  |  | 2.7 | 
|                             |  |      |  |  |     | 
|2013                         |  | High |  |  | Low | 
|January                      |  | 10.1 |  |  | 2.7 | 
|February                     |  | 11.6 |  |  | 3.1 | 
|March                        |  | 11.2 |  |  | 3.1 | 
|April (until April 20, 2013) |  | 12.7 |  |  | 3.5 | 



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



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



Not applicable.



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



Our ADSs, each representing
one ordinary share and evidenced by an American depositary receipt, or ADR, have been traded on the New York Stock Exchange, Inc.
under the symbol “BSI” since July 1996. The ADRs 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.



194







| | 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.



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 public traded securities or is not in 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 in “market
terms” the board of directors has to determine, on the base of detailed explanation, that the private placement is on market
terms, unless proven otherwise.



195







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 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 committee and shareholder approval is also required. The vote required by the audit 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.
Under the Israeli Companies Law, the audit committee is to be comprised of at least three members appointed by the board of directors,
which members must include all of the external directors. The majority of members of the audit committee should be independent
directors, and the chairman of the audit committee should be an external director.



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, otherwise
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.



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:



196







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.



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 of a company with 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
on conditions of their employment, in other capacities, require the approval of the audit committee, the board of directors, and
the shareholders.



197







Compensation
Policy



A recent amendment
to the Companies Law requires 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 a new compensation policy the Company is required to adopt. The recent
amendment to the Companies Law requires that by August 11, 2013 the board and shareholders (with approval by a Special Majority,
described under Item 10(B)) adopt a compensation policy applicable to Company officers and directors. This compensation policy
is required to take 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.



Description of Securities



Ordinary Shares



The following is a
description of our ordinary shares. Our authorized share capital is 100,000,000 ordinary shares, par value NIS 1.0 per share.



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 in two Hebrew-language daily newspapers
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 in two daily newspapers 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 Alon Blue 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.





198









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 - “Alon Retail 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 may, with similar approval, deposit any
part of the company's property with trustees in favor of the shareholders as the liquidator, with the approval mentioned
above deems fit.



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 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 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.



199







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 - Private Placements.”



| | 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 – Supermarkets,” “Item 4. Information on The Company - B. Business
Overview – Fueling and Commercial Sites,” “Item 4. Information on The Company - B. Business Overview –
Non-Food,” “Item 4. Information on The Company - B. Business Overview – Real Estate,” “Item 4. Information
on The Company - B. Business Overview - Related Businesses”, “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, Exemptions 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. In May 1998, a new
“general permit” was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that
previously existed under the law and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency
into non-Israeli currencies.



200







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 freely repatriable 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, 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.



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



The Israeli corporate
tax rate applicable to Israeli resident companies in 2012 is 25%.



201







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 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.



As of January
1, 2012, the real capital 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 expenses in respect of such gain will be taxed at the rate of 30%.



Individual and corporate
shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (25% in 2012 for corporations
and a marginal tax rate of up to 48% in 2012 for individuals) (an additional 2% tax would be levied on individuals whose taxable
income from Israeli sources exceeds NIS 811,560 in 2013). 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 (not applicable in respect of Shares purchased on or after January 1, 2009), (ii) the seller
does not have a permanent establishment in Israel to which the generated capital gain is attributed, and (iii) if the seller is
a corporation, less than 25% of its means of control or the rights to its profit or income are held by or attributed to Israeli
resident shareholders. 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").



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 at a 25% tax rate for corporations and/or for individuals.



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 Aouthority 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 must not be filed and no advance payment must be paid. A capital
gain is also reportable on the annual income tax return.



202







Dividends



As of January 1,
2012, 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.



As of January 1,
2012, 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 an Approved
Enterprise/Benefited Enterprise/Preferred Enterprise – the tax rate is 15%; (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.



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.



203







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 Double 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;
| | - | ------

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



204







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.



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.



205







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 “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 “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”.



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.



206







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 Double 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 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.



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.



207







Medicare Tax on Unearned
Income



For taxable years beginning
after December 31, 2012, certain U.S. Holders that are individuals, estates or trusts are required to pay an additional 3.8% tax
on, 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.



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.



208







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.



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 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.



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.



209







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 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.



| | 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.



210







| | 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 2,672.1 million and marketable securities in the amount of approximately NIS
288.7 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, 2012:



211









|                                                                                           |  | December 31, 2012Expected maturity (NIS in thousands) |        
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------------- | -------
|                                                                                           |  | 2013                                                  |        
|Long term loan from banks - linked:                                                        |  |                                                       |        
|Linked to
    the Israeli CPI - 3.84% (weighted  average rate as of December 31, 2012)     |  |                                                       | 93,734 
|Long term loans from bank - unlinked:                                                      |  |                                                       |        
|Fixed annual interest rate of 6.78%                                                        |  |                                                       | 46,722 
|Variable interest (average
    annual rate as of December 31, 2012 of 4.18%)               |  |                                                       | 111,007
|Long term loans from others - unlinked:                                                    |  |                                                       |        
|Variable
    interest (average annual rate as of December 31, 2012-1 of 2.0%)              |  |                                                       | -      
|                                                                                           |  |                                                       | 251,463
|Debentures- Linked to the Israeli CPI:                                                     |  |                                                       |        
|Issued by the Company
    - fixed rate 5.9%                                                |  |                                                       | 80,764 
|Issued by the Company
    - fixed rate 2.5%                                                |  |                                                       | 11,017 
|Issued by BSRE - fixed
    rate 4.7%                                                       |  |                                                       | 224,415
|Issued by BSRE - fixed
    rate 4.2%                                                       |  |                                                       | 23,560 
|Issued by BSRE - fixed
    rate 4.5%                                                       |  |                                                       | -      
|Issued by Dor Alon - fixed
    rate 5%                                                     |  |                                                       | 70,897 
|Issued by Dor Alon - fixed
    rate 4.95%                                                  |  |                                                       | 7,923  
|Issued by Dor Alon - fixed
    rate 6.45% (weighted average rate as of December 31, 2012)  |  |                                                       | 8,855  
|                                                                                           |  |                                                       |        
|Debentures- unlinked:                                                                      |  |                                                       |        
|Issued by Dor Alon–variable interest(average annual rate as of December 31, 2012 of 4.10%) |  |                                                       | 15,879 
|Issued by Dor Alon - fixed rate 6.65%                                                      |  |                                                       | 76,159 
|                                                                                           |  |                                                       |        
|Convertible Debentures Linked to the Israeli  CPI:
    (1)                                 |  |                                                       |        
|Issued by BSRE - fixed rate 6.25%                                                          |  |                                                       | 29,158 
|                                                                                           |  |                                                       | 548,627
|Marketable Securities
    - Linked to the Israeli CPI                                      |  |                                                       | 105,955
|Marketable
    Securities – unlinked in NIS                                                |  |                                                       | 176,602
|Marketable
    Securities – in other currencies                                            |  |                                                       | 6,160  
|                                                                                           |  |                                                       | 288,717



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



212







For CPI-linked financial
instruments as stipulated in the table above, a one percent increase (decrease) in the CPI would cause an approximately NIS
31.2 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 financial statements, leading to lower reported earnings and shareholders equity. The extent of this effect
on our 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) | 
|---- |  | ------ |  |  | ------------------------ | 
|     |  |        |  |  |                          | 
|2010 |  | 2.7%   |  |  | 2.3%                     | 
|2011 |  | 2.2%   |  |  | 2.6%                     | 
|2012 |  | 1.6%   |  |  | 1.4%                     | 



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

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





213







The table below provides
an analysis of monetary assets and liabilities by currency and linkage as of December 31, 2012:



|                                                           |  | December 31, 2012  |          
|---------------------------------------------------------- |  | ------------------ | ---------
|                                                           |  | NIS linked  to CPI |          
|                                                           |  | NIS in thousands   |          
|Assets:                                                    |  |                    |          
|Cash and cash equivalents                                  |  |                    | -        
|Short term bank deposit                                    |  |                    | -        
|Investment in securities                                   |  |                    | 105,955  
|Trade receivables                                          |  |                    | -        
|Other accounts receivables                                 |  |                    | -        
|Income taxes receivable                                    |  |                    | 92,814   
|Loan Receivable                                            |  |                    | 112,137  
|Derivative financial instruments                           |  |                    | -        
|Investment in equity securities                            |  |                    | -        
|Other long-term receivables                                |  |                    | 309      
|Assets of disposal groups classified as held for sale      |  |                    | 171      
|Total assets                                               |  |                    | 311,386  
|                                                           |  |                    |          
|Liabilities:                                               |  |                    |          
|Credit and loans from banks and others                     |  |                    | -        
|Trade payables                                             |  |                    | -        
|Other accounts payable and accrued expenses                |  |                    | 26,387   
|Customer's deposits                                        |  |                    | 28,011   
|Income tax payables                                        |  |                    | 3,458    
|Provisions                                                 |  |                    | 16,648   
|Loans                                                      |  |                    | 886,831  
|Debentures                                                 |  |                    | 2,192,206
|Convertible debentures                                     |  |                    | 119,560  
|Other long-term liabilities                                |  |                    | 9,679    
|Derivative financial instruments                           |  |                    | 9,336    
|Liabilities of disposal groups classified as held for sale |  |                    | -        
|Total liabilities                                          |  |                    | 3,292,116



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



214







|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.





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                                                                                                                                                                                          



215







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 on Form 20-F 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.



216







(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, 2012 based onthe
framework for Internal Control-Integrated Framework set forth by The Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on our assessment and this framework, our management concluded that the Company's internal control over financial
reporting were effective as of December 31, 2012.



217







(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, 2012 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.



| | 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, 2011 and 2012, for which audited 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 2011 and 2012.



|                       |  | 2012               |       |  | 2011               | 
|---------------------- |  | ------------------ | ----- |  | ------------------ | 
|                       |  | (NIS in thousands) |       |  | (NIS in thousands) | 
|Audit Fees (1)         |  |                    | 5,349 |  |                    | 
|Audit-Related fees (2) |  |                    | 55    |  |                    | 
|Tax Fees (3)           |  |                    | 256   |  |                    | 
|All Other Fees (4)     |  |                    | 169   |  |                    | 
|TOTAL                  |  |                    | 5,829 |  |                    | 



218







| | (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) | Audit-related services in connection with Alon Blue Square and BSRE's shelf prospectuses and in
connection with reports delivered to the Company's controlling shareholder.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | 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 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.
| | --------- | -----------------------------------------------------------------------



Below is a list of
purchases of the ordinary shares by the Company and by entities controlling, controlled by and under common control with the Company
during calendar year 2012:



219







|Period (1)                          |  | Total Numberof SharesPurchased |  | Average PricePaid Per Share(in NIS) |  | Total Number ofShares Purchasedas Part ofPubliclyAnnounced Plansor Programs |  | MaximumNumber ofShares that MayYet Be PurchasedUnder Plans orPrograms | 
|----------------------------------- |  | ------------------------------ |  | ----------------------------------- |  | --------------------------------------------------------------------------- |  | --------------------------------------------------------------------- | 
|July 12, 2012 to July 25, 2012      |  | 70,490                         |  | 8.43                                |  | N/A                                                                         |  | N/A                                                                   | 
|July 5, 2012 to July 11, 2012       |  | 51,850                         |  | 8.80                                |  | N/A                                                                         |  | N/A                                                                   | 
|July 1, 2012 to July 4, 2012        |  | 42,867                         |  | 8.91                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 28, 2012                       |  | 24,950                         |  | 8.65                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 27, 2012                       |  | 10,500                         |  | 8.70                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 25, 2012                       |  | 9,200                          |  | 8.60                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 24, 2012                       |  | 35,019                         |  | 8.57                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 21, 2012                       |  | 23,500                         |  | 8.54                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 20, 2012                       |  | 21,600                         |  | 8.54                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 19, 2012                       |  | 46,500                         |  | 8.57                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 18, 2012                       |  | 53,000                         |  | 8.52                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 17, 2012                       |  | 48,950                         |  | 8.63                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 13, 2012 through June 14, 2012 |  | 69,388                         |  | 9.06                                |  | N/A                                                                         |  | N/A                                                                   | 
|June 5, 2012 through June 12, 2012  |  | 90,427                         |  | 8.99                                |  | N/A                                                                         |  | N/A                                                                   | 



(1) All such
purchases were made by Alon.



| | 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.



220







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.



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:
Under NYSE Rule 303A.05, a domestic listed company must have a compensation committee composed entirely of independent directors.
We do have a compensation committee although it is not composed entirely of independent directors.



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).



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.



221







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 (incorporated by
    reference to Exhibit A.2 to Alon Holding’s Annual Report on Form 20-F for the year ended December 31, 2009.                                                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|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)).                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.1         |  | Letter, dated July 1, 1996, by Co-Op Blue Square Consumers Cooperative Society Ltd. indemnifying the Registrant against certain real estate tax liabilities (incorporated by reference to Exhibit 10.17 to the Registration Statement on Form F-1 (File No. 333-05024)).                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.2         |  | Letter, dated May 21, 1993 and March 18, 1993, by Co-Op Blue Square Consumers Cooperative Society Ltd. indemnifying Blue Square Chain Investments & Properties Ltd. against certain real estate tax liabilities (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form F-1 (File No. 333-05024)).                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                    
|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)).



222







|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|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        |  | Deed of Trust made on August 5, 2003, by and between Alon Blue Square and Israel Discount Bank Trust Company Ltd., together with second schedule (English translation) (incorporated by reference to Exhibit 4.18 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2003).                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.16        |  | First Schedule to Deed of Trust – Debenture Certificate for Registered Debenture (Series A) of NIS 1 par value each (out of series of NIS 200,000,000 par value Debentures (Series A)) (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, 2003).                                                                                                                                      



223







|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.17        |  | First Schedule to Deed of Trust – Debenture Certificate for Registered Debenture (Series B) of NIS 1 par value each (out of series of NIS 200,000,000 par value Debentures (Series B)) (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, 2003).                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.18        |  | Agreement between the Registrant and Blue Square Chain (Hyper Hyper) Ltd. (incorporated by reference to Exhibit 4.21 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2002).                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.19        |  | General services framework and expenses allotment agreement, dated October 11, 2005, among Alon Blue Square, Blue Square Chain Investments & Properties Ltd. and Blue Square Chain (Hyper Hyper) Ltd., as amended (incorporated by reference to Exhibit 4.21 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2005).                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.20        |  | 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).                                                                                                                               
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.21        |  | 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).                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.22        |  | 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).                                                                                                                                
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.23        |  | 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).                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.24        |  | 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).                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.25        |  | Service Agreement, dated August 13, 2006, between Alon Blue Square and Blue Square Real Estate Ltd. (English translation) (incorporated by reference to Exhibit 4.27 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2006).                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.26        |  | Underwriting Agreement, dated August 15, 2006, among Blue Square Real Estate Ltd., and Poalim I.B.I Underwriting and Issues Ltd., Africa-Israel Issues Ltd., Discount Underwriting and Issues Ltd. and various other underwriters (English translation) (incorporated by reference to Exhibit 4.28 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2006).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.27        |  | Deed of Trust (for Series A 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 4.29 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2006).                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                           
|4.28        |  | First Schedule to Deed of Trust - Debenture Certificate for Registered Debentures (Series A) of NIS 1 par value each (out of series of NIS 100,000,000 par value Debentures (Series A)) (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, 2006).                                          



224







|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.29        |  | 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).                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.30        |  | 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).                                                                                                                          
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.31        |  | 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).                                                                                                      
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.32        |  | 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).
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.33        |  | Document of Principles of Transaction, dated July 26, 2007, among Alon Blue Square and Orin Provizor Holdings Ltd., M.A.Sh.- M.I.S. Ltd., Mr. Guy Provizor, and Eden Natural Health Market Ltd., as amended (English translation) (incorporated by reference to Exhibit 4.35 to Alon Blue Square'sAnnual Report on Form 20-F for the year ended December 31, 2007).                                                                                                       
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.34        |  | Sale Agreement, made on August 2, 2007, between Kfar Hasha'ashuim Central Warehouse Ltd. and Eldar Gil & Mahoney Assets Ltd., as amended (English translation) (incorporated by reference to Exhibit 4.36 to Alon Blue Square's Annual Report on Form 20-F for the year ended December 31, 2007).                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.35        |  | Share Purchase Agreement, dated August 3, 2008, between Bee Group Retail Ltd. and Twikor Ltd., Mr. Avner Katz, Mr. Doron Yanai, Mr. Ronen Levy, Avi Katz Marketing Ltd. and Levy R.S. Managements and Investments Ltd. (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, 2008).                                                                                           
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.36        |  | Protocol, dated April 11, 2010, between TelAviv 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).                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.37        |  | Agreement, dated June 3, 2010, between TelAviv 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).                                                                                             
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.38        |  | Agreement, dated June 3, 2010, between TelAviv 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).                                                                                                                                  
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.39        |  | 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).                                                                             



225







|Exhibit No. |  | Description                                                                                                                                                                                                                          
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                                                                      
|4.40        |  | 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 and CODM 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 Co-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).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 CODM, Co-CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                              
|            |  |                                                                                                                                                                                                                                      
|14.(a).1    |  | Consent of Independent Registered Public Accounting Firm from Kesselman & Kesselman, certified public accountants (Isr.) dated April 29, 2013.                                                                                       
|            |  |                                                                                                                                                                                                                                      
|14.(a).2    |  | Consent of Independent Registered Public Accounting Firm from KPMG Somekh Chaikin-  dated April 25, 2013.                                                                                                                            
|            |  |                                                                                                                                                                                                                                      
|14.(a).3    |  | Consent of an Expert dated April 25, 2013.                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                      
|14.(a).4    |  | Consent of an Expert dated April 25, 2013.                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                      
|14.(a). 5   |  | Consent of an Expert dated April 25, 2013.                                                                                                                                                                                           
|            |  |                                                                                                                                                                                                                                      
|14.(a).6    |  | Consent of an Expert dated April 25, 2013.                                                                                                                                                                                           



226













ALON HOLDINGS BLUE SQUARE - ISRAEL LTD.



CONSOLIDATED FINANCIAL STATEMENTS



AS OF
DECEMBER 31, 2012



TABLE
OF CONTENTS



|                                                                                                                  |  | Page      
|----------------------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                                  |  |           
|REPORT OF INDEPENDENT REGISTERED
    PUBLIC ACCOUNTING FIRM                                                       |  | F-2       
|                                                                                                                  |  |           
|CONSOLIDATED FINANCIAL STATEMENTS
    (IN THOUSANDS OF NEW ISRAELI SHEKELS - NIS):                                |  |           
|                                                                                                                  |  |           
|Statements of financial position                                                                                  |  | F-3-F-4   
|                                                                                                                  |  |           
|Statements of income                                                                                              |  | F-5-F-6   
|                                                                                                                  |  |           
|Statements of comprehensive
    income                                                                            |  | F-7       
|                                                                                                                  |  |           
|Statements of changes in equity                                                                                   |  | F-8       
|                                                                                                                  |  |           
|Statements of cash flows                                                                                          |  | F-9-F-11  
|                                                                                                                  |  |           
|Notes to consolidated financial
    statements                                                                    |  | F-12-F-126
|                                                                                                                  |  |           
|APPENDIX - DETAILS OF PRINCIPAL
    SUBSIDIARIES, PROPORTIONATELY CONSOLIDATED COMPANIES AND ASSOCIATED COMPANIES |  | F-127     



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



F-1











Report of Independent Registered Public
Accounting Firm



To the shareholders of



ALON HOLDINGS BLUE
SQUARE - ISRAEL LTD.



We have audited the accompanying consolidated
statements of financial position of Alon Holdings Blue Square – Israel Ltd. and its subsidiaries and proportionately consolidated
companies (collectively - the "Company" or "Blue Square") as of December 31, 2012 and 2011 and the related
consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period
ended December 31, 2012. 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 Diners Club Israel Ltd. (an equity method investee) the Company's interest in which as reflected in
the consolidated statement of financial position as of December 31, 2012 is NIS 31.8 million and the Company's share in its profit
is NIS 19.6 million for the year then ended. Those statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Diners Club Israel Ltd., is based solely on the report
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
report of other auditors provide a reasonable basis for our opinion.



In our opinion, based on our audits and
the report of 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, 2012 and 2011 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, 2012, in conformity with International Financial Reporting
Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").



|Tel Aviv, Israel | Kesselman & Kesselman                                            
|---------------- | -----------------------------------------------------------------
|April 29, 2013   | Certified Public Accountants (lsr.)                              
|                 | A member firm of PricewaterhouseCoopers
    International Limited





Kesselman & Kesselman, Trade Tower, 25 Hamered
Street, Tel-Aviv 68125, Israel

P.O Box 50005 Tel Aviv 61500 Telephone:
+972-3-7954555 Fax -3-7954556, www.pwc.com/il



F-2







|                                                     |  |      |  | December 31  |           |  | Convenience translation (note 1b) December 31, | 
|---------------------------------------------------- |  | ---- |  | ------------ | --------- |  | ---------------------------------------------- | 
|                                                     |  |      |  | 2011         |           |  | 2012                                           | 
|                                                     |  | Note |  | NIS          |           |  | U.S. dollars                                   | 
|                                                     |  |      |  | In thousands |          
|Assets                                               |  |      |  |              |           |  |                                                | 
|                                                     |  |      |  |              |           |  |                                                | 
|CURRENT ASSETS:                                      |  |      |  |              |           |  |                                                | 
|Cash and cash equivalents                            |  | 15a  |  |              | 76,451    |  |                                                | 
|Investment in securities                             |  | 12   |  |              | 300,053   |  |                                                | 
|Short-term deposits                                  |  | 15b  |  |              | 103,942   |  |                                                | 
|Trade receivables                                    |  | 14a  |  |              | 1,576,150 |  |                                                | 
|Other accounts  receivable                           |  | 14b  |  |              | 291,790   |  |                                                | 
|Derivative financial instruments                     |  | 13   |  |              | 2,543     |  |                                                | 
|Income taxes receivable                              |  |      |  |              | 125,789   |  |                                                | 
|Inventories                                          |  | 14c  |  |              | 676,590   |  |                                                | 
|Assets classified as held for sale                   |  | 8    |  |              | 3,610     |  |                                                | 
|Assets of disposal group classified as held for sale |  | 6    |  |              | -         |  |                                                | 
|                                                     |  |      |  |              | 3,156,918 |  |                                                | 
|                                                     |  |      |  |              |           |  |                                                | 
|NON-CURRENT ASSETS:                                  |  |      |  |              |           |  |                                                | 
|Investments in associates                            |  | 11   |  |              | 202,653   |  |                                                | 
|Derivative financial instruments                     |  | 13   |  |              | 896       |  |                                                | 
|Real estate inventories                              |  | 14c  |  |              | 100,035   |  |                                                | 
|Payments on account of real estate                   |  |      |  |              | 191,600   |  |                                                | 
|Investment in securities                             |  | 12   |  |              | 33,159    |  |                                                | 
|Loans receivable, net of current maturities          |  | 16   |  |              | 182,654   |  |                                                | 
|Property and equipment, net                          |  | 7    |  |              | 2,942,487 |  |                                                | 
|Investment property                                  |  | 8    |  |              | 576,093   |  |                                                | 
|Intangible assets, net                               |  | 9    |  |              | 1,461,070 |  |                                                | 
|Other long-term receivables                          |  | 17   |  |              | 142,331   |  |                                                | 
|Deferred taxes                                       |  | 23   |  |              | 104,321   |  |                                                | 
|                                                     |  |      |  |              | 5,937,299 |  |                                                | 
|Total assets                                         |  |      |  |              | 9,094,217 |  |                                                | 



|April 29, 2013          |  |                                            |  |                                                                            |  |                          |  |                                                  
|----------------------- |  | ------------------------------------------ |  | -------------------------------------------------------------------------- |  | ------------------------ |  | -------------------------------------------------
|Date of approval of the |  | Yitzhak Bader                              |  | David Wiessman                                                             |  | Limor Ganot              |  | Dror Moran                                       
|financial statements    |  | ExecutiveChairman of theBoard of Directors |  | Chief Operating
        Decision Maker,Chief ExecutiveOfficer and Director |  | Co-ChiefExecutiveOfficer |  | Vice President and
        Chief FinancialOfficer



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



F-3







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION



|                                                                   |  |      |  | December 31  |           |   | Convenience  translation (note 1b)  December 31, | 
|------------------------------------------------------------------ |  | ---- |  | ------------ | --------- | - | ------------------------------------------------ | 
|                                                                   |  |      |  | 2011         |           |   | 2012                                             | 
|                                                                   |  | Note |  | NIS          |           |   | U.S. dollars                                     | 
|                                                                   |  |      |  | In thousands |          
|Liabilities and equity                                             |  |      |  |              |           |   |                                                  | 
|CURRENT LIABILITIES:                                               |  |      |  |              |           |   |                                                  | 
|Credit and loans from banks and others                             |  | 21   |  |              | 1,036,928 |   |                                                  | 
|Current maturities of debentures and convertible debentures        |  | 21   |  |              | 212,726   |   |                                                  | 
|Current maturities of long-term loans from banks                   |  | 21   |  |              | 311,642   |   |                                                  | 
|Trade payables                                                     |  |      |  |              | 1,243,914 |   |                                                  | 
|Other accounts payable and accrued expenses                        |  | 20   |  |              | 730,985   |   |                                                  | 
|Customers' deposits                                                |  |      |  |              | 27,733    |   |                                                  | 
|Derivative financial instruments                                   |  | 13   |  |              | 2,814     |   |                                                  | 
|Income taxes payable                                               |  |      |  |              | 6,311     |   |                                                  | 
|Provisions for other liabilities                                   |  | 25   |  |              | 78,266    |   |                                                  | 
|Liabilities of disposal group classified as held for sale          |  | 6    |  |              | -         |   |                                                  | 
|                                                                   |  |      |  |              | 3,651,319 |   |                                                  | 
|NON CURRENT LIABILITIES:                                           |  |      |  |              |           |   |                                                  | 
|Long-term loans from banks and others, net of current maturities   |  | 21   |  |              | 1,240,487 |   |                                                  | 
|Convertible debentures, net of current maturities                  |  | 21   |  |              | 118,826   |   |                                                  | 
|Debentures, net of current maturities                              |  | 21   |  |              | 2,034,047 |   |                                                  | 
|Other liabilities                                                  |  | 22   |  |              | 264,597   |   |                                                  | 
|Derivative financial instruments                                   |  | 13   |  |              | 16,701    |   |                                                  | 
|Liabilities in respect of employee benefits, net of amounts funded |  | 24   |  |              | 62,245    |   |                                                  | 
|Deferred taxes                                                     |  | 23   |  |              | 159,769   |   |                                                  | 
|                                                                   |  |      |  |              | 3,896,672 |   |                                                  | 
|Total liabilities                                                  |  |      |  |              | 7,547,991 |   |                                                  | 
|                                                                   |  |      |  |              |           |   |                                                  | 
|EQUITY:                                                            |  |      |  |              |           |   |                                                  | 
|Equity attributed to equity holders of the Company:                |  |      |  |              |           |   |                                                  | 
|Ordinary shares of NIS 1 par value                                 |  | 18   |  |              | 79,881    |   |                                                  | 
|Additional paid-in capital                                         |  | 18   |  |              | 1,219,279 |   |                                                  | 
|Other reserves                                                     |  | 19   |  |              | (9,672    | ) |                                                  | 
|Accumulated deficit                                                |  |      |  |              | (106,434  | ) |                                                  | 
|                                                                   |  |      |  |              | 1,183,054 |   |                                                  | 
|Non-controlling interests                                          |  |      |  |              | 363,172   |   |                                                  | 
|Total equity                                                       |  |      |  |              | 1,546,226 |   |                                                  | 
|Total liabilities and equity                                       |  |      |  |              | 9,094,217 |   |                                                  | 



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



F-4







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

CONSOLIDATED STATEMENTS OF INCOME



|                                                                                                |  |      |  |                                       |           |   |                     |  |            |      |  |  | Convenience           |  
|----------------------------------------------------------------------------------------------- |  | ---- |  | ------------------------------------- | --------- | - | ------------------- |  | ---------- | ---- |  |  | --------------------- | -
|                                                                                                |  |      |  |                                       |           |   |                     |  |            |      |  |  | translation (note 1b) |  
|                                                                                                |  |      |  |                                       |           |   |                     |  |            |      |  |  | for the year          |  
|Continuing Operations                                                                           |  |      |  | Year ended December 31                |           |   | ended  December 31, | 
|                                                                                                |  |      |  | 2010                                  |           |   | 2011                |  |            | 2012 |  |  | 2012                  |  
|                                                                                                |  | Note |  | NIS                                   |           |   | U.S. dollars        | 
|                                                                                                |  |      |  | In thousands (except  per share data) |          
|Revenues                                                                                        |  |      |  |                                       | 9,068,126 |   |                     |  | 15,159,447 |      |  |  | 15,805,539            |  
|Less – government levies                                                                        |  |      |  |                                       | 723,709   |   |                     |  | 2,813,671  |      |  |  | 2,955,154             |  
|Net revenues                                                                                    |  |      |  |                                       | 8,344,417 |   |                     |  | 12,345,776 |      |  |  | 12,850,385            |  
|Cost of sales                                                                                   |  |      |  |                                       | 6,058,120 |   |                     |  | 9,442,009  |      |  |  | 10,008,056            |  
|Gross profit                                                                                    |  |      |  |                                       | 2,286,297 |   |                     |  | 2,903,767  |      |  |  | 2,842,329             |  
|Selling, general and administrative expenses                                                    |  |      |  |                                       | 2,042,655 |   |                     |  | 2,611,801  |      |  |  | 2,658,198             |  
|Operating profit before other gains and losses and changes in fair value of investment property |  |      |  |                                       | 243,642   |   |                     |  | 291,966    |      |  |  | 184,131               |  
|Other gains                                                                                     |  | 26   |  |                                       | 3,258     |   |                     |  | 1,637      |      |  |  | 29,939                |  
|Other losses                                                                                    |  | 26   |  |                                       | (23,953   | ) |                     |  | (18,529    | )    |  |  | (6,544                | )
|Increase in fair value of investment property , net                                             |  | 8    |  |                                       | 32,917    |   |                     |  | 41,913     |      |  |  | 106,399               |  
|Operating  profit                                                                               |  |      |  |                                       | 255,864   |   |                     |  | 316,987    |      |  |  | 313,925               |  
|Finance income                                                                                  |  | 29   |  |                                       | 85,620    |   |                     |  | 156,567    |      |  |  | 73,875                |  
|Finance expenses                                                                                |  | 29   |  |                                       | (232,940  | ) |                     |  | (328,493   | )    |  |  | (319,644              | )
|Finance expenses, net                                                                           |  |      |  |                                       | (147,320  | ) |                     |  | (171,926   | )    |  |  | (245,769              | )
|Share of profit (losses) of associates                                                          |  | 11   |  |                                       | (518      | ) |                     |  | 5,746      |      |  |  | 12,024                |  
|Income before taxes on income                                                                   |  |      |  |                                       | 108,026   |   |                     |  | 150,807    |      |  |  | 80,180                |  
|Taxes on income                                                                                 |  | 30   |  |                                       | 38,591    |   |                     |  | 48,485     |      |  |  | 16,561                |  
|Net income  from continuing operation                                                           |  |      |  |                                       | 69,435    |   |                     |  | 102,322    |      |  |  | 63,619                |  
|Net loss from discontinued operation                                                            |  | 6    |  |                                       | (6,826    | ) |                     |  | (18,609    | )    |  |  | (22,468               | )
|Net income for the year                                                                         |  |      |  |                                       | 62,609    |   |                     |  | 83,713     |      |  |  | 41,151                |  



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



F-5







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

CONSOLIDATED STATEMENTS OF INCOME



|                                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  | Convenience           |  
|---------------------------------------------------------------------------------------------------- |  | -- |  | ------------------------------------- | ------ | - | ------------------ |  | ------- | ---- |  |  | --------------------- | -
|                                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  | translation (note 1b) |  
|                                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  | for the year          |  
|                                                                                                     |  |    |  | Year ended December 31                |        |   | ended December 31, | 
|                                                                                                     |  |    |  | 2010                                  |        |   | 2011               |  |         | 2012 |  |  | 2012                  |  
|                                                                                                     |  |    |  | NIS                                   |        |   | U.S. dollars       | 
|                                                                                                     |  |    |  | In thousands (except  per share data) |       
|Attributable to:                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Equity holders of the Company                                                                        |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Continuing operation                                                                                 |  |    |  |                                       | 54,665 |   |                    |  | 78,112  |      |  |  | 19,255                |  
|Discontinued operation                                                                               |  |    |  |                                       | (6,826 | ) |                    |  | (18,609 | )    |  |  | (22,468               | )
|                                                                                                     |  |    |  |                                       | 47,839 |   |                    |  | 59,513  |      |  |  | (3,213                | )
|                                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Non-controlling interests                                                                            |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Continuing operation                                                                                 |  |    |  |                                       | 14,770 |   |                    |  | 24,200  |      |  |  | 44,364                |  
|Discontinued operation                                                                               |  |    |  |                                       | -      |   |                    |  | -       |      |  |  | -                     |  
|                                                                                                     |  |    |  |                                       | 14,770 |   |                    |  | 24,200  |      |  |  | 44,364                |  
|                                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|                                                                                                     |  |    |  |                                       | 62,609 |   |                    |  | 83,713  |      |  |  | 41,151                |  
|                                                                                                     |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Earnings per ordinary share or ADS attributable
    to equity holders of the Company                 |  | 31 |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Basic                                                                                                |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Continuing operations                                                                                |  |    |  |                                       | 1.10   |   |                    |  | 1.18    |      |  |  | 0.29                  |  
|Discontinued operation                                                                               |  |    |  |                                       | (0.14  | ) |                    |  | (0.28   | )    |  |  | (0.34                 | )
|                                                                                                     |  |    |  |                                       | 0.96   |   |                    |  | 0.90    |      |  |  | (0.05                 | )
|Fully diluted                                                                                        |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Continuing operations                                                                                |  |    |  |                                       | 1.10   |   |                    |  | 1.07    |      |  |  | 0.29                  |  
|Discontinued operation                                                                               |  |    |  |                                       | (0.14  | ) |                    |  | (0.28   | )    |  |  | (0.34                 | )
|                                                                                                     |  |    |  |                                       | 0.96   |   |                    |  | 0.79    |      |  |  | (0.05                 | )
|Weighted average number of shares or ADSs used for computation of earnings per share (in thousands): |  |    |  |                                       |        |   |                    |  |         |      |  |  |                       |  
|Basic                                                                                                |  |    |  |                                       | 49,590 |   |                    |  | 65,940  |      |  |  | 65,954                |  
|Fully diluted                                                                                        |  |    |  |                                       | 49,814 |   |                    |  | 66,167  |      |  |  | 65,954                |  



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



F-6







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME



|                                                                        |  |      |  | Year ended December 31 |         |   | Convenience translation (note 1b) year ended December 31 | 
|----------------------------------------------------------------------- |  | ---- |  | ---------------------- | ------- | - | -------------------------------------------------------- | 
|                                                                        |  |      |  | 2010                   |         |   | 2011                                                     | 
|                                                                        |  | Note |  | NIS                    |         |   | U.S. dollars                                             | 
|                                                                        |  |      |  | In thousands           |        
|Net income for the year                                                 |  |      |  |                        | 62,609  |   |                                                          | 
|                                                                        |  |      |  |                        |         |   |                                                          | 
|Other comprehensive income (losses) items, net of tax:                  |  |      |  |                        |         |   |                                                          | 
|Available-for-sale financial assets:                                    |  | 12   |  |                        |         |   |                                                          | 
|Revaluation                                                             |  |      |  |                        | 1,821   |   |                                                          | 
|Gain from sales transferred to income statement                         |  |      |  |                        | (9,925  | ) |                                                          | 
|Actuarial loss from post-employment benefit obligations                 |  | 24   |  |                        | (277    | ) |                                                          | 
|Revaluation reserve of fixed assets reclassified as investment property |  |      |  |                        | -       |   |                                                          | 
|Currency translation differences                                        |  |      |  |                        | (6,406  | ) |                                                          | 
|Total – other comprehensive income (losses)                             |  |      |  |                        | (14,787 | ) |                                                          | 
|Total comprehensive income for the year                                 |  |      |  |                        | 47,822  |   |                                                          | 
|                                                                        |  |      |  |                        |         |   |                                                          | 
|From continuing operations:                                             |  |      |  |                        |         |   |                                                          | 
|Attributable to:                                                        |  |      |  |                        |         |   |                                                          | 
|Equity holders of the Company                                           |  |      |  |                        | 43,626  |   |                                                          | 
|Non-controlling interests                                               |  |      |  |                        | 11,022  |   |                                                          | 
|                                                                        |  |      |  |                        | 54,648  |   |                                                          | 
|                                                                        |  |      |  |                        |         |   |                                                          | 
|From discontinued operations:                                           |  |      |  |                        |         |   |                                                          | 
|Attributable to:                                                        |  |      |  |                        |         |   |                                                          | 
|Equity holders of the Company                                           |  |      |  |                        | (6,826  | ) |                                                          | 
|Non-controlling interests                                               |  |      |  |                        | -       |   |                                                          | 
|                                                                        |  |      |  |                        | (6,826  | ) |                                                          | 



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



F-7







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY



|                                                             |  | Equity attributable to equity holders of the Company                                                                                                                                                                                                                   |        |  |                          |  |           |               | 
|------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ |  | ------------------------ |  | --------- | ------------- | 
|                                                             |  | Ordinaryshares                                                                                                                                                                                                                                                         |        |  | Additionalpaid-incapital |  |           | Otherreserves | 
|                                                             |  | NIS in thousands                                                                                                                                                                                                                                                       |       
|                                                             |  |                                                                                                                                                                                                                                                                        |        |  |                          |  |           |               | 
|BALANCE AT JANUARY 1 ,2010                                   |  |                                                                                                                                                                                                                                                                        | 57,438 |  |                          |  | 1,030,259 |               | 
|CHANGES DURING 2010:                                         |  |                                                                                                                                                                                                                                                                        |        |  |                          |  |           |               | 
|Comprehensive income for the year                            |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Employee share-based payment                                 |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Movement in equity as result of business combination         |  |                                                                                                                                                                                                                                                                        | 20,328 |  |                          |  | 945,442   |               | 
|Transactions with non-controlling  interests                 |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Exercise of options                                          |  |                                                                                                                                                                                                                                                                        | 759    |  |                          |  | -         |               | 
|Issuance of shares upon conversion of convertible debentures |  |                                                                                                                                                                                                                                                                        | 1,187  |  |                          |  | 42,708    |               | 
|Acquisition of treasury shares                               |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Dividend paid                                                |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | (800,000  | )             | 
|Dividend to non-controlling interests of subsidiaries        |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|BALANCE AT DECEMBER 31, 2010                                 |  |                                                                                                                                                                                                                                                                        | 79,712 |  |                          |  | 1,218,409 |               | 
|CHANGES DURING 2011:                                         |  |                                                                                                                                                                                                                                                                        |        |  |                          |  |           |               | 
|Comprehensive income for the year                            |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Employee share-based payment                                 |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Transactions with non-controlling  interests                 |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Exercise of options                                          |  |                                                                                                                                                                                                                                                                        | 143    |  |                          |  | -         |               | 
|Issuance of shares upon conversion of convertible debentures |  |                                                                                                                                                                                                                                                                        | 26     |  |                          |  | 870       |               | 
|Acquisition of treasury shares                               |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Dividends paid                                               |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Dividend to non-controlling interests of subsidiaries        |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|BALANCE AT DECEMBER 31,
    2011                             |  |                                                                                                                                                                                                                                                                        | 79,881 |  |                          |  | 1,219,279 |               | 
|CHANGES DURING 2012:                                         |  |                                                                                                                                                                                                                                                                        |        |  |                          |  |           |               | 
|Comprehensive income for the year                            |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Employee share-based payment                                 |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Transactions with non-controlling interests                  |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|BALANCE AT DECEMBER 31,
    2012                             |  |                                                                                                                                                                                                                                                                        | 79,881 |  |                          |  | 1,219,279 |               | 
|                                                             |  |                                                                                                                                                                                                                                                                        |       
|                                                             |  | Convenience
                                                                                                   translation into U.S. dollars
                                                                                                   in thousands (note 1b) |       
|BALANCE AT JANUARY 1, 2012                                   |  |                                                                                                                                                                                                                                                                        | 21,399 |  |                          |  | 326,622   |               | 
|CHANGES DURING 2012:                                         |  |                                                                                                                                                                                                                                                                        |        |  |                          |  |           |               | 
|Comprehensive income for the year                            |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Employee share-based payment                                 |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|Transaction with non-controlling  interest                   |  |                                                                                                                                                                                                                                                                        | -      |  |                          |  | -         |               | 
|BALANCE AT DECEMBER 31,
    2012                             |  |                                                                                                                                                                                                                                                                        | 21,399 |  |                          |  | 326,622   |               | 



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



F-8







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

STATEMENTS OF CASH FLOWS



|                                                                                        |  |                        |          |   | Convenience | 
|--------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ----------- | 
|                                                                                        |  |                        |          |   | translation | 
|                                                                                        |  |                        |          |   | (note 1b)   | 
|                                                                                        |  |                        |          |   | year ended  | 
|                                                                                        |  | Year ended December 31 |          |   | December 31 | 
|                                                                                        |  | 2010                   |          |   | 2011        | 
|                                                                                        |  | NIS                    |          |   | U.S dollars | 
|                                                                                        |  | In thousands           |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                   |  |                        |          |   |             | 
|Income before taxes on income from continuing operations                                |  |                        | 108,026  |   |             | 
|Loss before taxes from discontinued operation                                           |  |                        | (9,130   | ) |             | 
|Income tax (paid) received, net                                                         |  |                        | 5,741    |   |             | 
|Adjustments to net cash provided by operating activities (a)                            |  |                        | 101,192  |   |             | 
|Net cash provided by operating activities                                               |  |                        | 205,829  |   |             | 
|                                                                                        |  |                        |          |   |             | 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                   |  |                        |          |   |             | 
|Purchase of property and equipment                                                      |  |                        | (193,474 | ) |             | 
|Purchase of investment property                                                         |  |                        | (20,720  | ) |             | 
|Purchase of intangible assets                                                           |  |                        | (34,133  | ) |             | 
|Proceeds (investments) from collection of short-term deposits and other receivable, net |  |                        | 12,401   |   |             | 
|Proceeds from sale of property and equipment                                            |  |                        | 1,306    |   |             | 
|Proceeds from sale of investment property                                               |  |                        | -        |   |             | 
|Investment in restricted deposit                                                        |  |                        | -        |   |             | 
|Proceeds from sale of  marketable securities                                            |  |                        | 373,040  |   |             | 
|Investment in marketable securities                                                     |  |                        | (365,091 | ) |             | 
|Acquisition of subsidiaries                                                             |  |                        | 87,219   |   |             | 
|Acquisition of an associated investee                                                   |  |                        | -        |   |             | 
|Grant of long term loans                                                                |  |                        | (31,442  | ) |             | 
|Payments on account of real estate                                                      |  |                        | (76,884  | ) |             | 
|Collection of long-term loans receivable                                                |  |                        | 1,565    |   |             | 
|Net outflow from realization of proportionately consolidated company (note10)           |  |                        | -        |   |             | 
|Interest received                                                                       |  |                        | 18,331   |   |             | 
|Net cash used in investing activities                                                   |  |                        | (227,882 | ) |             | 



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



F-9







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

STATEMENTS OF CASH FLOWS



|                                                                                  |  |                          |          |   | Convenience  | 
|--------------------------------------------------------------------------------- |  | ------------------------ | -------- | - | ------------ | 
|                                                                                  |  |                          |          |   |              | 
|                                                                                  |  |                          |          |   |              | 
|                                                                                  |  |                          |          |   |              | 
|                                                                                  |  | Year  ended December 31, |          |   | December 31, | 
|                                                                                  |  | 2010                     |          |   | 2011         | 
|                                                                                  |  | NIS                      |          |   | U.S dollars  | 
|                                                                                  |  | In thousands             |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                          |          |   |              | 
|Purchase of treasury shares                                                       |  |                          | (4,295   | ) |              | 
|Dividend paid to Company shareholders                                             |  |                          | (875,000 | ) |              | 
|Dividend paid to non-controlling interests                                        |  |                          | (17,619  | ) |              | 
|Issuance of debentures                                                            |  |                          | 205,035  |   |              | 
|Repayment of debentures                                                           |  |                          | (2,155   | ) |              | 
|Transactions with non-controlling interests in subsidiary without loss of control |  |                          | (7,362   | ) |              | 
|Receipt of long-term loans                                                        |  |                          | 470,600  |   |              | 
|Repayment of long-term loans                                                      |  |                          | (165,014 | ) |              | 
|Repayment of long term credit from payables                                       |  |                          | (1,740   | ) |              | 
|Short-term credit from banks and others, net                                      |  |                          | (52,404  | ) |              | 
|Receipt of loans from  controlling shareholders                                   |  |                          | 90,000   |   |              | 
|Proceeds from exercise of options in the Company and a subsidiary                 |  |                          | 759      |   |              | 
|Settlement of forward contracts                                                   |  |                          | 21,248   |   |              | 
|Interest paid                                                                     |  |                          | (147,532 | ) |              | 
|Net cash provided by (used in) financing activities                               |  |                          | (485,479 | ) |              | 
|INCREASE (DECREASE)  IN CASH AND CASH  EQUIVALENTS AND BANK OVERDRAFTS            |  |                          | (507,532 | ) |              | 
|Translation differences on cash and cash equivalents                              |  |                          | (71      | ) |              | 
|BALANCE OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT BEGINNING OF YEAR     |  |                          | 611,734  |   |              | 
|BALANCE OF CASH AND CASH EQUIVALENTS AND BANK OVERDRAFTS AT END OF YEAR           |  |                          | 104,131  |   |              | 



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



F-10







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

STATEMENTS OF CASH FLOWS



|    |  |                                                                                                           |  |                        |         |   | Year ended   | 
|--- |  | --------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------ | 
|    |  |                                                                                                           |  | Year ended December 31 |         |   | December 31, | 
|    |  |                                                                                                           |  | 2010                   |         |   | 2011         | 
|    |  |                                                                                                           |  | NIS                    |         |   | U.S dollars  | 
|    |  |                                                                                                           |  | In thousands           |        
|(a) |  | Adjustments to net cash provided by operating activities:                                                 |  |                        |         |   |              | 
|    |  | Adjustments for:                                                                                          |  |                        |         |   |              | 
|    |  | Depreciation and amortization                                                                             |  |                        | 206,945 |   |              | 
|    |  | Increase in fair value of investment property, net                                                        |  |                        | (32,917 | ) |              | 
|    |  | Gain from decrease in holding rate in proportionately consolidated company  upon losing control (note 10) |  |                        | -       |   |              | 
|    |  | Share in losses (profit) of associates, net of dividend                                                   |  |                        | 518     |   |              | 
|    |  | Dividend received                                                                                         |  |                        | -       |   |              | 
|    |  | Share based payment                                                                                       |  |                        | 6,834   |   |              | 
|    |  | Loss (gain) from sale and disposal of property and equipment, net                                         |  |                        | 5,962   |   |              | 
|    |  | Provision for impairment of property and equipment, net                                                   |  |                        | 946     |   |              | 
|    |  | Changes in fair value of  derivative financial instruments, net                                           |  |                        | (8,029  | ) |              | 
|    |  | Linkage differences on monetary    assets, debentures, loans and other long term liabilities              |  |                        | 57,626  |   |              | 
|    |  | Employee benefit liability, net                                                                           |  |                        | 2,371   |   |              | 
|    |  | Decrease (increase)  in value of investment in securities, deposits and long-term receivables, net        |  |                        | (15,013 | ) |              | 
|    |  | Interest paid, net                                                                                        |  |                        | 118,311 |   |              | 
|    |  | Changes in operating assets and liabilities:                                                              |  |                        |         |   |              | 
|    |  | Decrease (increase) in trade receivables and other accounts receivable                                    |  |                        | (53,264 | ) |              | 
|    |  | Increase (decrease) in trade payables and other accounts payable                                          |  |                        | 19,468  |   |              | 
|    |  | Changes in advance deposits from customers                                                                |  |                        | -       |   |              | 
|    |  | Decrease (increase) in inventories                                                                        |  |                        | (49,910 | ) |              | 
|    |  | Investment in real estate inventories                                                                     |  |                        | (87,092 | ) |              | 
|    |  | Payments on account of real estate inventories                                                            |  |                        | (71,564 | ) |              | 
|    |  | Total                                                                                                     |  |                        | 101,192 |   |              | 
|    |  |                                                                                                           |  |                        |         |   |              | 
|(b) |  | Supplementary information on investing and financing
    activities not involving cash flows:             |  |                        |         |   |              | 
|    |  | Issuance of shares upon conversion of convertible debentures of the Company                               |  |                        | 43,895  |   |              | 
|    |  | Purchase of property and equipment and investment properties on credit                                    |  |                        | 37,084  |   |              | 
|    |  | Advances from customers deposited in restricted use deposit                                               |  |                        | 22,428  |   |              | 
|    |  | Issue of shares against acquisition of share in subsidiary                                                |  |                        | 965,770 |   |              | 
|    |  | Exercise of options to purchase shares in equity accounted investee                                       |  |                        | -       |   |              | 
|    |  | Realization of property and equipment                                                                     |  |                        | -       |   |              | 



F-11







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1 - GENERAL:



a. Information
on the activities of Alon Holdings Blue Square - Israel Ltd and its subsidiaries



Alon Holdings Blue Square-Israel
Ltd. ("Blue Square") is an Israeli corporation, which, directly and through its subsidiaries and proportionately consolidated
companies (together - the Company) mainly operates in Israel. All references to the Company include, unless the context otherwise
indicates, Blue-Square and its subsidiaries.

In October 2010 the Company
completed the acquisition of approximately 78% of Dor Alon (see note 6), in July 2011 completed the acquisition of 49% of Diners
Club Israel (see note 11) and during the second quarter of 2012, the Company launched its operations in the cellular activity.



In December 2012, the Company
resolved to realize Kfar Hash'ashuim that represent the activity of the leisure and toy activity of the Company under the Non-Food
segment (see note 6).



The Company operates in four
reportable segments: (1) Fueling and Commercial sites (2) Supermarkets (3) Non-Food Retail and Wholesale, (4) Real Estate. The
Company has two more operating segments that do not meet the quantitative threshold and accordingly are presented as "Other
activities" in the segment disclosure: Cellular activity and the Company's proportional share in issuance and clearance of
credit cards activity (see note 5).



Alon Holdings Blue Square–IsraelLtd. is a limited public company incorporated and domiciled in Israel, whose ADSs and shares are listed
for trading on the New-York Stock Exchange (the "NYSE") and on the Tel-Aviv Stock Exchange (the "TASE").

The Company is controlled by
Alon Israel Oil Company Ltd ("Alon"). The address of its registered office is 2 Amal St., Afek Industrial Zone, Rosh
Ha’ayin, Israel.



b.
Convenience translation into U.S dollars (hereinafter-"dollars" or "$")



For the convenience of the
reader, the reported New Israeli Shekel (NIS) amounts as of December 31, 2012 have been translated into dollars, at the representative
rate of exchange on December 31, 2012 (U.S. $1 = NIS 3.733). The 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.



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:



The principal accounting policies
applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently
applied to all the years presented unless otherwise stated (see below).



| | 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").



F-12







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The accounting policies adopted
by the Company are consistent with those of the previous financial year, except for the following amendments to IFRS effective
as of 1 January 2012:



IAS
12 – Income Taxes (Amendment) – Deferred Taxes



As
from January 1, 2012 the Company appliesDeferred Tax on Investment Property, an amendment to IAS 12 Income Taxes(hereinafter
– “the Amendment”). The amendment clarified the determination of deferred tax on investment property measured
at fair value and introduces a rebuttable presumption that deferred tax on investment property measured using the fair value model
in IAS 40 should be determined on the basis that its carrying amount will be recovered through sale. The Amendment was adopted
retrospectively, the effect of the above change on the presented comparative figures are decrease in provisions for deferred taxes
of NIS 3 million, increase in accumulated earnings of NIS 2.4 million and increase in non-controlling interests of NIS 0.6 million.
The above amendment had no material effect on the statement of income.



The consolidated financial statements
have been prepared under the historical cost convention, as modified by actuarial adjustments for defined benefit plan assets
and liabilities and financial assets (including derivative instruments) and investment property measured at fair value. The cost
of certain non-monetary assets, certain investments in associated companies and certain equity items as of the transition date
have been determined on the basis of their deemed cost, or historical cost adjusted to inflation in Israel through December 31,
2003, as allowed by the IFRS transition guidance.



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



| | 1) | Subsidiaries
| | -- | ------------



Subsidiaries are all entities
over which the Company has the power to govern the financial and operating policies, accompanying a shareholding of more than
one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible
are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on
which control is obtained by the Company. They are de-consolidated from the date that control ceases.



The purchase method of accounting
is used to account for the acquisition of subsidiaries by the Company.

Cost of an acquisition is
measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling
interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either
at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition costs incurred are expensed.



F-13







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



In accordance with IFRS 3
(revised), upon the acquisition of Dor Alon in 2010, the Company valued the acquisition date fair value of the non-controlling
interests in Dor Alon on the basis of the active market price of the equity shares of Dor Alon not held by the Company on the
Tel Aviv Stock Exchange, where Dor Alon is listed.



When the Company acquires
a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance
with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date.



If the business combination
is achieved in stages, the acquisition fair value of the acquirer's previously held interest in the acquiree is remeasured to
fair value as at the date of achievement of control through profit and loss.



Goodwill is initially measured
at cost being the excess of the consideration transferred over the net identifiable assets acquired and liabilities assumed. If
this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in
the statement of income.

After initial recognition,
goodwill 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.

Where goodwill forms part
of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation
disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation.



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.



Total comprehensive income
within a subsidiary is attributed to the non-controlling interest even if it results in a deficit balance unless the Company has
an obligation or has made payments on behalf of the non-controlling interest.



| | 2) | Transactions with 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.



When the Company ceases to
have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in
carrying amount recognized in the statement of income. The fair value is the initial carrying amount for the purposes of subsequently
accounting for the retained interest as an associate, joint venture or financial asset.



F-14







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Upon a decrease in ownership
rate without loss of control the Company reallocates a portion of the goodwill arising to the controlling interests to the non-controlling
interests ("NCI").



Call option that is fixed
in terms, provided with respect to the sale of non-controlling interests in a subsidiary, is accounted for as an equity component
of NCI, with any differences recorded in equity; Call option granted to the Company for interests sold to NCI of the subsidiary,
that has no attached performance conditions, is accounted for as a derivative instrument and its fair value adjustments are carried
to financial income or expense, as appropriate.



| | 3) | Joint ventures
| | -- | --------------



The Company’s interests
in jointly controlled entities are accounted for by the proportionate consolidation method. The Company combines its share of
the joint ventures’ individual income and expenses, assets and liabilities and cash flows on a line-by-line basis with similar
items in the Company’s financial statements. The Company recognizes that part of gains or losses arising from the sale of
assets by the Company to a jointly controlled entity that is attributable to the other partners in the jointly controlled entity.
The Company does not recognize its share of profits or losses from the jointly controlled entity that result from the Company's
purchases of goods from the jointly controlled entity until it resells the goods to an independent party. However, a loss on the
transaction is recognized immediately if such loss provides evidence of a reduction in the net realizable value of current assets,
or an impairment loss.

When the Company ceases to
have joint control any retained interest in the entity is remeasured to its fair value at the date when jointly control is lost,
with the change in carrying amount recognized in the statement of income, under other gains or losses. The fair value is the initial
carrying amount for the purposes of subsequently accounting for the retained interest as an associate or financial asset. In addition,
any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Company
had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive
income are reclassified to profit or loss.



The part of the loans granted
attributable to the joint venture partner is classified as loans and receivables in accordance with IAS 39.



| | 4) | Associates
| | -- | ----------



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

The investment in an associate
is accounted for using the equity method. Under the equity method, the investment in the associate is presented in the statement
of financial position at cost plus changes in the company's share of net assets including other comprehensive income of the associate.
The equity method is applied until the loss of significant influence or classification as an asset held-for-sale.



F-15







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The Company's share of post-acquisition
profit or loss is recognized in the statement of income, as "share in profits (losses) of associates" and its share
of post-acquisition movements in other comprehensive income is recognized as a separate line item in other comprehensive income
with a corresponding adjustment to the carrying amount of the investment. When the Company's share in losses of an associate equals
or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses,
unless it has incurred legal or constructive obligation or made payments on behalf of the associate.



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. The test of impairment is carried out with reference to the entire investment,
including the goodwill attributed to the associate. 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. The
loss, or its reversal, is recognized in profit or loss in the line item, share of profits (losses) of associates.



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

The financial statements of
the Company and of associates are prepared as of the same dates and periods. The accounting policies applied in the preparation
of the financial statements of associates conform with the policies applied in the preparation of the financial statements of
the Company (see also note 11).



| | c. | 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.



F-16







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | d. | Foreign currency transactions
| | -- | -----------------------------



| | 1) | Functional and presentation currency
| | -- | ------------------------------------



Items included in the financial
statements of each of the Company’s entities are measured using the currency of the primary economic environment in which
the entity operates (the functional currency). The consolidated financial statements are presented in NIS, which is Blue Square's
functional and presentation currency.



| | 2) | Transactions and balances
| | -- | -------------------------



Transactions in a currency
which is different from the functional currency (foreign currency) are translated into the functional currency 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 statement of income 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.



| | 3) | Group companies
| | -- | ---------------



| |  | The results and financial position
                                                              of all the group entities that have a functional currency different
                                                              from the presentation currency are translated into the presentation
                                                              currency as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | b. | Income and expenses for each statement
                                                               of income are translated at average exchange rates; (unless this
                                                               average is not a reasonable approximation of the cumulative effect
                                                               of the rates prevailing on the transaction dates, in which case
                                                               income and expenses are translated at the rate on the dates of
                                                               the transactions).
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | All resulting exchange differences
                                                               are recognized in other comprehensive income.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------



F-17







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | e. | 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. Subsequent costs are included in the
asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic
benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. When part of an
asset is replaced, its carrying amount is derecognized. All other repairs and maintenance are charged to the statement of income
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            
|-------------------------------------- |  | -----------------
|Land and buildings                     |  | 50-100           
|Leasehold improvements                 |  | 12               
|Fueling stations equipment             |  | 10-25 (mainly 14)
|Motor vehicles                         |  | 5-7              
|Furniture, equipment and installations |  | 3-16 (mainly 10) 



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



The assets residual values
and useful lives are reviewed, and adjusted if appropriate, at each statement of financial position date.



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
(see h below).



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



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 HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | f. | Investment property
| | -- | -------------------



| |  | 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."
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Fair value is based on current prices
                                                              in an active market, 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 statement of income under "Changes in fair value of investment property, net"
in the period in which they arise.



Land that is held under an operating
lease with The Israel Lands Administration or local authorities is classified and accounted for as an investment property, provided
that the conditions for such classification are met. In such cases, the lease rights are 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.



| | g. | Intangible assets:
| | -- | ------------------



| | 1) | 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. Also, when the fair value
policy choise is used to recognize the NCI in subsidiaries – goodwill will also include any such excess relating to the
respective NCI.



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. Each unit or group of units to which the goodwill
is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes,
which is not larger than an operating segment.



F-19







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Goodwill impairment reviews
are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. 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.



| | 2) | 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 on an annual basis, or more frequently,
if events or changes in circumstances indicate potential impairment. 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).



| | 3) | Computer software
| | -- | -----------------



The costs
of separately acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use
the specific software. These costs are amortized over their estimated useful lives (mainly four years).

Costs
associated with servicing or maintaining computer software are recognized as an expense as incurred. Costs that are directly associated
with the development of identifiable and unique software products controlled by the Company that it is probable they would generate
probable future economic benefits and that meet certain technical, financial and other criteria are recognized as intangible assets.
Costs include directly attributable employee benefits and applicable consulting and development fees.



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



Other
development expenditures that do not meet these criteria are recognized as an expense as incurred. Development costs previously
recognized as an expense are not recognized as an asset in a subsequent period.



| | 4) | 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.



F-20







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | 5) | Fees paid on the establishment of loan facilities
| | -- | -------------------------------------------------



Fees
paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable
that some or all of the facility will be drawn down. In this case, the fee is 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.



| | 6) | 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.



| | h. | Impairment of non-financial
                                                                       assets
| | -- | ---------------------------------------------------------------------------------------------------------



Assets that have indefinite
useful life, including goodwill and brands, are not subject to amortization and are tested annually for impairment (see also g.
above). 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 will 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.



In the Supermarkets segment,
a CGU can be a single store or a group of stores where the cash inflows of one store are largely interdependent on the cash inflows
of another store in the same geographic area. The food retail activities are grouped into 82 CGUs.



In the fueling and commercial
sites segment the Company evaluates the fueling stations and the convenience stores on its sites together, on one basis, due to
common customer base and business dependence on gas stations revenues. The convenience stores that are not located in fueling
sites are grouped into 13 separate CGUs based on their geographical
locations in a manner similar to the food retail activities.



F-21







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



In the Non-Food segment each
of the self-operated stores (115) is considered a separate CGU on the basis of their geographical location and customers.



An impairment loss is recognized
in the statement of income under "other gain (losses)". Non-financial assets other than goodwill that suffered an 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.



| | i. | Non- current assets
                                                                       held for sale
| | -- | --------------------------------------------------------------------------------------------------------



| |  | Non- current assets (or disposal
                                                              groups) are classified as assets held for sale when their carrying
                                                              amount is to be recovered principally through a sale transaction
                                                              and a sale is considered highly probable. They are stated at the
                                                              lower of carrying amount and fair value less costs to sell.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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. Borrowing costs consist of interest and other
costs that an entity incurs in connection with the borrowing of funds.



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



| | 1) | 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.



| | a) | 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; a financial asset is classified in this category
if management has designated it as such, because it is managed and its performance is evaluated on a fair-value basis.



Derivative financial instruments
are also classified in this category since they are not designated for hedging purposes. Assets in this category are classified
as current assets if expected to be settled within one year from the date of the statement of financial position; otherwise they
are classified as non-current.



F-22







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | b) | Loans and receivables
| | -- | ---------------------



Loans and receivables are
non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included
in current assets, except for maturities greater than 12 months after the statement of financial position date. These are
classified as non-current assets.



| | c) | 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. They
are included in non-current assets unless management intends to dispose of the investment within 12 months of the statement of
financial position date.



| | 2) | Recognition and measurement
| | -- | ---------------------------



Regular
purchases and sales of financial assets are recognized on the settlement-date. Investments are initially recognized at fair value
plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at
fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the statement of
income. 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 statement of income within finance income or expenses in the period in which they arise.



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".



Financial
assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the
Company has transferred substantially all risks and rewards of ownership.



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 statements of income as part of finance income or expenses.



Financial
assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable
right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset and settle the
liability simultaneously.



F-23







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | (a) | 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.
A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is an objective
evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event')
and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial
assets that can be reliably estimated.

If, in a subsequent period, the
amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment
was recognized (such as an improvement in the debtor's credit rating) the reversal of the previously recognized impairments loss
is recognized in the consolidated income statement. Impairment testing of trade receivables is described in note o below.



| | (b) | 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.
For debt securities, the company uses the criteria referred to in (a) above. In the case of equity investments classified as available
for sale, a significant or prolonged decline in the fair value of the security below its cost is also evidence that the assets
are impaired. If any such evidence exists for available for sale financial assets, the cumulative loss – measured as the
difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously
recognized in profit or loss – is removed from equity and recognized in profit or loss. Impairment losses recognized in
the consolidated income statement on equity instrument are not reversed through the consolidated income statement. 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 statement.



| | l. | Deposits received from
                                                                       customers
| | -- | -------------------------------------------------------------------------------------------------------



| |  | In the course of its operations,
                                                              a subsidiary in the fueling and commercial sites segments receives
                                                              deposits from its customers in respect of containers and other loaned
                                                              equipment. The deposits are to be refunded at the current price
                                                              of the deposit the company collects from its customers, linked to
                                                              the Israeli CPI from the last time the price was updated. Under
                                                              IAS 39 – "Financial Instruments – Recognition and
                                                              Measurement" – the value of such a financial liability
                                                              is the amount that can be demanded in return. Since the subsidiary
                                                              does not have an unconditional right to defer the repayment beyond
                                                              12 months, the deposit liabilities are presented among current liabilities.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-24







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



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



Derivative financial instruments
are initially recognized at fair value on the date a derivative contract is entered into and are subsequently re-measured at their
fair value.



The Company's derivative financial
instruments do not meet the criteria required for hedge accounting. Changes in the fair value of these derivative financial instruments
are recognized on a current basis in the statement of income as part of "finance income or expenses."



Changes in fair value of separable
embedded derivatives are recognized in the statement of income as part of finance income or expenses.



See note s. below for the
conversion component of the convertible debentures.



| | 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. Net realizable value is the estimated selling price in the ordinary course of business, less applicable
selling expenses.

Cost of real estate inventories
is specific and includes capitalization of borrowing costs for long term projects.



The Company evaluates inventory
shrinkage of consumer products throughout the year based on the results of periodic stock taking in its stores, and records allowances
based on the results of these counts as of the statement of financial position date.



The Company reviews the need
for a provision for slow moving inventories, if applicable, by comparing the value of the inventories with the level of sales,
the period that passed since the start of distribution and the quality of the goods, on the basis of past experience.



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.



Management regularly monitors
the balance of trade receivables, and the financial statements include a specific allowance computed for accounts, the collectability
of which, in the view of management, is doubtful. Material financial difficulties of a customer, reasonable expectations that
it will go into liquidation or will undergo a reorganization and inability to pay or delays in payment are indicators that the
receivables are impaired. The carrying amount of the asset is reduced through the use of an allowance account to the present value
of expected future cash flows and the amount of the loss is recognized in the statement of income within selling, general and
administrative expenses. When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent
recoveries of amounts previously written off are credited against selling, general and administrative expenses in the statement
of income.



F-25







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | 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 until the shares are cancelled or reissued. Where such
ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction
costs and the related income tax effects, is included in equity attributable to the Company's equity holders.



| | r. | Trade payables and rebates
| | -- | --------------------------



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



The Company receives annual
rebates from supplier for which the Company has no obligation to meet specified purchasing targets.



In some cases the Company
expects to receive certain rebates mainly upon meeting specified purchasing targets, such as the fulfillment of a minimum annual
purchase quota (in quantitative or monetary amounts), or an increase in purchases in comparison with purchases made in previous
periods. The related rebates are recognized in the financial statements as earned to the extent to which the Company has reached
the target.



Rebates from suppliers are
presented as a reduction of inventories and cost of sales, as applicable.



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



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



F-26







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



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 statement of income, while the debentures are measured at amortized cost.

Loans from banks, debentures
and convertible debentures, are classified as current liabilities unless the Company has an unconditional right to defer settlement
of the liability for at least 12 months after the statement of financial position date.



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



Income tax comprises current
and deferred tax. Current tax and deferred tax are recognized in profit or loss except to the extent that they relate to a business
combination, or are recognized directly in equity or in other comprehensive income to the extent they relate to items recognized
directly in equity or in other comprehensive income.



| | 1) | 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.



| | 2) | 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.



| | 3) | 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 following temporary differences:

| | • | The initial recognition of
                                                                     goodwill,
| | - | ---------------------------------------------------------------------------------------------------------

| | • | The initial recognition of
                                                                     assets and liabilities in a transaction that is not a business
                                                                     combination and that affects neither accounting nor taxable
                                                                     profit nor loss,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | • | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The measurement of deferred
tax reflects the tax consequences that would follow the manner in which the Company expects, at the end of the reporting period,
to recover or settle the carrying amount of its assets and liabilities. For investment property that is measured at fair value,
there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale. 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-27







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(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 reviewed at each reporting date and are
reduced to the extent that it is no longer probable that the related tax benefit will be realized.



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.



| | 4) | Inter-company transactions
| | -- | --------------------------

Deferred tax in respect of
inter-company transactions in the consolidated financial statements is recorded according to the tax rate applicable to the buying
company.



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



| | 1) | 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 plans.



Labor laws and agreements, and
the practice of the Company, require it to pay retirement benefits to employees dismissed or retiring in certain other circumstances.



The obligation of the Company
to pay retirement benefits is generally treated as a defined benefit plan. However, for employees for whom the retirement benefit
obligation is covered by section 14 of the Israel Severance Pay Law, the obligation is treated as a defined contribution plan,
as discussed below.



A defined contribution plan
is a pension plan under which the Company pays fixed contributions into a separate and independent entity. The Company has no
legal or constructive obligations to pay further contributions if the relevant fund does not hold sufficient assets to pay an
employee the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee
benefit expense when they are paid.



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.



F-28







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The present value of the defined
benefit obligation is determined by discounting the estimated future cash outflows (after taking into account the expected rate
of salary increases and other actuarial assumptions) by reference to Israeli Government bonds that have terms to maturity approximating
the terms of the related retirement liability.



In accordance with IAS 19 "Employee
benefits" the market yields the Company uses to discount expected future cash flows are based on the interest rates of Israeli
Government bonds since the Company's management believes that Israel does not have a deep market for high-quality corporate bonds.



Actuarial gains and losses arising
from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income
in the period in which they arise.



Amounts funded for retirement
benefits are measured at fair value. These funded amounts represent “plan assets”, as defined by IAS 19, and therefore
are offset from the retirement benefit obligation for statement of financial position presentation.



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.



Prepaid contributions are recognized
as an asset to the extent that a cash refund or a reduction in the future payments is available.



| | 2) | Provision for unutilized sick leave
| | -- | -----------------------------------



Pursuant to employment agreements,
certain employees are entitled to receive payment for a certain number of sick leave days per year which are accumulating to future
periods. Under these said agreements, the Company has undertaken to pay each employee, upon retirement, certain amounts which
depend on the balance of the unutilized days and on the cumulative number of sick leave days the employee has utilized during
his employment with the Company.



The provision for unutilized
sick leave is based on an annual actuarial calculation by the independent qualified actuary: In making such a computation, the
actuary makes actuarial assumptions (rates of employee turnover, future salary levels etc). The cost of this benefit is recognized
using the same method as is used for defined benefit retirement plans. Actuarial gains and losses are recognized in OCI in the
period which they arise.



| | 3) | Jubilee grant
| | -- | -------------



Pursuant to employee agreements,
certain employees are entitled to receive a jubilee grant upon completion of service of 20, 30 and 35 years.

The statement of financial position
includes a provision in respect of the jubilee grant based on an annual actuarial calculation, by the independent qualified actuary.



F-29







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | 4) | 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.



| | 5) | 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. At each statement of financial position date,
the Company revises its estimates of the number of options that are expected to vest. It recognizes the impact of the revision
of original estimates, if any, in the statement of income, with a corresponding adjustment to accumulated deficit in equity.



The consideration received upon
exercise of share options, net of any directly attributable transaction costs are credited to share capital (par value) and additional
paid in capital.



| | 6) | Profit sharing and bonus plans
| | -- | ------------------------------



The Company accruals for bonuses
and profit-sharing for certain employees, based on a formula that takes into consideration the profit attributable to the stores
in which those employees serve, after certain adjustments. The Company recognizes a provision where contractually obligated or
where there is a past practice that has created a constructive obligation.



| | 7) | 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 not recognized for future operating losses.



F-30







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Where there are a number of
similar obligations, the likelihood that an outflow will be required for settlement is determined by considering the class of
obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in
the same class of obligations may be low.



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.



| | w. | Other 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, actuarial
adjustments of employee defined benefit plans and revaluation reserve for fixed assets.



| | 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.
Revenue is shown after including government levies collected by the Company within the course of its fueling operations and net
of value added tax, returns, rebates and discounts and after eliminating sales within the Company. Government levies are deducted
from Net revenue.



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 of revenue 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 amount of revenue is not
considered to be reliably measurable until all contingencies relating to the sale have been resolved. 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.



| | 1) | Sales of goods – retail
| | -- | -----------------------



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.



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.



F-31







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Discounts, including those related
to gift certificates are recognized as a reduction of sales upon recognition of the related sales.



Revenue from the provision of
the sale of goods on the internet is recognized at the point that the risks and rewards of the inventory have passed to the customer,
which is the point of dispatch. Transactions are settled by credit card.



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.



| | 2) | Sales of goods – wholesale
| | -- | --------------------------



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.



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.



| | 3) | Club member awards and loyalty programs
| | -- | ---------------------------------------



Club members participating in
the Company's programs are entitled to earn benefits upon purchasing goods, which can be utilized over a specific term to receive
certain free gifts or discounts on products or receive certain products sold by the Company free of charge.

The Company applies IFRIC 13:
"Customer Loyalty Programs" and accordingly defers revenue from such sales representing the fair value of such benefits.
The attributed fair value takes into account management estimates of awards that will expire unexercised. The deferred revenue
is recognized in income (carried to sales) when the award is exercised by the customer.



| | 4) | 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.



F-32







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | 5) | 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.



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



Finance income 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 statement of income. Interest income is recognized as it accrues, using the
effective interest method. The net gain from changes in the fair value of financial assets measured at fair value through profit
or loss includes interest deriving from such assets.

Finance expense comprises
interest expense on loans received and debentures issued, changes in the value of a liability in respect of a put option to the
non-controlling interests in a subsidiary, 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. All borrowing costs are recognized in the statement of income using the effective
interest method.



| | z. | Advertising costs
| | -- | -----------------



Advertising costs are expensed
as incurred. Reimbursements from suppliers in respect of specific joint advertising campaigns are recognized as a reduction of
these costs, in accordance with the terms of specific agreement.



| | aa. | 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 statement of income on a straight-line basis
over the period of the lease.



Land held under an operating
lease is classified and accounted for as investment property when the property would otherwise meet the definition of investment
property. In such case, the operating lease is accounted for as if it were a finance 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.



F-33







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | ab. | 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.



| | ac. | 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 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.



| | ad. | Non-current assets
                                                                        and disposal group held for sale
| | --- | ---------------------------------------------------------------------------------------------------------------------------



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.



Immediately before classification
as held for sale, the assets (or components of a disposal group) except for investment property are remeasured in accordance with
the Company's accounting policies. Thereafter, the assets (or components of a disposal group) are measured at the lower of their
carrying amount and fair value less cost to sell.



Any impairment loss on a disposal
group is initially allocated to goodwill, and then to remaining assets and liabilities on pro rata basis, except that no loss
is allocated to assets not in the scope of the measurement requirements of IFRS 5.



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.



F-34







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



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



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



The following new standards
and amendments to standards have been issued up to and during 2012, and were not early adopted by the Company, are effective for
annual periods beginning on or after January 1, 2013:



| | 1. | IAS 1 Presentation of Items of
                                                               Other Comprehensive Income – Amendments to IAS 1
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------



The
amendments to IAS 1 change the grouping of items presented in other comprehensive income (OCI). Items that could be reclassified
(or ‘recycled’) to profit or loss at a future point in time (for example, net gain on hedge of net investment, exchange
differences on translation of foreign operations, net movement on cash flow hedges and net loss or gain on available-for-sale
financial assets) would be presented separately from items that will never be reclassified (for example, actuarial gains and losses
on defined benefit plans and revaluation of land and buildings). The amendment affects presentation only and has no impact on
the Company’s financial position or performance. The amendment to IAS 1 is applicable
retrospectively for annual periods beginning on or after July 1, 2012, and will therefore be
applied in the Company’s financial statements in 2013.



| | 2. | IAS 19 Employee Benefits (Revised)
| | -- | ----------------------------------



The
amendment to IAS 19 introduces a number of changes to the accounting treatment of employee benefits, including the recognition
of all actuarial gains and losses immediately through other comprehensive income. Furthermore, the interest that is recognized
in profit or loss will be calculated on the balance of the net defined benefit liability (asset), according to the discount rate
that is used to measure the liability. In addition, employee benefits will be classified as short or long term depending on when
the entity expects the benefits to be wholly settled. The amendment to IAS 19 is applicable retrospectively for annual periods
beginning on or after January 1, 2013. The amendment to IAS 19 is not expected to have a material effect on the financial statements.



| | 3. | IFRS 11 – Joint arrangements
| | -- | ----------------------------



IFRS
11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities – Non-monetary Contributions by Ventures.
IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs
that meet the definition of a joint venture must be accounted for using the equity method. The application of this new standard
will impact the financial position of the Company and its operating results.



F-35







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The
Company is currently evaluating the effect of the anticipated application of this standard.
As to the amounts represent the Company's 50% share in the assets and liabilities, and the results of operations of the proportionately
consolidated companies, see note 10a.2.
In addition the Company expects that the application of the new standard will result in reversal of the gain resulting from losing
control in JCE in the amount of NIS 19.6 as reported in 2012.



The following new standard
and amendments to standards have been issued, but are not effective for the financial year beginning January 1, 2012 and have
not been early adopted:



IFRS
9 Financial Instruments: Classification and Measurement



IFRS 9, as issued, reflects
the first phase of the IASB’s work on the replacement of IAS 39 and applies to classification and measurement of financial
assets and financial liabilities as defined in IAS 39. The standard was initially effective for annual periods beginning on or
after 1 January 2013, but Amendments to IFRS 9 Mandatory Effective Date of IFRS 9 and Transition Disclosures, issued in December
2011, moved the mandatory effective date to 1 January 2015. In subsequent phases, the IASB will address hedge accounting and impairment
of financial assets. The adoption of the first phase of IFRS 9 will have an effect on the classification and measurement of the
Company’s financial assets, but will not have an impact on classification and measurements of financial liabilities. The
Company will quantify the effect in conjunction with the other phases, when the final standard including all phases is issued.



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.



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.



F-36







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | (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. 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.



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. The analysis is based on the assumption that all other variables are held constant.



|                  |  | Year ended December 31    |    
|----------------- |  | ------------------------- | ---
|                  |  | 2010                      |    
|                  |  | NIS in millions           |    
|                  |  | Impact on post-tax profit |    
|                  |  |                           |    
|Government bonds  |  |                           | -  
|Corporate bonds   |  |                           | 3.5
|Equity securities |  |                           | 1.0
|                  |  |                           | 4.5



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 (in the event of decline
in fair value other than temporary, decline in fair value will be recognized directly in income or loss).



F-37







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | (b) | Foreign currency risk
| | --- | ---------------------



Most of the operating units
comprising the Company are domiciled and operate in Israel. Some of those units import part of their inventories and raw materials
from suppliers with credit liked to the U.S dollar. Those units are exposed to foreign currency risk arising primarily with respect
to the U.S. dollar. Some units use forward currency contracts in order to hedge part of the foreign currency risk. In addition,
certain of Dor Alon's suppliers provide it with credit and hold related deposits which are linked to the exchange rate of the
U.S. dollar.



At December 31, 2012 if the
NIS had strengthened / weakened by 5% against the U.S. dollar with all the other variables held constant, the post-tax profit
would have been NIS 4.0 million higher / lower (2011 NIS 5.4 million). As at December 31, 2012 Dor Alon had forward contracts
for a notional amount of U.S. $95.6 million (2011 U.S. $102 million) in order to partially hedge the foreign currency risk. These
forward contracts are not accounted for using hedge accounting.



| | (c) | CPI risk
| | --- | --------



As at December 31, 2012, the
excess of financial liabilities over financial assets linked to the CPI was NIS 2,918 million (2011: NIS 2,796 million). As at
December 31, 2012 the Company had forward contracts for a notional amount of NIS 500 million (2011 NIS 502 million) in order to
partially hedge the CPI risk. These forward contracts are not accounted for using hedge accounting.



At December 31, 2012 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 21.9 million (2011: NIS 21.2 million, 2010: NIS 23.3 million).



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, 2012, BSRE has NIS
299 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.



As of December, 31, 2012 BSRE
has agreements in amount of NIS 87 million which are linked to the CPI.



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 33a.



F-38







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | (d) | 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, 2012 if interest rates on borrowings had been 1% (100 basis points) higher/lower with all other variables
held constant, post-tax profit for the year would have been NIS 19.2 million (2011: NIS 18.0 million, 2010: NIS 12.0 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 statement of
income.



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, 2012 if interest rates had been 5% higher/lower with all the other variables held constant other components of
equity would have been NIS 7.1 million (2011: NIS 7.4 million, 2010: NIS 7.0 million) lower/higher mainly as result of the decrease/increase
in the fair value of these debt securities classified as available for sale.



| | (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
that have a minimum rating of A+ at the date of investment. According to the Company's investment policy, there are no significant
concentrations of credit risk in respect of investments in debt securities.



Sales to retail customers are
collected principally through use of major credit cards, post-dated checks (partially guaranteed by credit insurance) or cash.
Sales to wholesale and business customers are made on terms of credit of up to 180 days.



Sales of gift certificates are
made on terms of credit of up to 120 days to a large number of different entities.



Sales to wholesale customers
are mainly made under accepted market credit terms. The credit quality of each wholesale customer is assessed. The Company's customers
are diversified, therefore the Company believes that the risk of credit concentration is low. Individual risk limits are set based
on internal ratings that take into consideration the customer’s financial position, credit history and other factors.



F-39







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Dor Alon requests collateral
from some of its customers and or the recipients of loans in accordance with management's credit risk assessment. Where relevant,
a credit committee consisting of, among others, the general manager and the finance director meets to discuss the credit risks
to the Company. The provision for doubtful debts is updated on a regular basis by the credit committee, based on the Dor Alon's
policy and to extent necessary with external legal advisers.



BSRE receives
collaterals for third party lease agreements of investment property.



Balances owed to BSRE by the
residence company and the mall company (see note 10 and 11) amount to NIS 55.4 million and NIS 31.9 million, as of December 31
2012 and 2011, 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 the amount of NIS 55.4 million and NIS 31.9 million
as of December 31 2012 and 2011, respectively, and therefore the credit risk of these loans is considered by BSRE as low.



| | (3) | Liquidity risk
| | --- | --------------



Prudent liquidity risk management
implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed
credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company's
operating units maintain flexibility in funding by use of credit facilities.



Management monitors rolling
forecasts of the Company’s liquidity reserve (comprised of borrowing facilities and cash and cash equivalents) on the basis
of expected cash flows. This is generally carried out at corporate level. These reserves vary by location to take into account
the liquidity of the market in which the Company operates. In addition, the Company’s liquidity management policy involves
projecting cash flows and considering the necessary level of liquid assets, monitoring statement of financial position liquidity
requirements, and maintaining debt financing plans.



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 does not include the
liabilities for operating leases, and the related embedded derivatives. Contractual cash flows for operating leases are presented
in note 33a. Cash flows relating to the conversion component of convertible debentures are included in the maturities of the debentures
above.



Between Dor Alon and the controlling
shareholder of Blue Square there is a deposit / borrow agreement under which it can deposit / borrow monies on on-call terms of
up to NIS 150 million (see note 35d).



F-40







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                                       |  | December 31, 2012 |          
|-------------------------------------- |  | ----------------- | ---------
|                                       |  | Less than 1 Year  |          
|                                       |  | NIS in thousands  |          
|Credit and loans from banks and others |  |                   | 1,204,553
|Trade payables                         |  |                   | 1,249,743
|Other payables                         |  |                   | 472,577  
|Bank loans and other                   |  |                   | 310,619  
|Debentures and convertible debentures  |  |                   | 679,649  
|Other long-term payables               |  |                   | 17,566   
|                                       |  |                   |          
|Total                                  |  |                   | 3,934,707



|                                       |  | December 31, 2011 |          
|-------------------------------------- |  | ----------------- | ---------
|                                       |  | Less than 1 Year  |          
|                                       |  | NIS in thousands  |          
|Credit and loans from banks and others |  |                   | 1,044,611
|Trade payables                         |  |                   | 1,243,914
|Other payables                         |  |                   | 546,510  
|Bank loans and other                   |  |                   | 399,104  
|Debentures and convertible debentures  |  |                   | 321,044  
|Other long-term payables               |  |                   |          
|Total                                  |  |                   | 3,555,183



Market risks that result from the changes in oil products prices



Dor Alon holds oil product inventories
with selling prices that change in accordance with the changes of oil prices in the Mediterranean Sea area. Dor Alon has no influence
on these prices or their fluctuations. Dor Alon management considers from time to time whether to enter into hedge transactions,
in order to cover its possible exposure to any decline in oil prices, taking into account the inventory volumes that will be held
during the next month, the trend of prices and the costs of such hedge transactions.

Increase/decrease in the oil
products prices will increase/decrease the Company's gross profit in the following period.



F-41







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | b. | Capital risk management
| | -- | -----------------------



The Company’s objectives
in managing capital are to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital
structure to reduce the cost of capital and to meet its financial covenants.



In order to maintain or adjust
the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue
new shares or sell assets to reduce debt.



Consistent with others in the
industry, the Company monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt to EBITDA. Net
debt is calculated as total borrowings (including ‘current and non-current borrowings’ as shown in the consolidated
statement of financial position) less cash and cash equivalents and other liquid financial assets. This ratio is a non-GAAP figure
not determined in IFRS and its definition and calculation may vary from one Company to another. The Company considers this ratio
to be an important measure for investors, analysts and rating agencies.



The dividend in 2010 was declared
after the Board of Directors decided on January 14, 2010, in view of the changes and development of the Company since 2003 that
the ratio of net financial obligations to EBITDA is to be calculated by deducting from the net financial obligations the Company's
debt which is related by the Company to real estate that is not in use by the Company. The Board of Directors further resolved
that the net debt to EBITDA ratio for dividend distribution will not exceed 4.5. Following the changes in the Company's activities
and the growing needs for financing deriving from the acquisition of Dor Alon and its operations, the new projects in the real
estate industry and entering the cellular (MVNO) market, the board of directors reconsidered on January 2, 2012 its former resolution
and decided to update the above ratio so that it will not exceed 6. The Board of directors will continue to monitor this ratio
and update it, if required, to suit the changes in the Company activities and its working capital requirements.



The debentures of Blue Square
are rated A2 by Midroog, see note 21.



| | 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-42







ALON HOLDINGS 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 assets and liabilities that are measured at fair value at December 31, 2012 and 2011:



|December 31, 2012                                           |  | Level 1          |         |  | Level 2 |  |        | Level 3 |  |  | Total balance | 
|----------------------------------------------------------- |  | ---------------- | ------- |  | ------- |  | ------ | ------- |  |  | ------------- | 
|                                                            |  | NIS in thousands |        
|Assets:                                                     |  |                  |         |  |         |  |        |         |  |  |               | 
|Financial assets at fair value through profit or loss:      |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                            |  |                  | 36,119  |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                             |  |                  | 25,205  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                             |  |                  | 3,159   |  |         |  | -      |         |  |  | -             | 
|Embedded derivatives in rent agreements                     |  |                  | -       |  |         |  | 1,790  |         |  |  | -             | 
|Investment in equity securities – property company          |  |                  | -       |  |         |  | -      |         |  |  | 21,300        | 
|Available-for-sale financial assets:                        |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                            |  |                  | 137,324 |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                             |  |                  | 51,002  |  |         |  | -      |         |  |  | -             | 
|Money market fund                                           |  |                  | 35,908  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                             |  |                  | 15,296  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities – gas exploration companies |  |                  | 7,317   |  |         |  | 41,292 |         |  |  | -             | 
|Total assets                                                |  |                  | 311,330 |  |         |  | 43,082 |         |  |  | 21,300        | 
|Liabilities:                                                |  |                  |         |  |         |  |        |         |  |  |               | 
|Embedded derivatives:                                       |  |                  |         |  |         |  |        |         |  |  |               | 
|Conversion component  embedded in convertible debentures    |  |                  | -       |  |         |  | 74     |         |  |  | -             | 
|Forwards contracts over foreign currency                    |  |                  | -       |  |         |  | 8,230  |         |  |  | -             | 
|Forwards contracts over Israeli CPI                         |  |                  | -       |  |         |  | 9,336  |         |  |  | -             | 
|Rent agreements                                             |  |                  | -       |  |         |  | 6,382  |         |  |  | -             | 
|Total liabilities                                           |  |                  | -       |  |         |  | 24,022 |         |  |  | -             | 



|                                                        |  | Level 1          |         |  | Level 2 |  |        | Level 3 |  |  | Total balance | 
|------------------------------------------------------- |  | ---------------- | ------- |  | ------- |  | ------ | ------- |  |  | ------------- | 
|December 31, 2011                                       |  | NIS in thousands |        
|Assets:                                                 |  |                  |         |  |         |  |        |         |  |  |               | 
|Financial assets at fair value through profit or loss:  |  |                  |         |  |         |  |        |         |  |  |               | 
|Government Bonds                                        |  |                  | 16,902  |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                         |  |                  | 49,684  |  |         |  | -      |         |  |  | -             | 
|Investment in equity securities                         |  |                  | 2,172   |  |         |  | -      |         |  |  | -             | 
|Forwards contracts over Israeli CPI                     |  |                  | -       |  |         |  | 2,543  |         |  |  | -             | 
|Embedded derivatives in rent agreements                 |  |                  | -       |  |         |  | 896    |         |  |  | -             | 
|Investment in equity securities – property company      |  |                  | -       |  |         |  | -      |         |  |  | 30,600        | 
|Available-for-sale financial assets:                    |  |                  | -       |  |         |  | -      |         |  |  | -             | 
|Government Bonds                                        |  |                  | 135,324 |  |         |  | -      |         |  |  | -             | 
|Corporate bonds                                         |  |                  | 59,947  |  |         |  | -      |         |  |  | -             | 
|Equity securities                                       |  |                  | 5,423   |  |         |  | -      |         |  |  | -             | 
|Equity securities – gas exploration companies           |  |                  | 4,990   |  |         |  | 28,169 |         |  |  | -             | 
|Total assets                                            |  |                  | 274,442 |  |         |  | 31,608 |         |  |  | 30,600        | 
|Liabilities:                                            |  |                  |         |  |         |  |        |         |  |  |               | 
|Embedded derivatives:                                   |  |                  |         |  |         |  |        |         |  |  |               | 
|Conversion component embedded in convertible debentures |  |                  | -       |  |         |  | 169    |         |  |  | -             | 
|Forwards contracts over  foreign currency               |  |                  |         |  |         |  | 2,556  |         |  |  | -             | 
|Forwards contracts over Israeli CPI                     |  |                  | -       |  |         |  | 10,440 |         |  |  | -             | 
|Rent agreements                                         |  |                  | -       |  |         |  | 6,519  |         |  |  | -             | 
|Total liabilities                                       |  |                  | -       |  |         |  | 19,684 |         |  |  | -             | 



F-43







ALON HOLDINGS 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:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | The valuation of the property company
                                                               is 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.
| | -- | ------------------------------------------------------------

| | b. | The investment in gas exploration
                                                               companies is partly listed and is partly unlisted. The value of
                                                               the unlisted shares, which makes up a small minority share in an
                                                               entity that is involved in the exploration of gas in Israel is
                                                               based on the share price of the majority holding of the entity
                                                               that is listed on the Tel Aviv stock exchange.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During 2012, the Company recorded
gain from changes in the fair value of the equity securities in the amount of NIS 3.2 million and received dividend in the amount
of NIS 12.5 million. As of December 31, 2012, the balance of the equity securities amounts to NIS 21.3 million.



F-44







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



The following table presents
the changes in level 3 instruments for the years ended December 31, 2011 and 2010:



|                                                                               |  | Investment in
    equity securities |        |  | Diners option |  |          | Total | 
|------------------------------------------------------------------------------ |  | ----------------------------------- | ------ |  | ------------- |  | -------- | ----- | 
|Year ended December 31, 2011                                                   |  | NIS in thousands                    |       
|Opening balance                                                                |  |                                     | 29,000 |  |               |  | 53,367   |       | 
|Gains recognized in profit or loss                                             |  |                                     | 1,600  |  |               |  | 101,031  |       | 
|Realization of the option and transfer to investment in associate, see note 11 |  |                                     | -      |  |               |  | (154,398 | )     | 
|Closing balance                                                                |  |                                     | 30,600 |  |               |  | -        |       | 



|                                                          |  | Investment in equity securities |        |  | Diners option |  |        | Total | 
|--------------------------------------------------------- |  | ------------------------------- | ------ |  | ------------- |  | ------ | ----- | 
|Year ended December 31, 2010                              |  | NIS in thousands                |       
|Opening balance                                           |  |                                 | 25,000 |  |               |  | 12,266 |       | 
|Acquisition of subsidiary consolidated for the first time |  |                                 | -      |  |               |  | 6,669  |       | 
|Gains recognized in the statement of income               |  |                                 | 4,000  |  |               |  | 34,432 |       | 
|Closing balance                                           |  |                                 | 29,000 |  |               |  | 53,367 |       | 



d. Financial Instruments
by category



|                                                  |  | December 31, 2012     |          
|------------------------------------------------- |  | --------------------- | ---------
|                                                  |  | Loans and Receivables |          
|                                                  |  | NIS in thousands      |          
|Current:                                          |  |                       |          
|Cash and cash equivalents                         |  |                       | 285,034  
|Short term bank deposits                          |  |                       | 96,176   
|Investment in  securities                         |  |                       | -        
|Trade receivables                                 |  |                       | 1,430,983
|Other receivables excluding prepayments and other |  |                       | 250,980  
|Non-Current:                                      |  |                       |          
|Loans to associates                               |  |                       | 132,522  
|Investment in equity securities                   |  |                       | -        
|Other long-term receivables                       |  |                       | 207,968  
|Non-current derivative financial instruments      |  |                       | -        
|Total                                             |  |                       | 2,403,663



F-45







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



|                                                        |  | December 31, 2012                             |          
|------------------------------------------------------- |  | --------------------------------------------- | ---------
|                                                        |  | Other financial liabilities at amortized cost |          
|                                                        |  | NIS in thousands                              |          
|                                                        |  |                                               |          
|Credit and loans from banks and others                  |  |                                               | 1,169,229
|Trade payables                                          |  |                                               | 1,249,743
|Other account payables and accrued expenses             |  |                                               | 541,596  
|Loans from banks and others                             |  |                                               | 1,515,859
|Convertible debentures                                  |  |                                               | 119,486  
|Conversion component embedded in convertible debentures |  |                                               | -        
|Debentures                                              |  |                                               | 2,575,859
|Derivatives financial instruments                       |  |                                               | -        
|Other liabilities                                       |  |                                               | 17,345   
|Total                                                   |  |                                               | 7,189,117



|                                                     |  | December 31, 2011     |          
|---------------------------------------------------- |  | --------------------- | ---------
|                                                     |  | Loans and Receivables |          
|                                                     |  | NIS in thousands      |          
|Current:                                             |  |                       |          
|Cash and cash equivalents                            |  |                       | 76,451   
|Short term bank deposits                             |  |                       | 103,942  
|Investment in  securities                            |  |                       | -        
|Trade receivables                                    |  |                       | 1,576,150
|Other receivables excluding prepayments and other    |  |                       | 269,538  
|Derivative financial instruments (Forward Contracts) |  |                       | -        
|Non-Current:                                         |  |                       |          
|Loans to associates                                  |  |                       | 2,571    
|Investment in equity securities                      |  |                       | -        
|Other long-term receivables                          |  |                       | 301,920  
|Non-current derivative financial instruments         |  |                       | -        
|Total                                                |  |                       | 2,330,572



F-46







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



d. Financial Instruments
by category (continued):



|                                                         |  | December 31, 2011                             |          
|-------------------------------------------------------- |  | --------------------------------------------- | ---------
|                                                         |  | Other financial liabilities at amortized cost |          
|                                                         |  | NIS in thousands                              |          
|Credit and loans from banks and others                   |  |                                               | 1,036,928
|Trade payables                                           |  |                                               | 1,243,914
|Other account payables and accrued expenses              |  |                                               | 610,477  
|Bank loans                                               |  |                                               | 1,552,129
|Convertible debentures                                   |  |                                               | 118,740  
|Conversion component embedded  in convertible debentures |  |                                               | -        
|Debentures                                               |  |                                               | 2,246,690
|Non current Derivatives financial instruments            |  |                                               | -        
|Other liabilities                                        |  |                                               | 12,341   
|Total                                                    |  |                                               | 6,821,219



| | 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, 2012 were deposited with major Israeli banks.



Trade receivables



|                            |  | December 31      |          
|--------------------------- |  | ---------------- | ---------
|                            |  | 2011             |          
|                            |  | NIS in thousands |          
|Retail:                     |  |                  |          
|Credit cards                |  |                  | 529,666  
|Insured checks receivables* |  |                  | 38,947   
|Wholesale:                  |  |                  |          
|Checks receivables          |  |                  | 151,548  
|Open accounts               |  |                  | 748,177  
|                            |  |                  | 1,468,338



| | * | The Company is engaged with credit
                                                              check companies to fully receive payments of checks that have been
                                                              approved by the credit check company, even if no cover is available
                                                              at the indicated time of presentation.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-47







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



Available-for-sale debt securities



As described above, most of the
Company's investments are publicly traded on the Tel-Aviv Stock Exchange and are independently rated with a minimum A+ at the
date of investment.



| | f. | Composition of financial instrument balances:
| | -- | ---------------------------------------------



| | 1. | The currency exposure of the Company's
                                                            monetary assets and liabilities and equity instruments and their fair
                                                            values are as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                           |  | December 31, 2012 |          
|---------------------------------------------------------- |  | ----------------- | ---------
|                                                           |  | NIS linkedto CPI  |          
|                                                           |  | NIS in thousands  |          
|Assets:                                                    |  |                   |          
|Cash and cash equivalents                                  |  |                   | -        
|Short term bank deposit                                    |  |                   | -        
|Investment in  securities                                  |  |                   | 105,955  
|Trade receivables                                          |  |                   | -        
|Other  accounts receivables                                |  |                   | -        
|Income taxes receivable                                    |  |                   | 92,814   
|Loans receivable                                           |  |                   | 112,137  
|Derivative financial instruments                           |  |                   | -        
|Investment in equity securities                            |  |                   | -        
|Other long-term receivables                                |  |                   | 309      
|Assets of disposal groups classified as held for sale      |  |                   | 171      
|Total assets                                               |  |                   | 311,386  
|                                                           |  |                   |          
|Liabilities:                                               |  |                   |          
|Credit and loans from banks and others                     |  |                   | -        
|Trade payables                                             |  |                   | -        
|Other accounts payable and accrued expenses                |  |                   | 26,387   
|Customer's deposits                                        |  |                   | 28,011   
|Income tax payables                                        |  |                   | 3,458    
|Provisions                                                 |  |                   | 16,648   
|Loans                                                      |  |                   | 886,831  
|Debentures                                                 |  |                   | 2,192,206
|Convertible debentures                                     |  |                   | 119,560  
|Other long-term liabilities                                |  |                   | 9,679    
|Derivative financial instruments                           |  |                   | 9,336    
|Liabilities of disposal groups classified as held for sale |  |                   | -        
|Total liabilities                                          |  |                   | 3,292,116



(*) Financial instrument that are not monetary
assets



(**) The fair value of these monetary balances
is usually identical or close to their carrying value.



F-48







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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



| | 2. | 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 (1) |  |     | Israel actual CPI (2) | 
|---- |  | ------------------------------ | ---- | - | -------------------- |  | --- | --------------------- | 
|     |  | %                              |      |   | %                    |  |     | %                     | 
|2012 |  |                                | (2.3 | ) |                      |  | 1.4 |                       | 
|2011 |  |                                | 7.7  |   |                      |  | 2.6 |                       | 
|2010 |  |                                | (6.0 | ) |                      |  | 2.3 |                       | 



| | (1) | Calculated based on published CPI date (through November
of each year)
| | --- | ----------------------------------------------------------------------

| | (2) | Calculated based on actual CPI date (through December 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) | Impairment of non-financial assets
| | -- | ----------------------------------



In accordance with the accounting
policy stated in note 2, the Company reviews at each statement of financial position date whether any events have occurred
or changes in circumstances have taken place, which might indicate that there has been an impairment of property and equipment
and identifiable intangibles. When such indicators of impairment are present, the Company evaluates whether the carrying value
of the asset in the Company's accounts can be recovered from the cash flows anticipated from that asset, and, if necessary, records
an impairment provision to adjust the carrying amount to the recoverable amount.



The recoverable amount of an
asset is the higher of an asset's fair value less cost to sell and its value in use. These calculations require the use of estimates.



Goodwill and indefinite life
intangible assets:



In accordance with the accounting
policy stated in note 2, the Company tests at least annually whether goodwill and indefinite life intangible assets 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. These calculations require the use of estimates. See note 9 for details of key assumptions.



F-49







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued):



Referring to goodwill allocated
to Non-Food Houseware CGU, the Company performed a sensitivity analysis for the key assumption used in its annual goodwill impairment
test and determined that an increase in the pre-tax discount rate of 1.0% would result in the estimated recoverable amount of
the Houseware CGU falling below its carrying amount by NIS 6 million.



The recoverable
amounts of the other CGUs are substantially higher than the carrying value.



| | 2) | 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 28 million lower or
NIS 31 million higher. When the discount rate is different by 1% from management estimate the fair value of investment property
will be NIS 53 million lower or NIS 64 million higher.



| | 3) | 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 32.



| | 4) | 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.



F-50







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
4 – CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS (continued):



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. If the Company is unable to generate sufficient future taxable income, or actual results differ from
its other assumptions, the Company might be required to reduce its deferred tax assets or to increase its deferred tax liabilities,
which will increase its effective tax rate, and negatively affect its results.



| | 5) | Provision for doubtful debts
| | -- | ----------------------------



| |  | The provision for doubtful debts
                                                             is recognized according to management's judgment, whenever there
                                                             are objective indications that the Company will not be able to recover
                                                             all amounts owing to it according to the original terms of the debt,
                                                             due to material financial difficulties of the customer, a reasonable
                                                             expectation that the customer will become insolvent or will undergo
                                                             a reorganization and will be unable to repay its debts or there will
                                                             be a delay in the repayments.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6) | Property, plant and equipment
| | -- | -----------------------------



Property,
plant and equipment also represent a significant proportion of the Company’s total assets. Therefore the estimates and assumptions
made to determine their carrying value and related depreciation are critical to the Group’s financial position and performance.



The useful
lives of the Company's assets are determined by management at the time the asset is acquired and reviewed at least annually for
appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events, which
may impact their life, such as changes in technology.



NOTE
5 – SEGMENT INFORMATION:



The Company
includes segment information according to IFRS 8. The Company's chief operating decision maker (CODM), Mr. David Wiessman, reviews
the Company's internal reports in order to evaluate performance and allocate resources. Company's management has set the operating
segments based on the internal reports.

The Company
presents four reportable segments: (1) Fueling and Commercial sites, (2) Supermarkets, (3) Real estate, (4) Non-food (Retail and
Wholesale). Segments that do not meet the quantitative thresholds consist the cellular activity and the company's share in Diners
Club Israel (issuance and clearance of credit cards activity) and are presented under Other Activities. Virtually all of the Company's
activities are located in Israel.

The performance
of the operating segments is based on a measure of operating profit of the Company and its consolidated subsidiaries and Company's
share in net profit of certain associates which the CODM reviews. This measurement basis excludes discontinued operations. In
addition, selling, general and administrative expenses of Head Quarters operations and financial income and expenses are not included
in the results of each of the operating segments.

Additional
data provided to the CODM apart from the data provided below is measured in a manner that corresponds to the method of measurement
used in the financial statements.



F-51







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
5 – SEGMENT INFORMATION(continued):



The
Company's operating segments consist of the following:



| | (1) | Fueling
                                                                                                       and Commercial sites –
                                                                                                       Through its subsidiary
                                                                                                       Dor Alon the Company is
                                                                                                       engaged in the development,
                                                                                                       construction and operation
                                                                                                       of vehicle fueling stations,
                                                                                                       adjacent commercial centers
                                                                                                       and independent convenience
                                                                                                       stores, marketing of fuel
                                                                                                       products and other products
                                                                                                       through the filling stations
                                                                                                       and convenience stores
                                                                                                       and direct marketing of
                                                                                                       distillates to customers.
                                                                                                       The fueling and commercial
                                                                                                       sites segment is presented
                                                                                                       according to the published
                                                                                                       financial statements of
                                                                                                       Dor Alon. In the reconciliation
                                                                                                       to the financial statements
                                                                                                       the Company reclassified
                                                                                                       the credit card fees and
                                                                                                       includes the amortization
                                                                                                       of the excess of cost arising
                                                                                                       at the time of acquisition.
                                                                                                       As of December 31, 2012,
                                                                                                       Dor Alon operated 202 fueling
                                                                                                       stations and 209 convenience
                                                                                                       stores in various formats.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Supermarkets
                                                                                                       – The Company operates
                                                                                                       the second largest food
                                                                                                       retail chain in Israel.
                                                                                                       Through its subsidiary,
                                                                                                       Mega Retail Ltd. ("Mega
                                                                                                       Retail"), which operates
                                                                                                       supermarket branches, the
                                                                                                       Company offers a wide range
                                                                                                       of food and beverage products
                                                                                                       and “Non-food”
                                                                                                       items, such as houseware,
                                                                                                       toys, small electrical
                                                                                                       appliances, computers and
                                                                                                       computer accessories, entertainment
                                                                                                       and leisure products and
                                                                                                       textile products and “Near-Food”
                                                                                                       products, such as health
                                                                                                       and beauty aids, products
                                                                                                       for infants, cosmetics
                                                                                                       and hygiene products. As
                                                                                                       of December 31, 2012, Mega
                                                                                                       Retail operates 212 supermarkets.
                                                                                                       This segment also includes
                                                                                                       properties owned through
                                                                                                       BSRE and leased out to
                                                                                                       the supermarket operation
                                                                                                       of Mega.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Non-Food
                                                                                                       (Retail and Wholesale)
                                                                                                       – Mostly through
                                                                                                       its subsidiary, BEE Group
                                                                                                       Retail Ltd. ("BEE
                                                                                                       Group"), the Company
                                                                                                       is engaged in Non-Food
                                                                                                       retail and wholesale activities.
                                                                                                       As of December 31, 2012,
                                                                                                       The Company operated 135
                                                                                                       Non-Food Retail outlets,
                                                                                                       some through franchisees,
                                                                                                       with specialties in houseware
                                                                                                       and home textile and infant.
                                                                                                       This segment also includes
                                                                                                       properties owned through
                                                                                                       BSRE and leased out to
                                                                                                       the Non-Food operation.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | Real
                                                                                                       Estate – Through
                                                                                                       its subsidiary BSRE the
                                                                                                       Company is engaged in generating
                                                                                                       yield from commercial centers,
                                                                                                       logistics centers and offices,
                                                                                                       land for the purpose of
                                                                                                       capital appreciation and
                                                                                                       deriving long-term yield
                                                                                                       as well as in the development
                                                                                                       of the "Wholesale
                                                                                                       Market" residency
                                                                                                       project in Tel-Aviv. (see
                                                                                                       note 11(2))
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (5) | Other
                                                               – The Company is engaged in cellular "MVNO" activities
                                                               through its subsidiary Alon Cellular Ltd. The Company is also engaged
                                                               in issuance and clearance of credit cards and grant of credit through
                                                               its associate Diners Club Israel Ltd. (in 2012 the Company's share
                                                               in Diners profit amounted to NIS 19.6 million). In the reconciliation
                                                               to the financial statements the Company included the amortization
                                                               of the excess of cost arising at the time of acquisition (in 2012
                                                               the amortization amounted to NIS 10.5 million).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-52







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
5 – SEGMENT INFORMATION(continued):



|                                                                                                             |  | Fueling and
 commercial sites |           |  | Supermarkets |  |           | Non - food Retail and 
wholesale |  |  | Real estate |   |  | Other activities |         |   | Adjustments |  |         | Total consolidated | 
|------------------------------------------------------------------------------------------------------------ |  | ----------------------------- | --------- |  | ------------ |  | --------- | -------------------------------- |  |  | ----------- | - |  | ---------------- | ------- | - | ----------- |  | ------- | ------------------ | 
|                                                                                                             |  | NIS in thousands              |          
|                                                                                                             |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Year ended December 31, 2012:                                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Net segment revenues                                                                                         |  |                               | 5,935,249 |  |              |  | 6,552,909 |                                  |  |  | 321,116     |   |  |                  | 33,926  |   |             |  | 7,185   |                    | 
|Inter segment revenues                                                                                       |  |                               | 41,197    |  |              |  | -         |                                  |  |  | 29,458      |   |  |                  | -       |   |             |  | -       |                    | 
|Net revenues                                                                                                 |  |                               | 5,976,446 |  |              |  | 6,552,909 |                                  |  |  | 350,574     |   |  |                  | 33,926  |   |             |  | 7,185   |                    | 
|Depreciation and amortization                                                                                |  |                               | 96,759    |  |              |  | 169,563   |                                  |  |  | 11,438      |   |  |                  | -       |   |             |  | -       |                    | 
|Operating profit (loss) before other gains and losses net and changes in fair value of investment property   |  |                               | 164,781   |  |              |  | 128,951   |                                  |  |  | (12,072     | ) |  |                  | 5,583   |   |             |  | (14,027 | )                  | 
|Segment profit(loss)                                                                                         |  |                               | 164,662   |  |              |  | 139,666   |                                  |  |  | (15,450     | ) |  |                  | 125,871 |   |             |  | (14,027 | )                  | 
|Unallocated corporate expenses                                                                               |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Financial expenses, net                                                                                      |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Share in profits of associated companies, net                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Income before taxes on income                                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|                                                                                                             |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Year ended December 31, 2011:                                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Net segment revenues                                                                                         |  |                               | 5,301,865 |  |              |  | 6,723,845 |                                  |  |  | 289,045     |   |  |                  | 31,021  |   |             |  | -       |                    | 
|Inter segment revenues                                                                                       |  |                               | 36,087    |  |              |  | -         |                                  |  |  | 31,810      |   |  |                  | -       |   |             |  | -       |                    | 
|Net revenues                                                                                                 |  |                               | 5,337,952 |  |              |  | 6,723,845 |                                  |  |  | 320,855     |   |  |                  | 31,021  |   |             |  | -       |                    | 
|Depreciation and amortization                                                                                |  |                               | 96,130    |  |              |  | 159,601   |                                  |  |  | 12,011      |   |  |                  | -       |   |             |  | -       |                    | 
|Operating profit (loss) before other gains  and losses net and changes in fair value  of investment property |  |                               | 173,681   |  |              |  | 177,346   |                                  |  |  | (19,813     | ) |  |                  | 15,395  |   |             |  | 6,552   |                    | 
|Segment profit (loss)                                                                                        |  |                               | 173,578   |  |              |  | 169,697   |                                  |  |  | (28,952     | ) |  |                  | 57,307  |   |             |  | 6,552   |                    | 
|Unallocated corporate expenses                                                                               |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Financial expenses, net                                                                                      |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Share
in profits of associated companies, net                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Income before taxes on income                                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|                                                                                                             |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Year ended December 31, 2010:                                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Net segment revenues                                                                                         |  |                               | 1,144,981 |  |              |  | 6,894,978 |                                  |  |  | 279,296     |   |  |                  | 25,162  |   |             |  | -       |                    | 
|Inter segment revenues                                                                                       |  |                               | 8,339     |  |              |  | -         |                                  |  |  | 46,581      |   |  |                  | -       |   |             |  | -       |                    | 
|Net revenues                                                                                                 |  |                               | 1,153,320 |  |              |  | 6,894,978 |                                  |  |  | 325,877     |   |  |                  | 25,162  |   |             |  | -       |                    | 
|Depreciation and amortization                                                                                |  |                               | 27,328    |  |              |  | 163,020   |                                  |  |  | 15,156      |   |  |                  | -       |   |             |  | -       |                    | 
|Operating profit (loss) before other gains and losses net and changes in fair value of investment property   |  |                               | 42,936    |  |              |  | 241,942   |                                  |  |  | (4,969      | ) |  |                  | (4,843  | ) |             |  | -       |                    | 
|Segment profit                                                                                               |  |                               | 39,335    |  |              |  | 232,944   |                                  |  |  | (13,064     | ) |  |                  | 28,073  |   |             |  | -       |                    | 
|Unallocated corporate expenses                                                                               |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Financial expenses, net                                                                                      |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Share
in losses of associated companies, net                                                                 |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 
|Income before taxes on income                                                                                |  |                               |           |  |              |  |           |                                  |  |  |             |   |  |                  |         |   |             |  |         |                    | 



The Company does not regularly report any segment assets and
liabilities measure to the chief operating decision maker, see also note 2c.



F-53







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 - SUBSIDARIES



| | i) | Information about principal subsidiaries
| | -- | ----------------------------------------



Set out below are the Company's
principal subsidiaries at December 31, 2012. Unless otherwise stated, the subsidiaries as listed below have 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.



|Name of Entity                        |  | Principal activities                                                                |  | % of Ownership by the group |      
|------------------------------------- |  | ----------------------------------------------------------------------------------- |  | --------------------------- | -----
|Dor Alon Energy in Israel (1988) Ltd. |  | Operation of fueling stations and convenience stores, direct marketing and jet fuel |  |                             | 78.43
|Mega Retail Ltd.*                     |  | Operation of supermarket branches                                                   |  |                             | 100  
|Bee Group Ltd.*                       |  | Non-Food retail and wholesale activities                                            |  |                             | 100  
|Blue Square Real Estate Ltd.          |  | Project development and generating yield                                            |  |                             | 78.22
|Alon Cellular Ltd.                    |  | Cellular "MVNO" activities                                                          |  |                             | 100  



The Company filed an application
for merger between Mega Retail and BEE group*



The total non-controlling interest
as of December 31, 2012 is NIS 412.9 Million, of which NIS 206.9 Million is for Dor Alon, NIS 18.0 Million is for Bee Group and
NIS 188.0 Million is attributed to BSRE.



| | ii) | Events during the
                                                                          reporting period
| | --- | ------------------------------------------------------------------------------------------------------------



| | a) | Events during 2012
| | -- | ------------------



Kfar
Hasha'ashuim Marketing Ltd. ("Kfar")



In December 2012, the Company
resolved to realize Kfar that operates the leisure and toy activity of the Company under the Non-food segment, and as of December
31, 2012, operates 81 stores, mostly by franchisees. At December 31, 2012, Kfar was classified as a disposal group held for sale
and as a discontinued operation.



The
results of Kfar for the years ended December 31, 2012 and 2011 are as follows:



|                                               |  | 2011             |         |   | 2012 | 
|---------------------------------------------- |  | ---------------- | ------- | - | ---- | 
|                                               |  | NIS in thousands |        
|Revenues                                       |  |                  | 136,808 |   |      | 
|Expenses                                       |  |                  | 124,867 |   |      | 
|Gross profit                                   |  |                  | 11,941  |   |      | 
|Selling, general and administrative expenses   |  |                  | (28,371 | ) |      | 
|Finance expenses                               |  |                  | (4,076  | ) |      | 
|Loss before taxes from discontinued operations |  |                  | (20,506 | ) |      | 
|Tax benefit (taxes on income)                  |  |                  | 1,897   |   |      | 
|Loss from discontinued operations              |  |                  | (18,609 | ) |      | 



F-54







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 – SUBSIDARIES (continued):



The major classes of assets
and liabilities of Kfar classified as held for sale as at December 31, 2012 are, as follows:



|                                                          |  | December 31      |        
|--------------------------------------------------------- |  | ---------------- | -------
|                                                          |  | 2012             |        
|                                                          |  | NIS in thousands |        
|Assets                                                    |  |                  |        
|Cash and cash equivalents                                 |  |                  | 1,835  
|Trade receivables                                         |  |                  | 57,733 
|Other current assets                                      |  |                  | 13,981 
|Inventories                                               |  |                  | 34,354 
|Intangible assets, net                                    |  |                  | 26,012 
|Assets of disposal group classified as held for sale      |  |                  | 133,915
|                                                          |  |                  |        
|Liabilities                                               |  |                  |        
|Credit and loans from banks and others                    |  |                  | 40,039 
|Trade payables                                            |  |                  | 42,327 
|Other current liabilities                                 |  |                  | 5,428  
|Liabilities of disposal group classified as held for sale |  |                  | 87,794 
|                                                          |  |                  |        
|Net assets directly associated with disposal group        |  |                  | 46,121 



The net cash flows incurred
by Kfar, are as follows:



|                        |  | 2011             |        |   | 2012 | 
|----------------------- |  | ---------------- | ------ | - | ---- | 
|                        |  | NIS in thousands |       
|Operating               |  |                  | (6,464 | ) |      | 
|Investing               |  |                  | (557   | ) |      | 
|Financing               |  |                  | 4,414  |   |      | 
|Net cash flow (outflow) |  |                  | (2,607 | ) |      | 



| | b) | Events during 2011
| | -- | ------------------



| | 1) | Kfar Hasha'ashuim Marketing
                                                                     Ltd. ("Kfar")
| | -- | --------------------------------------------------------------------------------------------------------------



| |  | In November 2011, Bee Group sold
                                                               to a third party 5% of its 100% owned subsidiary Kfar, for a total
                                                               cash consideration of NIS 2 million. The Buyer has also received
                                                               the right to acquire additional 5% for another NIS 2 million for
                                                               a period of 36 months (in the form of a non-recourse loan on these
                                                               shares; and bear fixed annual interest of 4.65%), and the right
                                                               to purchase additional 10% from Bee Group after the elapse of the
                                                               36 months from December 22, 2011, subject to the fulfillment of
                                                               certain conditions; Bee Group has the right to repurchase the shares
                                                               bought after 48 months from that date. Bee Group's repurchase right
                                                               is exercisable for 30 days and is subject to certain conditions,
                                                               as stipulated in the agreement. As a result of the above the Company
                                                               recognized NIS 0.5 million liability for the fair value of the
                                                               options given to the buyer, which reduced the consideration received
                                                               for the shares sold. The excess of NIS 2.5 million between the
                                                               consideration received for the shares sold, and the carrying amount
                                                               of the respective non-controlling interests recognized in the Company's
                                                               accounts was carried directly to "other capital reserves"
                                                               relating to equity holders of the Company.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-55







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6 – SUBSIDARIES (continued):



| | 2) | Alon Cellular Ltd.
| | -- | ------------------



On March 13, 2011, the subsidiary
Alon Cellular, received a license from the Ministry of Communication of Israel to operate as a mobile virtual network operator
(MVNO). In connection with the Company’s plans to enter the cellular communications market by becoming an MVNO, on December
27, 2011, Alon Cellular signed an agreement with Partner Communications Ltd.(hereafter: Partner) for launching cellular services
in an MVNO model, which will enable Alon Cellular to offer cellular services. The agreement is for the term of 3 years with an
option of Alon Cellular to extend the term by one additional year.



Launching the services under
the agreement, and the scope of the services provided, are at the full discretion of Alon Cellular; Alon Cellular has also the
option to terminate the agreement, at any time, against a payment of an nominal amount.



| | c) | Events during 2010
| | -- | ------------------



Investment
in Dor Alon Energy in Israel (1988) Ltd.



On October 3, 2010, the Company
completed the acquisition of approximately 80% of the shares in Dor Alon Energy in Israel (1988) Ltd ("Dor Alon"), a
company listed on the Tel Aviv stock exchange, from its controlling shareholder Alon, which is also the Company's controlling
shareholder. Dor-Alon is engaged in the development, construction and operating of vehicle fueling stations, adjacent commercial
centers and independent convenience stores, marketing of fuel products and other products through the fueling stations and convenience
stores and direct marketing of distillates to customers. Dor-Alon operates in three CGUs: The fueling and commercial sites, the
direct marketing, and the jet fuel marketing. In return for the Dor Alon shares, the Company issued 20,327,710 shares to Alon
in such a way that each Dor Alon share held by Alon was exchanged into 1.8 shares of the Company.

The purchase price for the
acquisition of Dor Alon was NIS 966 million based on the Company's ordinary share price of NIS 47.51 (based on the closing price
on October 3, 2010 on the Tel Aviv stock exchange).



The main business purpose for
the transaction was to combine the retail operations of the two companies and to become one of the largest retail groups in Israel.
The acquisition was to bring diversity in the products offered by the Company, primarily in the retail sectors, which the Company
was able to offer to its current and potential customers, with all of its advantages including strengthening customer relationships.



F-56







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 7 – 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) |           |   | Fueling station equipment |  |         | Motor vehicles |  |  | Furniture, equipment and installations |   |  | Total |          
|---------------------------------------- |  | ------------------------------------------------------------- | --------- | - | ------------------------- |  | ------- | -------------- |  |  | -------------------------------------- | - |  | ----- | ---------
|                                         |  | NIS in thousands                                              |          
|Cost:                                    |  |                                                               |           |   |                           |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2012               |  |                                                               | 3,036,909 |   |                           |  | 272,687 |                |  |  | 24,601                                 |   |  |       | 1,437,308
|Additions                                |  |                                                               | 107,358   |   |                           |  | 35,022  |                |  |  | 2,592                                  |   |  |       | 74,131   
|Disposals                                |  |                                                               | (13,981   | ) |                           |  | (233    | )              |  |  | (2,691                                 | ) |  |       | (70,035  
|Transfer to and from investment property |  |                                                               | (56,528   | ) |                           |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2012             |  |                                                               | 3,073,758 |   |                           |  | 307,476 |                |  |  | 24,502                                 |   |  |       | 1,441,404
|Accumulated depreciation:                |  |                                                               |           |   |                           |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2012               |  |                                                               | 794,281   |   |                           |  | 38,374  |                |  |  | 12,815                                 |   |  |       | 953,782  
|Additions                                |  |                                                               | 111,523   |   |                           |  | 31,554  |                |  |  | 4,094                                  |   |  |       | 90,941   
|Disposals                                |  |                                                               | (8,876    | ) |                           |  | (106    | )              |  |  | (2,418                                 | ) |  |       | (56,917  
|Transfer to investment property          |  |                                                               | (11,142   | ) |                           |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2012             |  |                                                               | 885,786   |   |                           |  | 69,822  |                |  |  | 14,491                                 |   |  |       | 987,806  
|Impairment of property and equipment     |  |                                                               | (18,121   | ) |                           |  | -       |                |  |  | -                                      |   |  |       | (3,618   
|Net book value at December 31, 2012      |  |                                                               | 2,169,851 |   |                           |  | 237,654 |                |  |  | 10,011                                 |   |  |       | 449,980  



|                                     |  | Land, buildings
    and leasehold improvements  (see d. below) |           |   | Fueling stations equipment |  |         | Motor vehicles |  |  | Furniture, equipment and installations |   |  | Total |          
|------------------------------------ |  | -------------------------------------------------------------- | --------- | - | -------------------------- |  | ------- | -------------- |  |  | -------------------------------------- | - |  | ----- | ---------
|                                     |  | NIS in thousands                                               |          
|Cost:                                |  |                                                                |           |   |                            |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2011           |  |                                                                | 2,933,706 |   |                            |  | 233,765 |                |  |  | 25,404                                 |   |  |       | 1,450,249
|Additions                            |  |                                                                | 138,939   |   |                            |  | 39,499  |                |  |  | 4,198                                  |   |  |       | 81,150   
|Disposals                            |  |                                                                | (35,736   | ) |                            |  | (577    | )              |  |  | (5,001                                 | ) |  |       | (94,091  
|Balance at December 31, 2011         |  |                                                                | 3,036,909 |   |                            |  | 272,687 |                |  |  | 24,601                                 |   |  |       | 1,437,308
|Accumulated depreciation:            |  |                                                                |           |   |                            |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2011           |  |                                                                | 708,425   |   |                            |  | 7,061   |                |  |  | 11,016                                 |   |  |       | 954,037  
|Additions                            |  |                                                                | 105,829   |   |                            |  | 31,589  |                |  |  | 5,488                                  |   |  |       | 91,922   
|Disposals                            |  |                                                                | (19,973   | ) |                            |  | (276    | )              |  |  | (3,689                                 | ) |  |       | (92,177  
|Balance at December 31, 2011         |  |                                                                | 794,281   |   |                            |  | 38,374  |                |  |  | 12,815                                 |   |  |       | 953,782  
|Impairment of property and equipment |  |                                                                | (18,121   | ) |                            |  | -       |                |  |  | -                                      |   |  |       | (11,645  
|Net book value at December 31, 2011  |  |                                                                | 2,224,507 |   |                            |  | 234,313 |                |  |  | 11,786                                 |   |  |       | 471,881  



F-57







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
7 – PROPERTY AND EQUIPMENT(continued):



|                                                          |  | Land, buildings and leasehold improvements |           |   | Fueling stations equipment |  |         | Motor vehicles |  |  | Furniture, equipment and installations |   |  | Total |          
|--------------------------------------------------------- |  | ------------------------------------------ | --------- | - | -------------------------- |  | ------- | -------------- |  |  | -------------------------------------- | - |  | ----- | ---------
|                                                          |  | NIS in thousands                           |          
|Cost:                                                     |  |                                            |           |   |                            |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2010                                |  |                                            | 2,284,913 |   |                            |  | -       |                |  |  | 16,084                                 |   |  |       | 1,555,915
|Additions                                                 |  |                                            | 130,855   |   |                            |  | 7,886   |                |  |  | 1,019                                  |   |  |       | 73,210   
|Disposals                                                 |  |                                            | (144,779  | ) |                            |  | (95     | )              |  |  | (1,385                                 | ) |  |       | (218,672 
|Acquisition of subsidiary consolidated for the first time |  |                                            | 659,717   |   |                            |  | 225,974 |                |  |  | 9,686                                  |   |  |       | 39,796   
|Transfer from investment property                         |  |                                            | 3,000     |   |                            |  | -       |                |  |  | -                                      |   |  |       | -        
|Balance at December 31, 2010                              |  |                                            | 2,933,706 |   |                            |  | 233,765 |                |  |  | 25,404                                 |   |  |       | 1,450,249
|Accumulated depreciation:                                 |  |                                            |           |   |                            |  |         |                |  |  |                                        |   |  |       |          
|Balance at January 1, 2010                                |  |                                            | 771,751   |   |                            |  | -       |                |  |  | 8,253                                  |   |  |       | 1,079,472
|Additions                                                 |  |                                            | 80,157    |   |                            |  | 7,062   |                |  |  | 3,584                                  |   |  |       | 87,781   
|Disposals                                                 |  |                                            | (143,483  | ) |                            |  | (1      | )              |  |  | (821                                   | ) |  |       | (213,216 
|Balance at December 31, 2010                              |  |                                            | 708,425   |   |                            |  | 7,061   |                |  |  | 11,016                                 |   |  |       | 954,037  
|Impairment of property and equipment                      |  |                                            | (20,647   | ) |                            |  | -       |                |  |  | -                                      |   |  |       | (13,423  
|Net book value at December 31, 2010                       |  |                                            | 2,204,634 |   |                            |  | 226,704 |                |  |  | 14,388                                 |   |  |       | 482,789  



| | b. | As to liens placed on assets,
                                                                 see note 34.
| | -- | -----------------------------------------------------------------------------------------------------------

| | c. | Additions during the period
                                                                  – Property and equipment include property under construction
                                                                  (see note 10) and capitalization of labor and finance expenses
                                                                  in an amount of NIS 5.1 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Capitalized lease payments in
                                                                  respect of long-term land leases from the Israeli Land administration
                                                                  are as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                          |  | December 31      |        
|----------------------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                                          |  | 2011             |        
|                                                                                          |  | NIS in thousands |        
|                                                                                          |  |                  |        
|Capitalized leases for periods of 999 years                                               |  |                  | 3,988  
|Capitalized leases for periods ending between the years 2013 and 2056, as detailed below: |  |                  |        
|Leases for periods of under 10 years                                                      |  |                  | 11,550 
|Leases for periods of between 10 and 25 years                                             |  |                  | 24,575 
|Leases for periods of over 25 years                                                       |  |                  | 277,840
|                                                                                          |  |                  | 313,965
|                                                                                          |  |                  | 317,953



F-58







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 – INVESTMENT PROPERTY:



The changes
in the carrying value of investment property for the years ended December 31, 2012, 2011 and 2010 respectively, are as follows:



|                                                            |  | 2010             |         |   | 2011 |  |         | 2012 | 
|----------------------------------------------------------- |  | ---------------- | ------- | - | ---- |  | ------- | ---- | 
|                                                            |  | NIS in thousands |        
|At January 1                                                |  |                  | 421,188 |   |      |  | 546,870 |      | 
|Transfer from Payments on account of real estate (b)        |  |                  | -       |   |      |  | -       |      | 
|Transfer to and from property and equipment (c)             |  |                  | (3,000  | ) |      |  | -       |      | 
|Transfer to assets held for sale (d)                        |  |                  | -       |   |      |  | (3,610  | )    | 
|Additions (e)                                               |  |                  | 38,793  |   |      |  | 41,520  |      | 
|Disposals (f)                                               |  |                  | -       |   |      |  | (50,600 | )    | 
|Acquisition of subsidiary consolidated for the   first time |  |                  | 56,972  |   |      |  | -       |      | 
|Changes in fair value of investment property, net (g)       |  |                  | 32,917  |   |      |  | 41,913  |      | 
|At December 31                                              |  |                  | 546,870 |   |      |  | 576,093 |      | 



| | a) | All the Company's investment properties are located in
Israel.
| | -- | --------------------------------------------------------------



| | b) | Represents an amount of NIS 117
                                                                million invested in prior periods and classified from Payments
                                                                on account of real estate (see note 33d).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) | Three assets with fair value of
                                                                NIS 65 million which were used by the Company's Supermarkets segment
                                                                and during 2012 were leased to third parties. The appreciation
                                                                at the transfer in the amount of NIS 13 million was charged to
                                                                revaluation reserve directly to equity. An additional asset was
                                                                leased during 2012 to the supermarkets segment in the amount of
                                                                NIS 7 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d) | These Two assets were realized
                                                                subsequent to December 31, 2012, for more information see note
                                                                36.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | The additions in 2012, totaling
                                                                NIS 222.7 million, include an amount of approximately NIS 149
                                                                million in the wholesale market in Tel Aviv (see note 33d and
                                                                10) an amount of NIS 19 million in Hadar mall (see note 33.f)
                                                                and an amount of NIS 33 million in comverse (see note 33e). The
                                                                additions in 2011, totaling NIS 41.5 million, include an amount
                                                                of approximately NIS 38 million in Kiryat Hasharon, Netanya. The
                                                                additions in 2010, totaling NIS 38.7 million, include lands in
                                                                areas used for commercial development.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f) | On August 9, 2012 BSRE through
                                                                a proportionately held company signed an agreement to realize
                                                                an asset for an amount of NIS 40 million not including transaction
                                                                costs (BSRE's part NIS 19.5 million). On October 24, 2012 the
                                                                terms of the transaction were complete and the rights in the asset
                                                                were transferred to third party. In 2011 BSRE and Harel Insurance
                                                                Company Ltd. (hereafter – Harel) signed an agreement whereby
                                                                Harel acquired half of the BSRE's rights in an investment property
                                                                located in Kiryat Hasharon-Netanya in consideration for NIS 50.6
                                                                million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g) | Including NIS 87.6 million from the valuation of the mall under development in the wholesale market complex in Tel Aviv which
mainly resulted from approval of additional commercial areas in the mall.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h) | For details regarding liens and guarantees
                                                                see note 34.
| | -- | -----------------------------------------------------------------------------------------------------------------------



F-59







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 8 – INVESTMENT PROPERTY(continued):



| | i) | Association in Israel – based
                                                                on the current prices in an active market for similar property,
                                                                locations and conditions, and based on the discounted cash flows
                                                                that are expected to arise from the assets. The range of discount
                                                                rates used by the appraiser are 7.75% - 12% per annum (mainly
                                                                7.75% - 8.25%) (2011 mainly 7.75% - 8.25%)
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | j) | Rental revenue that has been recognized
                                                                in the statements of income within revenues:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------



|              |  | Year ended December 31 |       
|------------- |  | ---------------------- | ------
|              |  | 2010                   |       
|              |  | NIS in thousands       |       
|Rental income |  |                        | 27,012



| | k) | Break down of investment property
                                                                at December 31, 2012 and 2011, by lease rights and ownership of
                                                                land:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                             |  | December 31,     |        
|---------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                             |  | 2011             |        
|                                                                             |  | NIS in thousands |        
|Under ownership                                                              |  |                  | 242,763
|Finance lease from the Israel Lands Administration for a period of 999 years |  |                  | 7,200  
|Total                                                                        |  |                  | 249,963
|Finance lease from the Israel Lands Administration are as follows:           |  |                  |        
|Leases for periods of under 10 years                                         |  |                  | 785    
|Leases for periods between 10-25 years                                       |  |                  | 178,429
|Leases for periods of more than 25 years                                     |  |                  | 146,916
|                                                                             |  |                  | 326,130
|                                                                             |  |                  | 576,093



l) Capitalized
borrowing costs:



The amount of borrowing costs
capitalized during the years ended December 31, 2012, 2011 and 2010 was NIS 17.4 million, NIS 5 million and NIS 2.9 million, respectively.
The rate used to determine the amount of borrowing costs eligible for capitalization was 5.3% in 2012 and 5.2% in 2011 (linked
to the Israeli CPI).



F-60







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 – INTANGIBLE ASSETS:



The composition
of intangible assets and the accumulated amortization thereon, grouped by major classifications, and changes therein in 2012,
2011 and 2010, are as follows:



|                                                          |  |                  |         |   |          |  |          | Brand    |  |  |               |   |  |            |         |   |       | 
|--------------------------------------------------------- |  | ---------------- | ------- | - | -------- |  | -------- | -------- |  |  | ------------- | - |  | ---------- | ------- | - | ----- | 
|                                                          |  |                  |         |   |          |  |          | name and |  |  |               |   |  | Evacuation |         |   |       | 
|                                                          |  |                  |         |   |          |  |          | trade    |  |  | Customer      |   |  | Fees and   |         |   |       | 
|                                                          |  | Goodwill         |         |   | Software |  |          | marks    |  |  | relationships |   |  | Other      |         |   | Total | 
|                                                          |  | NIS in thousands |        
|At January 1, 2010                                        |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Cost                                                      |  |                  | 301,265 |   |          |  | 110,146  |          |  |  | 20,852        |   |  |            | 45,623  |   |       | 
|Accumulated amortization and impairment                   |  |                  | -       |   |          |  | (72,522  | )        |  |  | (5,740        | ) |  |            | (6,931  | ) |       | 
|Net carrying amount                                       |  |                  | 301,265 |   |          |  | 37,624   |          |  |  | 15,112        |   |  |            | 38,692  |   |       | 
|                                                          |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Year ended December 31, 2010:                             |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Opening net carrying amount                               |  |                  | 301,265 |   |          |  | 37,624   |          |  |  | 15,112        |   |  |            | 38,692  |   |       | 
|Additions                                                 |  |                  | -       |   |          |  | 26,701   |          |  |  | 150           |   |  |            | -       |   |       | 
|Acquisition of subsidiary consolidated for the first time |  |                  | 653,945 |   |          |  | 4,692    |          |  |  | 144,000       |   |  |            | 102,000 |   |       | 
|Disposals                                                 |  |                  | -       |   |          |  | -        |          |  |  | -             |   |  |            | -       |   |       | 
|Amortization charge                                       |  |                  | -       |   |          |  | (16,643  | )        |  |  | (5,808        | ) |  |            | (3,937  | ) |       | 
|Reversal of impairment (Impairment)                       |  |                  | (4,160  | ) |          |  | -        |          |  |  | -             |   |  |            | -       |   |       | 
|Net carrying amount                                       |  |                  | 951,050 |   |          |  | 52,374   |          |  |  | 153,454       |   |  |            | 136,755 |   |       | 
|                                                          |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|At December 31, 2010:                                     |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Cost                                                      |  |                  | 951,050 |   |          |  | 141,539  |          |  |  | 164,669       |   |  |            | 147,623 |   |       | 
|Accumulated amortization and impairment                   |  |                  | -       |   |          |  | (89,165  | )        |  |  | (11,215       | ) |  |            | (10,868 | ) |       | 
|Net carrying amount                                       |  |                  | 951,050 |   |          |  | 52,374   |          |  |  | 153,454       |   |  |            | 136,755 |   |       | 
|                                                          |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Year ended  December  31, 2011:                           |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Opening net carrying amount                               |  |                  | 951,050 |   |          |  | 52,374   |          |  |  | 153,454       |   |  |            | 136,755 |   |       | 
|Additions                                                 |  |                  | -       |   |          |  | 25,637   |          |  |  | 186           |   |  |            | -       |   |       | 
|Amortization charge                                       |  |                  | -       |   |          |  | (21,781  | )        |  |  | (1,689        | ) |  |            | (18,181 | ) |       | 
|Impairment                                                |  |                  | (1,427  | ) |          |  | -        |          |  |  | -             |   |  |            | -       |   |       | 
|Net carrying amount                                       |  |                  | 949,623 |   |          |  | 56,230   |          |  |  | 151,951       |   |  |            | 118,574 |   |       | 
|At 31 December 2011:                                      |  |                  |         |   |          |  |          |          |  |  |               |   |  |            |         |   |       | 
|Cost                                                      |  |                  | 949,623 |   |          |  | 167,176  |          |  |  | 164,607       |   |  |            | 147,623 |   |       | 
|Accumulated amortization and impairment                   |  |                  | -       |   |          |  | (110,946 | )        |  |  | (12,656       | ) |  |            | (29,049 | ) |       | 
|Net carrying amount                                       |  |                  | 949,623 |   |          |  | 56,230   |          |  |  | 151,951       |   |  |            | 118,574 |   |       | 



F-61







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 – INTANGIBLE ASSETS(continued):



|                                        |  | Goodwill         |         |   | Software |  |          | Brand name and trade marks |  |  | Customer relationships |   |  | Evacuation Fees and others |         |   | Total | 
|--------------------------------------- |  | ---------------- | ------- | - | -------- |  | -------- | -------------------------- |  |  | ---------------------- | - |  | -------------------------- | ------- | - | ----- | 
|                                        |  | NIS in thousands |        
|                                        |  |                  |         |   |          |  |          |                            |  |  |                        |   |  |                            |         |   |       | 
|Year ended December 31, 2012:           |  |                  |         |   |          |  |          |                            |  |  |                        |   |  |                            |         |   |       | 
|Opening net carrying amount             |  |                  | 949,623 |   |          |  | 56,230   |                            |  |  | 151,951                |   |  |                            | 118,574 |   |       | 
|Additions                               |  |                  | -       |   |          |  | 29,407   |                            |  |  | 187                    |   |  |                            | -       |   |       | 
|Disposals                               |  |                  | (1,880  | ) |          |  | (149     | )                          |  |  | -                      |   |  |                            | -       |   |       | 
|Amortization charge                     |  |                  | -       |   |          |  | (24,580  | )                          |  |  | (4,334                 | ) |  |                            | (17,677 | ) |       | 
|Transfer to assets of disposal group    |  |                  | (23,506 | ) |          |  | -        |                            |  |  | -                      |   |  |                            | -       |   |       | 
|Net  carrying amount                    |  |                  | 924,237 |   |          |  | 60,908   |                            |  |  | 147,804                |   |  |                            | 100,897 |   |       | 
|                                        |  |                  |         |   |          |  |          |                            |  |  |                        |   |  |                            |         |   |       | 
|At December 31, 2012:                   |  |                  |         |   |          |  |          |                            |  |  |                        |   |  |                            |         |   |       | 
|Cost                                    |  |                  | 924,237 |   |          |  | 196,263  |                            |  |  | 164,784                |   |  |                            | 147,623 |   |       | 
|Accumulated amortization and Impairment |  |                  | -       |   |          |  | (135,355 | )                          |  |  | (16,980                | ) |  |                            | (46,726 | ) |       | 
|Net carrying amount                     |  |                  | 924,237 |   |          |  | 60,908   |                            |  |  | 147,804                |   |  |                            | 100,897 |   |       | 



| | a. | Amortization is included in the
                                                               statement of income within Selling, general and administrative
                                                               expenses. Impairment losses are presented in other gains or losses.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Impairment tests for goodwill and
                                                               indefinite live assets
| | -- | -----------------------------------------------------------------------------------------------------------------------



Goodwill is allocated to six
identified groups of cash-generating units (CGUs).



The components of goodwill
and indefinite life intangible assets are as follows:



|                                         |  | December 31      |          
|---------------------------------------- |  | ---------------- | ---------
|                                         |  | 2011             |          
|                                         |  | NIS in thousands |          
|Supermarkets                             |  |                  | 160,993  
|Non - Food retail and wholesale:         |  |                  |          
|Houseware                                |  |                  | 111,179  
|Leisure*                                 |  |                  | 23,506   
|Fueling and Commercial sites:            |  |                  |          
|Goodwill – filling and convenience sites |  |                  | 621,945  
|Goodwill – direct marketing              |  |                  | 18,000   
|Goodwill – jet fuel                      |  |                  | 14,000   
|Indefinite life – brand name             |  |                  | 107,000  
|                                         |  |                  | 1,056,623



| | * | Transferred
                                                                                                       to assets of disposal group
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------



F-62







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 9 – INTANGIBLE ASSETS(continued):



The recoverable amount of a
CGU is determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on financial
budgets approved by management and management estimation covering a five-year period. Cash flows beyond the five-year period are
extrapolated using the estimated growth rates stated below.



The key assumptions used for
value in-use calculations are as follows:



|Segment               |  | Supermarkets |      |  | Non - Food retail and wholesale | 
|--------------------- |  | ------------ | ---- |  | ------------------------------- | 
|CGU                   |  | Supermarkets |      |  | Houseware                       | 
|                      |  | %            |     
|December 31, 2012:    |  |              |      |  |                                 | 
|Expected gross margin |  |              | 27.0 |  |                                 | 
|Growth rate (1)       |  |              | 0.25 |  |                                 | 
|Discount rate (2)     |  |              | 9.7  |  |                                 | 
|                      |  |              |      |  |                                 | 
|December 31, 2011:    |  |              |      |  |                                 | 
|Expected gross margin |  |              | 27.7 |  |                                 | 
|Growth rate (1)       |  |              | 1.0  |  |                                 | 
|Discount rate (2)     |  |              | 11.7 |  |                                 | 



|Segment                   |  | Fueling and commercial sites  |     
|------------------------- |  | ----------------------------- | ----
|CGU                       |  | Filling and convenience sites |     
|                          |  | %                             |     
|December 31, 2012:        |  |                               |     
|Expected operating profit |  |                               | 3.6 
|Growth rate (1)           |  |                               | 2   
|Discount rate (2)         |  |                               | 9.4 
|                          |  |                               |     
|December 31, 2011:        |  |                               |     
|Expected operating profit |  |                               | 4   
|Growth rate (1)           |  |                               | 2.2 
|Discount rate (2)         |  |                               | 10.4



| | (1) | Weighted average growth rate
                                                                 used to extrapolate cash flows beyond the budget management estimations
                                                                 covering a five-year period.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Pre-tax discount rate applied
                                                                 to cash flow projections.
| | --- | ------------------------------------------------------------------------------------------------------------------------



These assumptions have been
used for the analysis of each CGU.



F-63







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 – INVESTMENTS IN JOINT
VENTURES



| | a. | Information about principal
                                                                        joint ventures
| | -- | ------------------------------------------------------------------------------------------------------------------



The Company's
share of the results of its principal joint ventures, all of which are unlisted, and its interest held, are as follows:



|Name                           |  | Percentage of ownership and control |   
|------------------------------ |  | ----------------------------------- | --
|                               |  | December 31                         |   
|                               |  | 2011                                |   
|                               |  |                                     |   
|City Mall Tel Aviv Ltd.(1)     |  |                                     | 50
|City Core Tel Aviv Ltd. (2)    |  |                                     | 50
|Tel Aviv Parking lots Ltd. (3) |  |                                     | 50
|Eyal Baribua Ltd.(4)           |  |                                     | 50



In addition
BSRE has joint ventures which operate real estate for internal use and third party use and Dor Alon has certain joint ventures
which operate fuel stations and commercial centers (see appendix to the financial statements).



| | (1) | 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 33d).



| | a) | 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. Regarding the loan agreements used to finance the purchase see note 33d.

As of December 31, 2011, the
Mall Company paid advances on account of purchasing the rights in the land; the Company's share in the advances amounts to NIS
105.5million was presented in the statement of financial position as of that date under the item of advances on account of real
estate.



| | b) | Commitment with a performing contractor
| | -- | ---------------------------------------



On July 3, 2012, the purchasers
signed an agreement with a performing contractor (the contractor) to perform all skeleton work of the parking lots, the commercial
part, public structures and other finishing work. The purchasers shall pay the contractor for the work an estimated amount of
NIS 286 million (The Company's portion amounts to NIS 143 million). The contractor committed to complete the work in 19 months
from July 4, 2012 and provide the purchasers with guarantees. The agreement with the contractor included agreed compensation in
the event of material breach by the contractor and bonus in the event of earlier than the schedules or penalties in the event
deviate from the schedules. Regarding guarantees and charges see note 34 and regarding financing agreements, see note 33.



F-64







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 – INVESTMENTS IN JOINT
VENTURES(continued):



| | (2) | City Core Tel Aviv Ltd
| | --- | ----------------------



The proportionate
consolidation of City Core Tel Aviv Ltd (the residential company) was discontinued following a decrease in holding rate to 49.5%
(see note 11(2)).



In 2012 BSRE
recorded in the statements of income, under other income (expenses), a gain from losing joint control in the residential company
in the amount of NIS 19.6 million.



Net outflow from realization
of jointly controlled company:



|                                                                                        |  | NIS in thousands |         
|--------------------------------------------------------------------------------------- |  | ---------------- | --------
|Working capital                                                                         |  |                  | 49,978  
|Restricted deposit                                                                      |  |                  | (175,884
|Investment in associate                                                                 |  |                  | 74,029  
|Loan to associate                                                                       |  |                  | 17,309  
|Investment property                                                                     |  |                  | (12,097 
|Real estate inventories                                                                 |  |                  | (333,712
|Deferred taxes                                                                          |  |                  | (4,663  
|Advance deposits from customers                                                         |  |                  | 167,746 
|Long-term loans from banks                                                              |  |                  | 240,001 
|Gain from decrease in holding rate in jointly consolidated company  upon losing control |  |                  | (19,622 
|Net outflow from realization of jointly controlled company                              |  |                  | 3,085   



| | (3) | Tel Aviv Parking lots Ltd.
| | --- | --------------------------



Tel Aviv
Parking Lots Ltd (the Parking Lot Company) a jointly controlled entity by BSRE with Gindi. The Parking Lot Company has the right
from Tel Aviv municipality to build, operate and transfer (B.O.T) for 23 years the Givon parking lot in Tel Aviv consisting about
1,000 parking spaces adjacent to the wholesale market project in Tel Aviv and commits to build and develop the circle parking
planned to be erected on the complex in 30 months from delivering the right use the real estate.

The construction
cost is estimated in NIS 144 million (BSRE's share is NIS 72 million).



Regarding
the agreement of the Parking Lot Company to establish and finance the parking lot, see note 33c.



| | (4) | Eyal Baribua Ltd.
| | --- | -----------------



On December
27, 2007, the jointly controlled entity Eyal Baribua Ltd. (Eyal Baribua) which leases from the Israel Land Administration 41 dunams
under capitalized lease, was established.



In July
2011 Eyal Baribua entered into a lease agreement with Mega Retail. Pursuant to the lease agreement, Eyal Baribua shall construct
for Mega Retail a logistic center to be leased to Mega Retail for 15 years after the completion of its construction, where Mega
Retail has the option to extend the lease term for additional periods of three years each time provided that all lease periods
shall not exceed 24 years. The lease fees were determined at 8.7% - 9% of the total investment amount of the joint corporation
in the logistic center.



F-65







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 10 – INVESTMENTS IN JOINT
VENTURES(continued):



The construction
cost is estimated in NIS 120 million (BSRE's share is NIS 60 million).



As of the
date of the approval of the financial statements, a permit was received for excavation work to construct the logistic center and
works have begun.



The additions
in the reported period include investment in the construction works of the logistic center in the amount of approximately NIS
17 million (the Company's share).



Regarding
guarantees and charges see Note 34 and regarding financing agreements, see Note 33.



| | b. | The following amounts
                                                                        represent the Company's 50% share of the assets and liabilities,
                                                                        and the results of these companies.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                        |  | December 31      |        
|----------------------- |  | ---------------- | -------
|                        |  | 2011             |        
|                        |  | NIS in thousands |        
|Assets:                 |  |                  |        
|Current assets          |  |                  | 108,339
|Non-current assets      |  |                  | 528,281
|                        |  |                  | 636,620
|Liabilities:            |  |                  |        
|Current liabilities     |  |                  | 116,398
|Non-current liabilities |  |                  | 135,876
|                        |  |                  | 252,274
|Net Assets              |  |                  | 384,346



|                               |  | Year ended December 31 |        
|------------------------------ |  | ---------------------- | -------
|                               |  | 2010                   |        
|                               |  | NIS in thousands       |        
|                               |  |                        |        
|Revenues                       |  |                        | 50,360 
|Changes in fair value          |  |                        | 1,598  
|Expenses                       |  |                        | 67,902 
|Net income (loss) for the year |  |                        | (14,724



F-66







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 – INVESTMENTS IN ASSOCIATES



The Company's share of the
results of its principal associates, all of which are unlisted, and its interest held, are as follows:



|Name                       |  | % interest held |   
|-------------------------- |  | --------------- | --
|                           |  | December 31     |   
|                           |  | 2011            |   
|Diners club Israel Ltd (1) |  |                 | 49
|City Core Tel Aviv Ltd (2) |  |                 | - 



| | (1) | Diners club Israel
                                                                         Ltd
| | --- | -----------------------------------------------------------------------------------------------



On December 26, 2006, an agreement
(hereinafter – the original agreement) was signed between the Company, and Cal - Israel Credit Cards Ltd. (hereinafte –
CAL) and Diners Club Israel Ltd (hereinafter - Diners Israel), a subsidiary of CAL.



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 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.



According to the said
agreement, the Company jointly purchased from CAL 49% of the issued share capital of Diners in consideration for a total
amount of approximately NIS 21.3 million that was financed through a non-recourse loan provided by CAL to the Company. Both
parties had the ability to cancel the agreement in certain circumstances. The Company was entitled to receive income arising
from the activity of the loyalty program and to participate in the profit from activities of Diners (which is not part of the
loyalty program) upon meeting some milestones as specified in the original agreement.



The Company's investment in
Diners was accounted for as an option on Diners' shares.  The fair value of the call option was determined based on the binomial
valuation model which took into account Diners' expected profits, earnings multiples of companies in Israel in this field of operations
and costs of recruiting and maintaining credit card users with the addition of the probability of the multiple scenarios of achieving
the milestones.



On May 25, 2011, the Company
agreed to an amendment to the original agreement (hereinafter – "the amendment").



The main features of the amendment
were the elimination of the right of CAL to annul the agreement and the transfer to Diners part of the operations of CAL with
regard to the grant of "off-bank loans" to Diners' credit card holders. The amendment increased the value of the option.
On June 30, 2011 the fair value of the option was estimated to be NIS 156 million.



F-67







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 – INVESTMENTS IN ASSOCIATES(continued):



In July 2011 the non- recourse
loan, in the amount of NIS 36.4 million, was repaid. Upon repayment of the non-recourse loan Diners became the Company's associated
company and thus it is accounted for by the equity method.



Additionally, the amendment
set the terms as to the business relationship between the parties, including a cancellation mechanism in the event the loyalty
plan was cancelled by the Company.



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 will be amortized over 4.5 to 6.5 years and NIS 104 million to goodwill
which is not amortized (see also note 2b(4)).



The financial statements of
Diners are prepared in accordance with International Financial Reporting Standards and with the directives and guidelines of the
Supervisor of Banks in Israel. The Company includes its share in the profits of Diners in accordance with International Financial
Reporting Standards as issued by the International Accounting Standards Board.



Financial position statement
data of Diners Club Israel (100%):



|                             |  | December 31      |        
|---------------------------- |  | ---------------- | -------
|                             |  | 2011             |        
|                             |  | NIS in thousands |        
|                             |  |                  |        
|Current assets               |  |                  | 828,000
|Non - current assets         |  |                  | 12,000 
|Total assets                 |  |                  | 840,000
|                             |  |                  |        
|Current liabilities          |  |                  | 548,000
|Non- current liabilities     |  |                  | 132,000
|Total liabilities            |  |                  | 680,000
|Total equity                 |  |                  | 160,000
|Total liabilities and equity |  |                  | 840,000



Operational
data of Diners Club Israel (100%):

|                    |  | For the six months ended (*) |        |  | For the year ended | 
|------------------- |  | ---------------------------- | ------ |  | ------------------ | 
|                    |  | December 31                  |       
|                    |  | 2011                         |        |  | 2012               | 
|                    |  | NIS in thousands             |       
|                    |  |                              |        |  |                    | 
|Revenues            |  |                              | 71,000 |  |                    | 
|Operating profit    |  |                              | 34,000 |  |                    | 
|Profit for the year |  |                              | 25,000 |  |                    | 



(*) The results of
Diners Club Israel were included as of July 1, 2011.



F-68







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 – INVESTMENTS IN ASSOCIATES(continued):



| | (2) | City Core Tel Aviv
                                                                         Ltd
| | --- | -----------------------------------------------------------------------------------------------



City
Core Tel Aviv Ltd. (the residential company) was established as a jointly controlled entity with Gindi Group under the construction
project of the wholesale market and the Memorandum Of Understandings dated April 15, 2010 (the MOU) that regulates the relations
between the Company and Gindi Investments 1 Ltd. (Gindi Investments) and another corporation controlled by Moshe and Igal Gindi
(the additional corporation) (Gindi) in all that concerns the wholesale market complex in Tel Aviv. On June 29, 2012, the Company
and Gindi (and by their controlled subsidiaries) entered into an agreement constituting an appendix (the appendix) to the MOU.
Upon the completion of the transaction, the Company's holding rate in the residential company decreased from 50% to 49.5%. Effective
with the date of completing the transaction, the Company ceased to consolidate the financial statements of the residential company
by way of proportionate consolidation, the investment in which is presented according to equity method.



The
residential company is engaged in the establishment, marketing and sale of 722 apartments in the wholesale market complex in accordance
with a plan approved by Tel Aviv municipality that includes also the construction and lease of an additional 54 residential units
in the project and planning and construction of certain public buildings in return for a payment (as set forth in the MOU, see
note 33d) including the development of premises and constructing parking spaces for the municipality at its expense. As of the
date of the statement of financial position, the Company received a permit to construct 652 apartments in the project (regarding
70 apartments, a permit was not yet received) and a permit was received to construct basements when the excavation and reinforcement
works are about to be completed and skeleton works of the lower basement floor are carried out. It is clarified that upon receiving
the building permit, as above, the purchasers' right to cancel the sale agreements with respect to those apartments has expired.



In accordance
with the appendix to the MOU dated June 29, 2012, the residential company allocated to Gindi one additional share of NIS 1 par
value for NIS 300 thousand. In addition, the appendix contained provisions regarding the protection of the Company's minority
interests in the residential company. In view of the decline of the company's holding rate in the residential company to 49.5%
and as result of the loss of the joint control, as above, effective with the date of completing the transaction, the Company presented
the investment in the residential company according to equity method (see note 10a(2)).



This
difference is attributed to the balance of inventory of buildings under construction. The Company did not recognize deferred tax
liabilities in respect of the investment in the associate since the Company does not intend to realize the investment by way of
selling the shares in the foreseeable future.



Regarding
guarantees granted to banks in respect of the residential company, see note 34.



As of
the date of the approval of the financial statements, the residential company entered into 619 sale agreements with apartment
purchasers amounting to NIS 1,450 million (including VAT).



The
residential company is to recognize the revenue from the sale of apartments when the apartments are substantially constructed,
accepted by the customer and the full amount resulting from the sale agreement is paid by the buyer.



F-69







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 11 – INVESTMENTS IN ASSOCIATES(continued):



| | (3) | Composition
| | --- | -----------



|                                                             |  | December 31      |        
|------------------------------------------------------------ |  | ---------------- | -------
|                                                             |  | 2011             |        
|                                                             |  | NIS in thousands |        
|                                                             |  |                  |        
|Shares:                                                      |  |                  |        
|Cost of shares                                               |  |                  | 192,902
|Share in undistributed profits accumulated since acquisition |  |                  | 7,173  
|                                                             |  |                  | 200,075
|Perpetual capital notes (a)                                  |  |                  | 1,610  
|Long-term loans (b), (c)                                     |  |                  | 968    
|                                                             |  |                  | 202,653



| | (a) | Perpetual capital notes are linked
                                                                 to the Israeli CPI and bear interest at an annual rate of 5%.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The loan in amount of NIS 129,790
                                                                 thousands as of December 31, 2012 bears interest at minimum rate
                                                                 according to the Israeli Tax Regulations. The repayment date
                                                                 of the loan has not yet been determined.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | The loans in the amount of NIS 756
                                                                 thousands as of December 31, 2012 are linked to the Israeli CPI
                                                                 and bear interest at an annual rate of 4.5%. The repayment date
                                                                 of the loans has not yet been determined.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Changes in the investment in
                                                                 associated companies in the years ending December 31, 2012, 2011
                                                                 and 2010:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                               |  | Year ended December 31 |      
|---------------------------------------------------------------------------------------------- |  | ---------------------- | -----
|                                                                                               |  | 2010                   |      
|                                                                                               |  | NIS in thousands       |      
|                                                                                               |  |                        |      
|Balance at the beginning of the year                                                           |  |                        | 4,878
|Changes during the year:                                                                       |  |                        |      
|Addition resulting from decrease in holding rate in proportionality held company (see a above) |  |                        | -    
|Addition resulting from the acquisition of subsidiary consolidated for the first time          |  |                        | 1,652
|Investment in Diners Israel (see (1) above)                                                    |  |                        | -    
|Grant of long term loans                                                                       |  |                        | -    
|Linkage differences and interest receivable                                                    |  |                        | -    
|Share in profits (losses), net                                                                 |  |                        | (518 
|Amortization of excess cost                                                                    |  |                        | -    
|Dividend received                                                                              |  |                        | -    
|Balance at the end of the year                                                                 |  |                        | 6,012



F-70







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 – INVESTMENT IN SECURITIES



| | a. | Comprised as follows:
| | -- | ---------------------



|                                                              |  | December 31      |        
|------------------------------------------------------------- |  | ---------------- | -------
|                                                              |  | 2011             |        
|                                                              |  | NIS in thousands |        
|                                                              |  |                  |        
|Available for sale financial assets – current                 |  |                  | 200,695
|Financial assets at fair value through profit or loss-current |  |                  | 99,358 
|Available for sale financial assets – non-current             |  |                  | 33,159 
|                                                              |  |                  | 333,212



| | b. | Composition per type of security:
| | -- | ---------------------------------



|                  |  | December 31      |        
|----------------- |  | ---------------- | -------
|                  |  | 2011             |        
|                  |  | NIS in thousands |        
|                  |  |                  |        
|Debt securities   |  |                  | 261,858
|Equity securities |  |                  | 71,354 
|                  |  |                  | 333,212



| | c. | Available for sale financial assets
| | -- | -----------------------------------



|                                                          |  | 2010             |          |   | 2011 |  |          | 2012 | 
|--------------------------------------------------------- |  | ---------------- | -------- | - | ---- |  | -------- | ---- | 
|                                                          |  | NIS in thousands |         
|                                                          |  |                  |          |   |      |  |          |      | 
|At January 1                                              |  |                  | 183,179  |   |      |  | 217,198  |      | 
|Acquisition of subsidiary consolidated for the first time |  |                  | 32,863   |   |      |  | -        |      | 
|Purchases                                                 |  |                  | 164,013  |   |      |  | 122,646  |      | 
|Proceeds                                                  |  |                  | (166,727 | ) |      |  | (106,925 | )    | 
|Transfers to or from other comprehensive income           |  |                  | (9,732   | ) |      |  | 1,090    |      | 
|Transferred to statement of income                        |  |                  | 13,602   |   |      |  | (155     | )    | 
|At December 31                                            |  |                  | 217,198  |   |      |  | 233,854  |      | 



In 2010, 2011 and 2012 the Company
removed profits from equity into the income statement in the amount of NIS 11,553 thousand, NIS 1,480 thousands and NIS 2,906
thousands, respectively.



F-71







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 12 – INVESTMENT IN SECURITIES(continued):



| | d. | Financial assets at fair value through profit or loss
| | -- | -----------------------------------------------------



|                                |  | December 31      |       
|------------------------------- |  | ---------------- | ------
|                                |  | 2011             |       
|                                |  | NIS in thousands |       
|                                |  |                  |       
|Debt securities                 |  |                  | 66,586
|Investment in equity securities |  |                  | 32,772
|Total                           |  |                  | 99,358



NOTE 13 – DERIVATIVE FINANCIAL
INSTRUMENTS:



|                                                                              |  |                                     |  | December
    31      |      
|----------------------------------------------------------------------------- |  | ----------------------------------- |  | -------------------- | -----
|                                                                              |  |                                     |  | 2011                 |      
|Derivative
    financial                                                      |  | Statement
    of financial position |  | NIS
    in thousands |      
|instruments                                                                   |  | Item                                |  | Assets               |      
|Forward contracts over the Israeli CPI (a)                                    |  | Derivative financial instruments    |  |                      | -    
|Foreign exchange contracts (b)                                                |  | Derivative financial instruments    |  |                      | 2,543
|Embedded derivatives:                                                         |  |                                     |  |                      |      
|Rent agreements                                                               |  | Derivative financial instruments    |  |                      | 896  
|Conversion component embedded in the convertible
    debentures (see note 21) |  | Convertible debentures              |  |                      | -    
|Total                                                                         |  |                                     |  |                      | 3,439



| | (a) | The notional principal amounts
                                                                   of the outstanding forward contracts over the Israeli CPI at
                                                                   December 31, 2012 were approximately NIS 500 million.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | The notional amount of open
                                                                   forward foreign exchange contracts (up to 3 months, mostly
                                                                   2 months) as of December 31, 2011 and 2012 are $102 million
                                                                   and $95.6 million respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 14 – TRADE RECEIVABLES,
INVENTORIES AND OTHER RECEIVABLES:



a.  Trade receivables



|                                                    |  | December 31      |          
|--------------------------------------------------- |  | ---------------- | ---------
|                                                    |  | 2011             |          
|                                                    |  | NIS in thousands |          
|Trade receivables                                   |  |                  | 1,632,727
|Less: provision for impairment of trade receivables |  |                  | (56,577  
|                                                    |  |                  | 1,576,150



As of December 31, 2012, trade
receivables of NIS 30,766 thousands (2011: NIS 30,273 thousands) were past due but not impaired. These relate to a number of independent
customers for whom there is no recent history of default. Approximately 50% of these past-due receivables are overdue for up to
3 months.



F-72







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14 – TRADE RECEIVABLES,
INVENTORIES AND OTHER RECEIVABLES (continued):



As of December 31, 2012, trade
receivables of NIS 126,091 thousands (2011: NIS 134,116 thousands) were impaired and provided for. The amount of the provision
was NIS 53,643 thousands as of December 31, 2012 (2011: NIS 56,577 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      |       
|-------------------------------------------------------------------- |  | ---------------- | ------
|                                                                     |  | 2011             |       
|                                                                     |  | NIS in thousands |       
|At January 1                                                         |  |                  | 40,753
|Provisions made during the period                                    |  |                  | 19,744
|Unused amounts reversed                                              |  |                  | (1,441
|Receivable written off during the year as uncollectible              |  |                  | (2,478
|Transferred to assets of disposal groups classified as held for sale |  |                  | -     
|At December 31                                                       |  |                  | 56,577



The creation and release of
provisions for impaired receivables has been included in the statement of income 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.



b.   Other
receivables



|                                            |  | December 31      |        
|------------------------------------------- |  | ---------------- | -------
|                                            |  | 2011             |        
|                                            |  | NIS in thousands |        
|Prepayments                                 |  |                  | 14,776 
|Related parties , see note 35               |  |                  | 168,642
|Government authorities                      |  |                  | 8,901  
|Advances to suppliers and others            |  |                  | 7,476  
|Current maturities of loans receivable      |  |                  | 8,473  
|Receivables in respect of gift certificates |  |                  | 30,159 
|Other                                       |  |                  | 53,363 
|                                            |  |                  | 291,790



The fair value of other receivables
is usually identical or close to their carrying value.



F-73







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 14 – TRADE RECEIVABLES,
INVENTORIES AND OTHER RECEIVABLES(continued):



c.    Inventories



| | 1) | Inventories presented in current assets:
| | -- | ----------------------------------------



|                                       |  | December 31      |        
|-------------------------------------- |  | ---------------- | -------
|                                       |  | 2011             |        
|                                       |  | NIS in thousands |        
|Fuel and oil products                  |  |                  | 105,338
|Consumer (including non-food) products |  |                  | 571,252
|                                       |  |                  | 676,590



| | 2) | 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 related party
(see note 35a.b); BSRE has also signed a development agreement with the 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. BSRE appealed this decision and on January 7, 2013, the appellate court
determined that BSRE is entitled to promote the real estate development according to the detailed plan despite the county's decision.
The opponents to the detailed plan applied to the supreme court of Washington State seeking an additional hearing on the ruling
of the appellate court. As of the date of this report, a ruling was not yet rendered on the issue. At the same time, negotiations
are held with opponents aiming to reach an understanding out of court. As of the date of this report, BSRE is unable to estimate
the time required to finalize the detailed planning procedures and receive the approval of the competent authorities to realize
the construction rights pursuant to the detailed plan.



Through December
31, 2012, BSRE invested $5.6 million (NIS 20.9 million) in the development of property rights and capitalized borrowing costs
of $3.2 million (NIS 11.9 Million) (in 2011: $6.7 million and in 2010 $4.1 million).

The property
serves primarily as a plant for storage and distribution of fuel and oils by the 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 related party and on its account; the 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 participate in the
consideration net of costs as defined in the agreement, see note 35a.b.



F-74







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
15 – CASH, CASH EQUIVALENTS AND DEPOSITS:



a.  Cash and cash equivalents



|                                                               |  | December 31      |       
|-------------------------------------------------------------- |  | ---------------- | ------
|                                                               |  | 2011             |       
|                                                               |  | NIS in thousands |       
|Cash at bank and on hand                                       |  |                  | 50,730
|Bank deposits with original maturities of three months or less |  |                  | 25,721
|                                                               |  |                  |       
|                                                               |  |                  | 76,451



Cash, cash equivalents and
bank overdrafts include the following for the purposes of the statement of cash flows:



|                                                      |  | December 31      |       
|----------------------------------------------------- |  | ---------------- | ------
|                                                      |  | 2011             |       
|                                                      |  | NIS in thousands |       
|Cash and cash equivalents                             |  |                  | 76,451
|Cash at banks attributable to discontinued operations |  |                  | -     
|                                                      |  |                  | 76,451
|Bank overdrafts, see note 21                          |  |                  | (2,701
|                                                      |  |                  |       
|                                                      |  |                  | 73,750



b.  Short-term deposits



|                                               |  |                  |        
|---------------------------------------------- |  | ---------------- | -------
|                                               |  | December 31      |        
|                                               |  | 2011             |        
|                                               |  | NIS in thousands |        
|Deposits at suppliers (1)                      |  |                  | 77,329 
|Short term deposits relating to debentures (2) |  |                  | 16,073 
|Bank deposits (3)                              |  |                  | 10,540 
|                                               |  |                  | 103,942



| | (1) | Linked to the U.S. Dollar, bearing
                                                                interest of LIBOR plus 2%. Deposits used as a security for suppliers.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Deposit used as security for debentures
                                                                – see also note 21.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (3) | Bearing interest of 1.9%.
| | --- | -------------------------



F-75







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 16 – LOANS RECEIVABLE



|                                          |  | December 31      |        
|----------------------------------------- |  | ---------------- | -------
|                                          |  | 2011             |        
|                                          |  | NIS in thousands |        
|Loans to jointly controlled companies (1) |  |                  | 55,908 
|Loans to the Fuel Administration (2)      |  |                  | 31,091 
|Loans to others (3) (4)                   |  |                  | 104,128
|                                          |  |                  | 191,127
|Less current maturities                   |  |                  | 8,473  
|                                          |  |                  | 182,654



| | (1) | Including NIS 55,415 thousand relating
                                                                to the Wholesale Market project bearing interest of 5.26% and
                                                                linked to the Israeli CPI and the repayment date has not yet been
                                                                determined – see also note 11.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | The loan to the Fuel Administration
                                                                  is in accordance with the Control of Commodities and Service
                                                                  Order (Settlements in the Fuel Economy), 1988.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) | Mainly owners of fueling stations
                                                                  to which the Company supplies fuel. As at December 31, 2012
                                                                  and 2011 the amount includes a single debtor balance of NIS
                                                                  18.1 million and 19.3 million respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (4) | As of December 31, 2012 and 2011
                                                                  includes a loan to a related party of NIS 38.8 million and NIS
                                                                  38.3 million, respectively. The loan is linked to the Israeli
                                                                  CPI, bears interest of 5% and matures in January 2015.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The fair value of loans receivables
is usually identical or close to their carrying value.



The long term loans are receivable
in the years subsequent to the statement of financial position date as follows:



|                             |  | December 31      |        
|---------------------------- |  | ---------------- | -------
|                             |  | 2011             |        
|                             |  | NIS in thousands |        
|Second year                  |  |                  | 5,246  
|Third year                   |  |                  | 3,252  
|Fourth year                  |  |                  | 40,130 
|Fifth year                   |  |                  | 2,639  
|Sixth year and afterwards    |  |                  | 51,396 
|Without stated maturity date |  |                  | 79,991 
|                             |  |                  | 182,654



F-76







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 17 – OTHER LONG TERM RECEIVABLES



|                                                  |  | December 31      |        
|------------------------------------------------- |  | ---------------- | -------
|                                                  |  | 2011             |        
|                                                  |  | NIS in thousands |        
|Restricted deposits(1)                            |  |                  | 104,781
|Conditional grants to owners of fuel stations (2) |  |                  | 11,150 
|Prepaid rent (3)                                  |  |                  | 10,518 
|Others                                            |  |                  | 15,882 
|                                                  |  |                  | 142,331



| | (1) | In 2011 advanced payments from
                                                                 purchasers of apartments were deposited in a bank in an account
                                                                 of the residence company. As of December 31, 2012 the residence
                                                                 company is accounted for by the equity method and classified
                                                                 to Investment in associates (see note 11).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Includes mainly conditional grants
                                                                 the Company paid to the owners of land in connection with the
                                                                 construction of filling stations. 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.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company examines the land owners'
ability to meet their liabilities at every statement of financial position date.



Based on past experience, and in
accordance with management assessments, the owners of the filling stations are expected to meet their liabilities. These grants
are charged to the statement of income in selling, general and administrative expenses over the term of the agreements.



| | (3) | The prepaid rent in respect of
                                                                 the fueling and commercial sites is amortized over the term of
                                                                 the lease. As of December 31, 2012 the remaining term of the
                                                                 leases is between 4 and 14 years.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 18 – EQUITY



|                                                             |  | Number of     |           
|------------------------------------------------------------ |  | ------------- | ----------
|                                                             |  | Shares issued |           
|At January 1, 2010                                           |  |               | 43,717,058
|Change during 2010:                                          |  |               |           
|Issue of shares as part of business combination              |  |               | 20,327,710
|Exercise of options                                          |  |               | 759,051   
|Issuance of shares upon conversion ofconvertible debentures  |  |               | 1,187,060 
|At December 31, 2010                                         |  |               | 65,990,879
|Change during 2011:                                          |  |               |           
|Exercise of options                                          |  |               | 143,582   
|Issuance of shares upon conversion of convertible debentures |  |               | 26,399    
|At December 31, 2011                                         |  |               | 66,161,860
|                                                             |  |               |           
|At December 31, 2012                                         |  |               | 66,161,860



The total authorized number
of ordinary shares as of December 31, 2012 and 2011 is 100 million shares with a par value of NIS 1 per share. All issued shares
are fully paid.



F-77







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 18 – EQUITY (continued):



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 3% of the outstanding Ordinary Shares of the Company as of December 31, 2012.
As of December 31, 2012 the shares are quoted at $2.33 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, 2012 the shares are
quoted at NIS 8.87 per ordinary share.



During 2011 and 2010, convertible
debentures of the Company with par value of NIS 167 thousands and 11,268 thousands were converted into 27,399 and 1,187,060 ordinary
shares.



On October 3, 2010 in consideration
for the acquisition of Dor Alon the Company issued 20,327,710 ordinary shares.



During the year ended December
31, 2011 and 2010 the Company purchased 117,545 treasury shares at a total cost of NIS 4 million and 89,888 treasury shares at
a total cost of NIS 4.3 million respectively, relating to shares acquired by executives upon their exercise of vested options
granted to them under the company's 2008 share option plan.



The total number of treasury
shares held by the Company at December 31, 2012 and 2011 is 207,433 shares.



Share options plan



On January 21, 2008, the
Company's Board of Directors resolved to adopt a share options plan (hereinafter - "the plan") for executives and employees
of the Company. The total number of shares reserved for issuance under the plan is 5 million shares, (including options issuable
to the former Company's President and Chief Executive Officer). All exercises of options under the plan are on a cashless basis.
Each option can be exercised to purchase one ordinary share of NIS 1 par value of the Company. Immediately upon allotment, the
ordinary shares issued upon exercise of the options will have the same rights as other ordinary shares of the Company.



Under the plan, employees and/or
executives who exercise the options will be allotted only shares that reflect the benefit component embodied in the options, as
computed at the date of exercise, i.e., the difference between the exercise price of each option and the quoted price of a NIS
1 par value share at the date of exercise.



The employees and executives
are entitled to exercise the options at the end of the following vesting periods: 66.7% at the end of two years from the date
of grant and the remaining 33.3% at the end of three years from the date of grant. The options granted to employees and executives
can be exercised in the period of 30 days and 6 months from the end of the vesting period, respectively. Any options not exercised
by this date will expire.



F-78







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 18 – EQUITY (continued):



Following are details of options
granted under the plan during the reported periods:



|Grant date               |  | Options granted |           |  | Exercise price at grant date (NIS) |  |       | Share price at grant date (NIS) |  |  | Average fair value (NIS)* | 
|------------------------ |  | --------------- | --------- |  | ---------------------------------- |  | ----- | ------------------------------- |  |  | ------------------------- | 
|March 2008               |  |                 | 2,452,500 |  |                                    |  | 36.15 |                                 |  |  | 36.15                     | 
|March 2008 (executives)  |  |                 | 2,200,000 |  |                                    |  | 39.06 |                                 |  |  | 36.15                     | 
|May 2008 (executives)    |  |                 | 140,000   |  |                                    |  | 39.06 |                                 |  |  | 46.0                      | 
|August 2008              |  |                 | 135,000   |  |                                    |  | 36.15 |                                 |  |  | 36.23                     | 
|August 2008 (executives) |  |                 | 100,000   |  |                                    |  | 39.06 |                                 |  |  | 36.23                     | 
|March 2009               |  |                 | 63,000    |  |                                    |  | 34.42 |                                 |  |  | 23.74                     | 
|July 2009                |  |                 | 92,000    |  |                                    |  | 34.42 |                                 |  |  | 32.53                     | 
|August 2009 (executives) |  |                 | 80,000    |  |                                    |  | 37.33 |                                 |  |  | 33.85                     | 
|March 2010 (executives)  |  |                 | 20,000    |  |                                    |  | 47.70 |                                 |  |  | 45.35                     | 
|March 2010               |  |                 | 274,000   |  |                                    |  | 47.70 |                                 |  |  | 45.35                     | 
|March 2011 (executives)  |  |                 | 290,000   |  |                                    |  | 36.51 |                                 |  |  | 31.64                     | 



| | * | The fair value of the options was computed using the Black
& Scholes option-pricing model using the following assumptions:
| | - | --------------------------------------------------------------------------------------------------------------------------



|Grant date  |  | Expected dividend yield (%) |     |  | Expected volatility (%) |  |    | Risk free interest rate (%) |  |  | Expected term until exercise (years)
|----------- |  | --------------------------- | --- |  | ----------------------- |  | -- | --------------------------- |  |  | ------------------------------------
|March 2008  |  |                             | 6.4 |  |                         |  | 28 |                             |  |  | 4.5                                 
|March 2008  |  |                             | 6.4 |  |                         |  | 28 |                             |  |  | 4.5                                 
|May 2008    |  |                             | 6.4 |  |                         |  | 29 |                             |  |  | 5.1                                 
|August 2008 |  |                             | 7.5 |  |                         |  | 30 |                             |  |  | 5.1                                 
|August 2008 |  |                             | 7.5 |  |                         |  | 30 |                             |  |  | 5.1                                 
|March 2009  |  |                             | 6.5 |  |                         |  | 43 |                             |  |  | 2.3                                 
|July 2009   |  |                             | 6.5 |  |                         |  | 45 |                             |  |  | 2.5                                 
|August 2009 |  |                             | 6.5 |  |                         |  | 43 |                             |  |  | 3.0                                 
|March 2010  |  |                             | 4.0 |  |                         |  | 43 |                             |  |  | 2.9                                 
|March 2010  |  |                             | 4.0 |  |                         |  | 43 |                             |  |  | 2.9                                 
|March 2011  |  |                             | 4.0 |  |                         |  | 38 |                             |  |  | 3.8                                 



Volatility
is based on historical volatility of the Company’s share price for periods matching the expected term of the option until
exercise.



The plan is governed by the terms
stipulated by Section 102 of the Israeli Income Tax Ordinance. In accordance with the track chosen by the Company and pursuant
to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as
a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees
under the plan - with the exception of the work-income benefit component, if any, determined on the grant date.



F-79







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 18 – EQUITY (continued):



Compensation expense (income)
included in the consolidated statements of income in respect of the Company's options plan, amounts to NIS 6.5 million, NIS 3.2
million and NIS (0.5) million for the years 2010, 2011 and 2012, respectively.



Average exercise prices are as
follows:



|                                                   |  | Average exercise price per share *
 (NIS) |       |  | Number of options (thousands) | 
|-------------------------------------------------- |  | ----------------------------------------- | ----- |  | ----------------------------- | 
|At January 1, 2010                                 |  |                                           | 35.79 |  |                               | 
|Granted                                            |  |                                           | 41.55 |  |                               | 
|Exercised                                          |  |                                           | 35.80 |  |                               | 
|Forfeited                                          |  |                                           | 35.36 |  |                               | 
|At December 31, 2010                               |  |                                           | 30.71 |  |                               | 
|Granted                                            |  |                                           | 36.51 |  |                               | 
|Exercised                                          |  |                                           | 27.64 |  |                               | 
|Forfeited                                          |  |                                           | 29.80 |  |                               | 
|At December 31, 2011                               |  |                                           | 36.13 |  |                               | 
|Disposed                                           |  |                                           | 35.60 |  |                               | 
|Forfeited                                          |  |                                           | 36.08 |  |                               | 
|At December 31, 2012                               |  |                                           | 36.56 |  |                               | 
|Options that can be exercised at December 31, 2012 |  |                                           | 29.76 |  |                               | 



Share options outstanding at
the end of the year have the following expiry date and exercise prices:



|                  |  | Number of options (thousands) |     |  | Range of exercise prices (NIS)* |  |               | Average of expiry date (years) | 
|----------------- |  | ----------------------------- | --- |  | ------------------------------- |  | ------------- | ------------------------------ | 
|                  |  |                               |     |  |                                 |  |               |                                | 
|December 31, 2011 |  |                               | 704 |  |                                 |  | 26.85 - 40.98 |                                | 
|December 31, 2012 |  |                               | 96  |  |                                 |  | 29.76 - 40.98 |                                | 



| | * | After adjusting the option exercise
                                                               price at the rate of 50% of cash dividends distributed.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



Share options plans in subsidiaries



| | a. | In August 2008, BSRE's Board of Directors resolved to adopt
a share options plan for executives of BSRE. The total number of shares reserved for issuance under the plan is 250,000 shares.
All exercises of options under the plan are to be on a cashless basis. Each option can be exercised to purchase one ordinary share
of NIS 1 par value of BSRE. Immediately upon allotment, the ordinary shares issued upon exercise of the options will have the
same rights as other ordinary shares of BSRE. The exercise price of the option is set at the grant date according to the average
quoted price of BSRE's ordinary share during the 30 trading days before the date of the grant.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the plan, executives who
exercise the options would be allotted only shares that reflect the benefit component embodied in the options, as computed at
date of exercise, i.e., the difference between the exercise price of each option and the quoted price of a NIS 1 par value share
at date of exercise.



F-80







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
18 – EQUITY (continued):



Under the plan, the options to
executives can be exercised in the period of 6 months from the end of the vesting period. Any option not exercised by this date
will expire.



In August 2008, BSRE granted
125,000 options to BSRE's Chief Executive Officer, who will be entitled to exercise the options at the end of the following vesting
periods: 66.7% at the end of two years from the date of grant and the remaining 33.3% at the end of three years from the date
of grant.



The exercise price is NIS 51.76
(unlinked) per share. The quoted price of BSRE's ordinary share before the date of approval of the grant of options by the Board
of Directors was NIS 46.91.



The benefit component based on
Black & Scholes option pricing model is NIS 7.11 in respect of the first batch and NIS 9.83 in respect of the second batch,
so that the total fair value amounts to NIS 1 million.



The fair value is based on the
following assumptions: expected volatility of approximately 26%; risk-free interest rate of approximately 5%; and anticipated
term until the end of the exercise period.



The exercise price would be adjusted
at the rate of 50% of cash dividends distributed during the term of the options.



The plan is governed by the terms
stipulated by Section 102 of the Israeli Income Tax Ordinance. In accordance with the track chosen by the Company and pursuant
to the terms thereof, the Company is not allowed to claim, as an expense for tax purposes, the amounts credited to employees as
a benefit, including amounts recorded as salary benefits in the Company’s accounts, in respect of options granted to employees
under the plan - with the exception of the work-income benefit component, if any, determined on the grant date.



Compensation included in the
consolidated statements of income in respect of BSRE option plan amounts to NIS 0.3 million and NIS 0.1 million for the years
2010 and 2011, respectively.



In October 2010, BSRE granted
18,077 shares in BSRE upon the exercise of options in consideration for their par value. In February 2011, following the exercise
of part of the options in BSRE, BSRE granted 19,840 shares in BSRE in consideration for their par value.



In February 2012, following the
exercise of the option in BSRE, BSRE granted 16,181 shares in BSRE in consideration for their par value.



In August 2011, BSRE's Board
of Directors resolved to adopt an additional share options plan for executives of BSRE. The total number of shares reserved for
issuance under the plan is 125,000 shares under the same terms as determined on the 2008 BSRE option plan.



As of December 31, 2012, no options
above were granted under this plan.



F-81







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
18 – EQUITY (continued):



| | b. | Dividends per share
| | -- | -------------------



On December 29, 2011, the Company
paid dividends per share of NIS 1.13.



During the year 2010, the Company
paid dividends per share of NIS 1.70 on February 25 and NIS 12.31 on October 18.



Regarding capital risk management,
see also note 3.



NOTE 19 – OTHER RESERVES:



|                                              |  | Available for sale investments |        |   | Currency translation differences |  |        | Transactions with non-
controlling interests |  |  | Asset revaluation |   |  | Total |      
|--------------------------------------------- |  | ------------------------------ | ------ | - | -------------------------------- |  | ------ | -------------------------------------------- |  |  | ----------------- | - |  | ----- | -----
|At January  1, 2010                           |  |                                | 5,676  |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | -    
|Change in other reserves:                     |  |                                |        |   |                                  |  |        |                                              |  |  |                   |   |  |       |      
|Available for sale investments                |  |                                | (6,253 | ) |                                  |  | -      |                                              |  |  | -                 |   |  |       | -    
|Transactions with non- controlling  interests |  |                                | -      |   |                                  |  | -      |                                              |  |  | (6,943            | ) |  |       | -    
|Currency translation differences              |  |                                | -      |   |                                  |  | (5,019 | )                                            |  |  | -                 |   |  |       | -    
|At December 31, 2010                          |  |                                | (577   | ) |                                  |  | (5,019 | )                                            |  |  | (6,943            | ) |  |       | -    
|Change in other reserves:                     |  |                                |        |   |                                  |  |        |                                              |  |  |                   |   |  |       |      
|Available for sale investments                |  |                                | (1,082 | ) |                                  |  | -      |                                              |  |  | -                 |   |  |       | -    
|Transactions with non- controlling interests  |  |                                | -      |   |                                  |  | -      |                                              |  |  | (1,320            | ) |  |       | -    
|Currency translation differences              |  |                                | -      |   |                                  |  | 5,269  |                                              |  |  | -                 |   |  |       | -    
|At December 31, 2011                          |  |                                | (1,659 | ) |                                  |  | 250    |                                              |  |  | (8,263            | ) |  |       | -    
|Change in other reserves:                     |  |                                |        |   |                                  |  |        |                                              |  |  |                   |   |  |       |      
|Available for sale investments                |  |                                | 11,555 |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | -    
|Transactions with non- controlling interests  |  |                                | -      |   |                                  |  | -      |                                              |  |  | (607              | ) |  |       | -    
|Currency translation differences              |  |                                | -      |   |                                  |  | (1,693 | )                                            |  |  | -                 |   |  |       | -    
|Asset revaluation reserve                     |  |                                | -      |   |                                  |  | -      |                                              |  |  | -                 |   |  |       | 9,662
|At December 31, 2012                          |  |                                | 9,896  |   |                                  |  | (1,443 | )                                            |  |  | (8,870            | ) |  |       | 9,662



NOTE 20 – OTHER ACCOUNT PAYABLES
AND ACCRUED EXPENSES:



|                                                         |  | December 31      |        
|-------------------------------------------------------- |  | ---------------- | -------
|                                                         |  | 2011             |        
|                                                         |  | NIS in thousands |        
|Payroll and related expenses and other employee benefits |  |                  | 156,710
|Government authorities                                   |  |                  | 148,121
|Liability in respect of gift certificates                |  |                  | 165,911
|Accrued expenses                                         |  |                  | 138,652
|Other                                                    |  |                  | 121,591
|Total                                                    |  |                  | 730,985



F-82







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS FROM BANKS AND OTHERS,
DEBENTURES AND CONVERTIBLE DEBENTURES:



Composition



|                                 |  | December 31      |          
|-------------------------------- |  | ---------------- | ---------
|                                 |  | 2011             |          
|                                 |  | NIS in thousands |          
|                                 |  |                  |          
|Loans from banks and others  (1) |  |                  | 2,589,057
|Debentures (2)                   |  |                  | 2,246,690
|Convertible debentures (2)       |  |                  | 118,909  
|                                 |  |                  | 4,954,656



(1) Loans from banks and others:



|                                        |  | December 31      |          
|--------------------------------------- |  | ---------------- | ---------
|                                        |  | 2011             |          
|                                        |  | NIS in thousands |          
|Current liabilities:                    |  |                  |          
|Bank overdrafts (note 15)               |  |                  | 2,701    
|Loans from banks and others             |  |                  | 994,727  
|Commercial paper *                      |  |                  | 39,500   
|Current maturities of non-current loans |  |                  | 311,642  
|                                        |  |                  | 1,348,570
|Non-current liabilities:                |  |                  |          
|Loans from banks and others **          |  |                  | 1,240,487
|                                        |  |                  | 2,589,057



| | * | On June 30, 2009 the Company issued
                                                           commercial paper to institutional investors in an amount of NIS 40,000
                                                           thousand for a period of four years. The commercial paper bears a variable
                                                           annual interest and is repayable every six months at the demand of
                                                           the holders. Until December 31, 2012 the Company redeemed NIS 27,950
                                                           thousand. On August 23, 2012 the Company issued commercial paper to
                                                           institutional investors in an amount of NIS 80 million for a period
                                                           of five years. The commercial paper bears a variable annual interest
                                                           and is repayable every three months at the demand of the holders. Until
                                                           December 31, 2012 the Company redeemed NIS 5,017 thousand.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | ** | Including a loan of NIS 55,000 thousand
                                                            and 9,250 thousands in 2011 and 2012 respectively from the controlling
                                                            shareholder due in 2014. The loan is unlinked and bears interest of
                                                            2% as of December 31, 2012.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Regarding
financing agreements and term with banks and others, see note 33.



F-83







ALON HOLDINGS 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    |  | 3.55%                                  | 
|NIS - linked to the Israeli CPI and bears a variable annual interest rate |  | 4.80%                                  | 
|NIS - Unlinked and bearing a fixed annual interest rate                   |  | 6.78%                                  | 
|NIS - Unlinked and bearing a variable annual interest rate                |  | 4.02%                                  | 
|                                                                          |  |                                        | 



| | (a) | Weighted average interest rate, as
                                                             of December 31, 2012. 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      |          
|------------------------- |  | ---------------- | ---------
|                          |  | 2011             |          
|                          |  | NIS in thousands |          
|Second year               |  |                  | 313,803  
|Third year                |  |                  | 169,417  
|Fourth year               |  |                  | 141,099  
|Fifth year and afterwards |  |                  | 616,168  
|                          |  |                  | 1,240,487



| | (c) | The carrying amounts and fair value of the non-current
loans are as follows:
| | --- | ----------------------------------------------------------------------------



|                     |  | December 31      |          
|-------------------- |  | ---------------- | ---------
|                     |  | 2011             |          
|                     |  | NIS in thousands |          
|                     |  | Carrying amount  |          
|                     |  |                  |          
|Bank and other loans |  |                  | 1,552,129



(*) The fair values of long-term
loans are based on cash flows discounted using a rate based on the capitalization rate of 4.2% (2011: 5.4%).



The carrying amounts of short-term
loans approximate their fair value.



F-84







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | (d) | Financial covenants
| | --- | -------------------



Blue Square has a loan with total
of approximately NIS 174 million as at December 31, 2012, regarding which Blue Square has undertaken to meet certain financial
covenants. As of December 31, 2012, Blue Square met the above mentioned 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.

As of January 18, 2012, the debentures
were reduced from A1 to A2 stable by the rating agency Midroog.



BSRE has a loan with a total balance
of NIS 210.8 million, whereby BSRE has undertaken to meet certain financial covenants. As of December 31, 2012, BSRE met the above
mentioned covenants.



Dor Alon's subsidiaries have loans
with a total balance of NIS 103.6 million as at December 31, 2012 for which they have undertaken to meet certain covenants. As
at December 31, 2012 Dor Alon's subsidiaries met the covenants.

.

Bee Group has loans with a total
of NIS 93 million as of December 31, 2012, pursuant to which Bee Group has undertaken to meet certain financial covenants. These
financial covenants include a limitation on the distribution of dividends to Blue Square. As of December 31, 2012, except for
a loan balance of NIS 58 million, for which a waiver from a bank lender had been received, Bee Group and the rest of its subsidiaries
met the financial covenants in their loan agreements.



The financial covenants in the
subsidiaries' loan agreements do not restrict the 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.
As of December 31, 2012, Bee Group did not have any earnings to distribute as a dividend.



F-85







ALON HOLDINGS 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 interest rates at |      |   | December 31      | 
|-------------------------------------------------------------- |  | ------- |  | ---------------------------------- | ---- | - | ---------------- | 
|                                                               |  |         |  | December 31, 2012                  |      |   | 2011             | 
|Debentures                                                     |  | Ref     |  |                                    |      |   | NIS in thousands | 
|Blue Square:                                                   |  |         |  |                                    |      |   |                  | 
|Alon Holdings Blue Square (Series A)                           |  | d(1)(a) |  |                                    | 5.90 | % |                  | 
|Alon Holdings Blue Square (Series C)                           |  | d(1)(c) |  |                                    | 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) |  |                                    | 4.50 | % |                  | 
|                                                               |  |         |  |                                    |      |   |                  | 
|Dor Alon Energy:                                               |  |         |  |                                    |      |   |                  | 
|Marketable debentures-Dor Alon Energy (Series B)               |  | d(3)(a) |  |                                    | 5.00 | % |                  | 
|Marketable debentures-Dor Alon Energy (Series C)               |  | d(3)(b) |  |                                    | 4.10 | % |                  | 
|Marketable debentures-Dor Alon Energy (Series D)               |  | d(3)(c) |  |                                    | 6.65 | % |                  | 
|Debentures of Dorgas Batuchot ltd.                             |  | d(3)(d) |  |                                    | 4.95 | % |                  | 
|Dor Debentures                                                 |  | d(3)(e) |  |                                    | 6.45 | % |                  | 
|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-86







ALON HOLDINGS 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 with using the following assumptions:



|                                      |  | December 31 |      
|------------------------------------- |  | ----------- | -----
|                                      |  | 2011        |      
|Discount rate                         |  |             | 1.24 
|Share price (NIS)                     |  |             | 69   
|Standard deviation of the share price |  |             | 34.10



| | b) | Repayment dates of debentures and convertible debentures
(excluding discount or premium):
| | -- | -----------------------------------------------------------------------------------------



|                                |  | December 31      |          
|------------------------------- |  | ---------------- | ---------
|                                |  | 2011             |          
|                                |  | NIS in thousands |          
|First year - current maturities |  |                  | 201,194  
|Second year                     |  |                  | 494,258  
|Third year                      |  |                  | 494,427  
|Fourth year                     |  |                  | 414,925  
|Fifth year and afterwards       |  |                  | 781,804  
|Total                           |  |                  | 2,386,608



| | c) | The carrying amounts and fair value of the debentures and
the convertible debentures are as follows:
| | -- | ----------------------------------------------------------------------------------------------------



|                       |  | December 31      |          
|---------------------- |  | ---------------- | ---------
|                       |  | 2011             |          
|                       |  | NIS in thousands |          
|                       |  | Carrying amount  |          
|                       |  |                  |          
|Debentures             |  |                  | 2,246,690
|Convertible debentures |  |                  | 118,909  
|                       |  |                  |          
|Total                  |  |                  | 2,365,599



| | * | The fair values of debentures and convertible debentures,
both marketable and not marketable, are based on market prices and cash flows discounted using a rate based on the capitalization
rate of between 1.7% and 5.5%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-87







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
21 – LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | d) | Debentures and convertible debentures – additional
details
| | -- | ----------------------------------------------------------



| | 1) | Blue Square
| | -- | -----------



In August
2003, the Company issued NIS 400 million par value debentures to institutional investors in consideration for their par value
as follows:



| | (a) | 200 million registered debentures
                                                                   (Series A) of NIS 1 par value each.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | These debentures are linked (principal
                                                                and interest) to the Israeli CPI, but in the event that the Israeli
                                                                CPI is lower than the base index (index known at date of issuance),
                                                                the amount of the debentures will not be adjusted below the base
                                                                index. The principal is repayable in three equal annual installments
                                                                on August 5 of each of the years 2012 to 2014, and bears interest
                                                                at the rate of 5.9% per annum. The interest is payable semi-annually
                                                                on February 5 and on August 5.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | 200 million registered convertible
                                                               debentures (Series B) of NIS 1 par value each
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------



These debentures
are linked (principal and interest) to the Israeli CPI, but in the event that the Israeli CPI is lower than the base index (index
known at date of issuance), the amount of the debentures will not be adjusted below the base index. The principal is repayable
in three equal annual installments on August 5 of each of the years 2007, 2009 and 2011, and bears interest at the rate of 5.9%
per annum. The interest is payable semi-annually on February 5 and on August 5.



The terms of the debentures
provide that the holders of the debentures will not be entitled to request the Company to register for trading on the New York
Stock Exchange any shares derived from the conversion of the debentures (Series B). Such shares will be traded only on the Tel
Aviv Stock Exchange (TASE).



As to the conversion of convertible
debentures into shares in 2011 and 2010, see note 18.



Other
terms:



| | i) | The terms of the debentures (Series
                                                                A and Series B) provide that in the event that the shares of the
                                                                Company are delisted from trading on the TASE, and/or in the event
                                                                that the shares of the Company are no longer held by the public
                                                                and/or in the event that Standard & Poor's Maalot ("S&PMaalot")
                                                                reduces the Company’s rating to BBB or lower, then within
                                                                three months from one of the above mentioned events the Company,
                                                                subject to the then prevailing law, will offer to acquire the
                                                                debentures at a price equivalent to the price of debentures of
                                                                the same type reflecting a return of 2.5% in excess of the return
                                                                on Government debentures with an average life similar to the remaining
                                                                average life of the debentures of that series as of the date of
                                                                the offer, but in no event will the price exceed the carrying
                                                                value of the debentures of that series.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-88







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 – LOANS
FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | ii) | On April 26, 2010 Standard &
                                                                 Poors Maalot entered the rating for the debentures of the Company
                                                                 and BSRE of ilA+ into Credit Watch with negative outlook, due
                                                                 to the Wholesale Market transaction of BSRE. On October 26, 2010,
                                                                 Standard & Poors Maalot reduced the rating for the Company's
                                                                 debentures from ilA+ to ilA-. Also, on this date, the Company
                                                                 and BSRE announced they would terminate their rating agreements
                                                                 with Standard & Poors Maalot. From that date, Midroog (a
                                                                 subsidiary of Moody's) will be the rating agency that will continue
                                                                 to rate the Company's and BSRE's debentures.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | On November 9, 2010, following the
                                                             filing of a Shelf Offering Report, the Company completed its public
                                                             tender of Series C par value NIS 100 million 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. On April 11, 2012, Series C was expanded by a private offering of
                                                             NIS 35 million par value of debentures Series C to institutional
                                                             investors for 89.5% of their par value, reflecting a return of 5.7%.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December
31, 2012 the Company's subsidiaries hold NIS 10.1 million of Series C of the Company.



Other terms:



As of January 18, 2012, the
debentures were reduced from A1 to A2 stable by the rating agency Midroog.



| | 2) | BSRE
| | -- | ----



| | a) | BSRE (Series A)
| | -- | ---------------



100 million
registered convertible debentures (Series A) of NIS 1 par value each.



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, 2012 was NIS 247.84 par value of debentures per share.

The annual
effective interest rate on the debentures, taking into account the issuance expenses as above, is 5.4%.



F-89







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | b) | BSRE (Series B)
| | -- | ---------------



These debentures
with par value of NIS 775 million 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%.



As December
31, 2012 companies in the group hold NIS 6.2 million of Series B of BSRE.



| | c) | BSRE (Series C)
| | -- | ---------------



On October 18, 2009,
BSRE issued to the public Series C debentures in the total amount of NIS 300,000 thousands; 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.

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 4.54%.



As December
31, 2012 companies in the group hold NIS 4.8 million of Series C of BSRE.



| | d) | BSRE (Series D)
| | -- | ---------------



On July 12, 2010, BSRE completed
its NIS 110 million 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).



F-90







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



On January 4, 2012, the debentures
were expanded by a private offering of NIS 150 million par value of debentures (Series D) to institutional investors for 98.5%
of their par value, reflecting a return of 5.8%. On August 28, 2012, the debentures series was expanded by a private offering
of NIS 49 million par value of bonds (Series D) to an institutional investor for 98.0% of their par value, reflecting a return
of 6.0% and on November 19, 2012, the debentures series was expanded by a private offering of NIS 110 million par value of debentures
(Series D) to an institutional investor for 107.0% of their par value, reflecting a return of 4.8%.



The annual
effective interest rate payable on Series D debentures, taking into account the issuance expenses as above is 5.3%.



The terms of the debentures
determine that in case Midroog Ltd. or another rating agency were to reduce the 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) | As at December 31, 2012 BSRE's
                                                               (Series A, B, C and D) debentures were rated by Midroog at A1 with
                                                               a negative outlook.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3) | Dor Alon
| | -- | --------



| | a) | Dor Alon (Series B)
| | -- | -------------------



In accordance with a prospectus
dated May 29, 2005, these debentures with a par value of NIS 585,220 thousand are linked (principal and interest) to the Israeli
CPI. The interest of 5% per annum is repayable in semi-annual installments on May 31 and November 30 until May 2015. The principal
balance at December 31, 2012 was NIS 212,901 thousand, which is redeemed at annual payments on May 31 over three years, with NIS
70,967 thousand each year.



The annual effective interest
rate payable on Series B debentures, taking into account the issuance expenses as above is 6.65%.



| | b) | Dor Alon (Series C)
| | -- | -------------------



These debentures with a par
value of NIS 81,000 thousand were issued according to a prospectus dated August 20, 2009 on the Tel Aviv Stock exchange. The debentures
bear the interest rate of Israeli government bonds (No.817) with the addition of 2.25% and are paid in quarterly installments
up to December 2017. The principal is redeemed in semi-annual installments on June 1 and December 1 over five years, starting
2013, with NIS 16,200 thousand each year.



Subsequent to December 31,
2012 the debentures series was expanded by a private offering of NIS 21 million par value of debentures (Series C) to institutional
investors for 97.95% of their par value, reflecting a return of 5.3%.



F-91







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | c) | Dor Alon (Series D)
| | -- | -------------------



| |  | These debentures with a par value
                                                              of NIS 139,000 thousand were issued according to a prospectus dated
                                                              August 20, 2009 on the Tel Aviv stock exchange. The debentures bear
                                                              a fixed annual interest rate of 6.65%, payable in quarterly installments
                                                              up to December 2016.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These debentures series was
expanded by a private offering to institutional investors, On February 15, 2012 NIS 119.9 million par value of bonds for 100.95%
of their par value, reflecting a return of 6.9% and on August 20, 2012 NIS 46 million par value of debentures to institutional
investors for 101.08% of their par value, reflecting a return of 6.9%.



Subsequent to December 31,
2012 the debentures series was expanded by a private offering of NIS 129 million par value of debentures (Series D) for 103.8%
of their par value, reflecting a return of 5.2%.



The principal is repayable
in equal semi-annual payments on June 1 and December 1 from 2013 to 2016, with NIS 76,225 thousand each year.



The annual effective interest
rate payable on Series D debentures, taking into account the issuance expenses as above is 6.9%.



Series C and D of Dor Alon debentures are not secured. As at January, 2013 the debentures are rated as A2 in the surveillance list with stable outlook.



| | d) | Dorgas Batuchot Ltd.
| | -- | --------------------



| |  | These debentures with a par value
                                                              at the date of issue of NIS 96,000 thousand are linked (principal
                                                              and interest) to the Israeli CPI. The debentures bear a fixed rate
                                                              of annual interest of 4.95%. The principal balance at December 31,
                                                              2012 was NIS 60,213 thousand, which is repayable over the first
                                                              seven years at rate of NIS 7,923 thousand per annum with NIS 4,752
                                                              thousand in the eighth year. As at December 31, 2012 these debentures
                                                              are rated Aa2.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e) | Dor Debentures
| | -- | --------------



These debentures (Series 1 and
Series 2) with a par value at the date of issue of NIS 75 million were issued to institutional investors. The principal balance
at December 31, 2012 was NIS 69,714 thousand. At December 31, 2012 the debentures are rated -A.



e) Covenants for debentures
and convertible debentures



| | 1. | The debentures issued by Dor Debentures
                                                               and Dorgas Batuchout include the requirement to meet certain covenants.
                                                               As at December 31, 2012 the covenants for Dor Debentures (Series
                                                               2) and Dorgas Batuchot were met.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-92







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 21 –
LOANS FROM BANKS AND OTHERS, DEBENTURES AND CONVERTIBLE DEBENTURES(continued):



| | 2. | As at December 31, 2012 Dor Debentures
                                                               did not meet the covenants relating to the Series 1 debentures
                                                               issued by Dor Debentures. At the request of the trustee, the Company
                                                               provided a bank guarantee of NIS 9.2 million that was valid up
                                                               to January 31, 2013 and was extended to July 2013 (see also note
                                                               34f below). During the period to July 2013, the Company and the
                                                               trustee are to establish whether to change the terms of the original
                                                               covenants. As a result a liability amounting to NIS 6.6 million
                                                               was classified as current liabilities as at December 31, 2012.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 22 – OTHER LIABILITIES:



|                                                                    |  | December 31      |        
|------------------------------------------------------------------- |  | ---------------- | -------
|                                                                    |  | 2011             |        
|                                                                    |  | NIS in thousands |        
|Rental contracts and value of unfavorable terms of operating leases |  |                  | 149,009
|Advances from purchasers of apartments (see note 11 and 33)         |  |                  | 102,704
|Other                                                               |  |                  | 12,884 
|                                                                    |  |                  | 264,597



NOTE 23 – DEFERRED INCOME TAX:



| | a. | Deferred tax assets and liabilities,
                                                                as presented in the statement of financial position are expected
                                                                to be recovered or settled, as follows:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                 |  | December 31      |         
|---------------------------------------------------------------- |  | ---------------- | --------
|                                                                 |  | 2011             |         
|                                                                 |  | NIS in thousands |         
|Deferred tax assets:                                             |  |                  |         
|Deferred tax asset to be recovered after more than 12 months     |  |                  | 46,940  
|Deferred tax asset to be recovered within 12 months              |  |                  | 57,381  
|                                                                 |  |                  | 104,321 
|Deferred tax liabilities:                                        |  |                  |         
|Deferred tax liability to be recovered after more than 12 months |  |                  | (149,675
|Deferred tax liability to be recovered within 12 months          |  |                  | (10,094 
|                                                                 |  |                  | (159,769
|Deferred tax liabilities, net                                    |  |                  | (55,448 



The deferred taxes are computed
at the tax rates of 25%. (2011: 24%-25%). For changes in tax rate enacted in December 2011 – see also note 30.



F-93







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 23 – DEFERRED INCOME TAX(continued):



| | b. | The movement in the net deferred income tax accounts is
as follows:
| | -- | -------------------------------------------------------------------



|                                                                  |  | Year ended December 31 |        
|----------------------------------------------------------------- |  | ---------------------- | -------
|                                                                  |  | 2010                   |        
|                                                                  |  | NIS in thousands       |        
|Balance at January 1                                              |  |                        | (8,262 
|Statement of income charge:                                       |  |                        |        
|Tax charged to tax expenses                                       |  |                        | (4,009 
|Tax charged to discontinued operation                             |  |                        | 2,304  
|Additions in respect of companies consolidated for the first time |  |                        | (26,561
|Discontinuance of consolidation                                   |  |                        | -      
|Tax charged directly to other comprehensive income                |  |                        | 1,643  
|Balance at December 31                                            |  |                        | (34,885



| | c. | 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, 2010                                        |  |                                                            | (29,678  | ) |                             |  | (18,053 | )     | 
|                                                                  |  |                                                            |          |   |                             |  |         |       | 
|Charged (credited) to the statement of income                     |  |                                                            | (3,518   | ) |                             |  | 1,697   |       | 
|Additions in respect of companies consolidated for the first time |  |                                                            | (14,154  | ) |                             |  | (31,432 | )     | 
|Charged directly to OCI (see note 30)                             |  |                                                            | -        |   |                             |  | 1,628   |       | 
|Balance at December 31, 2010                                      |  |                                                            | (47,350  | ) |                             |  | (46,160 | )     | 
|                                                                  |  |                                                            |          |   |                             |  |         |       | 
|Credited to the statement of income                               |  |                                                            | (43,042  | ) |                             |  | (11,553 | )     | 
|Credited directly to OCI (see note 30)                            |  |                                                            | -        |   |                             |  | (1,676  | )     | 
|Balance at December 31, 2011                                      |  |                                                            | (90,392  | ) |                             |  | (59,389 | )     | 
|                                                                  |  |                                                            |          |   |                             |  |         |       | 
|Credited to the statement of income                               |  |                                                            | (22,729  | ) |                             |  | (8,480  | )     | 
|Credited directly to OCI (see note 30)                            |  |                                                            | (4,117   | ) |                             |  | (4,897  | )     | 
|Discontinuance of consolidation                                   |  |                                                            | 1,200    |   |                             |  | -       |       | 
|Balance at December 31, 2012                                      |  |                                                            | (116,038 | ) |                             |  | (72,766 | )     | 



F-94







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 23 – DEFERRED INCOME TAX(continued):



|Deferred tax assets                                               |  | Provisions for employee rights |        |   | Carry forwards tax losses |  |        | Derivative instruments |  |  | Provision for impairment of trade receivables |   |  | Total |       
|----------------------------------------------------------------- |  | ------------------------------ | ------ | - | ------------------------- |  | ------ | ---------------------- |  |  | --------------------------------------------- | - |  | ----- | ------
|Balance at January 1, 2010                                        |  |                                | 24,970 |   |                           |  | 17,643 |                        |  |  | (3,144                                        | ) |  |       | -     
|                                                                  |  |                                |        |   |                           |  |        |                        |  |  |                                               |   |  |       |       
|Charged (credited) to the income  statement                       |  |                                | (2,226 | ) |                           |  | 4,687  |                        |  |  | (2,672                                        | ) |  |       | 327   
|Additions in respect of companies consolidated for the first time |  |                                | 2,731  |   |                           |  | 4,025  |                        |  |  | -                                             |   |  |       | 12,269
|Charged directly to OCI (see note 30)                             |  |                                | 15     |   |                           |  | -      |                        |  |  | -                                             |   |  |       | -     
|Balance at December 31, 2010                                      |  |                                | 25,490 |   |                           |  | 26,355 |                        |  |  | (5,816                                        | ) |  |       | 12,596
|                                                                  |  |                                |        |   |                           |  |        |                        |  |  |                                               |   |  |       |       
|Charged (credited) to the income  statement                       |  |                                | 5,270  |   |                           |  | 18,612 |                        |  |  | 9,247                                         |   |  |       | (409  
|Charged directly to OCI (see note 30)                             |  |                                | 2,988  |   |                           |  | -      |                        |  |  | -                                             |   |  |       | -     
|Balance at December 31, 2011                                      |  |                                | 33,748 |   |                           |  | 44,967 |                        |  |  | 3,431                                         |   |  |       | 12,187
|                                                                  |  |                                |        |   |                           |  |        |                        |  |  |                                               |   |  |       |       
|Charged (credited) to tax expenses in the income statement        |  |                                | 5,675  |   |                           |  | 29,088 |                        |  |  | (2,208                                        | ) |  |       | 2,923 
|Credited to  discontinued operations in the income statement      |  |                                | (19    | ) |                           |  | (3,354 | )                      |  |  | -                                             |   |  |       | (1,627
|Charged directly to OCI (see note 30)                             |  |                                | 1,482  |   |                           |  | -      |                        |  |  | -                                             |   |  |       | -     
|Discontinuance of consolidation                                   |  |                                | -      |   |                           |  | (5,863 | )                      |  |  | -                                             |   |  |       | -     
|Balance at December 31, 2012                                      |  |                                | 40,886 |   |                           |  | 64,838 |                        |  |  | 1,223                                         |   |  |       | 13,483



Losses for tax purposes,
carried forward to future years



As of December
31, 2012, 2011 and 2010 the Company and subsidiaries have operating tax loss carry forwards of approximately NIS 450 million,
NIS 301 million and NIS 205 million, respectively. The balance of carry forward losses, in respect of which deferred tax assets
were not included, amounted to NIS 191 million, NIS 128 million and NIS 84.9 million as of December 31, 2012, 2011 and 2010,
respectively. In addition, the Company and its subsidiaries have capital loss tax carry forwards of approximately NIS 20.4 million,
NIS 32 million and NIS 30.7 million as of December 31, 2012, 2011 and 2010, respectively. The tax benefit in respect of capital
tax loss carry forwards amounting to NIS 20.4 million has not been recorded due to uncertainty of their realization.



For tax
rate and changes in tax rates, see note 30(a)(3).



F-95







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 24 – RETIREMENT BENEFIT OBLIGATIONS:



| | a. | Composition of the liability
                                                                   for defined benefit plans:
| | -- | --------------------------------------------------------------------------------------------------------------------------



|                                                 |  | December 31      |        
|------------------------------------------------ |  | ---------------- | -------
|                                                 |  | 2011             |        
|                                                 |  | NIS in thousands |        
|Statement of financial position obligations for: |  |                  |        
|Present value of funded obligation               |  |                  | 416,056
|Provision in respect of unutilized sick leave    |  |                  | 37,725 
|                                                 |  |                  | 453,781
|Fair value of the plan assets                    |  |                  | 391,536
|                                                 |  |                  |        
|Total present value of the obligation, net       |  |                  | 62,245 



| | b. | Changes in the liability for
                                                                   defined benefit plans:
| | -- | ----------------------------------------------------------------------------------------------------------------------



|                                                                        |  | 2010             |         |   | 2011 |  |         | 2012 | 
|----------------------------------------------------------------------- |  | ---------------- | ------- | - | ---- |  | ------- | ---- | 
|                                                                        |  | NIS in thousands |        
|Liability in respect of defined benefit plans at January 1              |  |                  | 369,603 |   |      |  | 440,717 |      | 
|Acquisition of subsidiary consolidated for the first time               |  |                  | 29,205  |   |      |  | -       |      | 
|Benefits paid                                                           |  |                  | (24,901 | ) |      |  | (35,746 | )    | 
|Current service costs                                                   |  |                  | 38,868  |   |      |  | 42,567  |      | 
|Actuarial losses (gains)                                                |  |                  | 7,414   |   |      |  | (15,523 | )    | 
|Interest costs                                                          |  |                  | 20,528  |   |      |  | 21,766  |      | 
|Allocated to liabilities of disposal groups classified as held for sale |  |                  | -       |   |      |  | -       |      | 
|Liability in respect of defined benefit plans at December 31            |  |                  | 440,717 |   |      |  | 453,781 |      | 



| | c. | Changes in plans assets:
| | -- | ------------------------



|                                                                   |  | 2010             |         |   | 2011 |  |         | 2012 | 
|------------------------------------------------------------------ |  | ---------------- | ------- | - | ---- |  | ------- | ---- | 
|                                                                   |  | NIS in thousands |        
|Fair value of plan assets at January 1                             |  |                  | 322,354 |   |      |  | 389,225 |      | 
|Acquisition of subsidiary consolidated for the first time          |  |                  | 27,753  |   |      |  | -       |      | 
|Employer contributions paid into the plan                          |  |                  | 30,868  |   |      |  | 37,036  |      | 
|Actuarial gains (losses)                                           |  |                  | 6,850   |   |      |  | (26,203 | )    | 
|Benefits paid                                                      |  |                  | (18,265 | ) |      |  | (28,392 | )    | 
|Expected return on plan assets                                     |  |                  | 18,561  |   |      |  | 19,902  |      | 
|Other adjustments                                                  |  |                  | 1,104   |   |      |  | (32     | )    | 
|Allocated to assets of disposal groups classified as held for sale |  |                  | -       |   |      |  | -       |      | 
|Fair value of plan assets at December 31                           |  |                  | 389,225 |   |      |  | 391,536 |      | 



F-96







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 24 – RETIREMENT BENEFIT OBLIGATIONS(continued):



The actual return (loss) on plan
assets was NIS 43,261 thousands (2011 – NIS (6,301) thousands, 2010-NIS 25,411 thousands, 2009-NIS 48,161 thousands).

Expected contributions to post-employment
benefit plans for the year ending December 31, 2013 are approximately NIS 44,151 thousand.

The accumulated amount of actuarial
gains (losses) that were recognized in the OCI, net of taxes, as of December 31, 2012, 2011, 2010 and 2009 is NIS (22,966) thousands,
NIS (17,945) thousands, NIS (10,253) thousands and (9,976) thousands, respectively.



| | d. | Expense recognized in the income
                                                                   statement in respect of defined benefit plans:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------



|                               |  | Year ended December 31 |        
|------------------------------ |  | ---------------------- | -------
|                               |  | 2010                   |        
|                               |  | NIS in thousands       |        
|Current services costs         |  |                        | 38,868 
|Interest cost                  |  |                        | 20,528 
|Expected return on plan assets |  |                        | (18,561
|Other adjustments              |  |                        | (1,104 
|                               |  |                        | 39,731 



The expense recognized in the statement
of income for defined contribution plans was NIS 9,067 thousands in 2012, NIS 7,706 thousand in 2011 and NIS 2,671 thousands in
2010.



| | e. | The expenses were included
                                                                   in the following statement of income items:
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------



|                                             |  | Year ended December 31 |       
|-------------------------------------------- |  | ---------------------- | ------
|                                             |  | 2010                   |       
|                                             |  | NIS in thousands       |       
|Selling, general and administrative expenses |  |                        | 37,764
|Financial (income) expenses                  |  |                        | 1,967 
|                                             |  |                        | 39,731



The principal
actuarial assumptions used were as follows:



|                               |  | December 31 |        
|------------------------------ |  | ----------- | -------
|                               |  | 2011        |        
|                               |  | %           |        
|Discount rate                  |  |             | 4.4-5.1
|Inflation rate                 |  |             | 2.5    
|Expected return on plan assets |  |             | 4.5-5.6
|Future salary increases        |  |             | 1-7.7  
|Rates of employee turnover     |  |             | 1-80   



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-97







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 25 – PROVISION FOR OTHER
LIABILITIES AND CHARGES:



|                                                 |  | Termination benefits |      |   | Real estate related disputes (1) |  |        | Legal claims |  |  | Total   |  
|------------------------------------------------ |  | -------------------- | ---- | - | -------------------------------- |  | ------ | ------------ |  |  | ------- | -
|                                                 |  | NIS in thousands     |     
|At January 1, 2011                               |  |                      | 282  |   |                                  |  | 18,130 |              |  |  | 53,458  |  
|Provisions capitalized to property and equipment |  |                      | -    |   |                                  |  | 1,090  |              |  |  | -       |  
|Charged (credited) to the income statement:      |  |                      |      |   |                                  |  |        |              |  |  |         |  
|Provisions made during the year                  |  |                      | 280  |   |                                  |  | -      |              |  |  | 10,933  |  
|Unwind of discount                               |  |                      |      |   |                                  |  | -      |              |  |  | 1,607   |  
|Provisions reversed during the year              |  |                      | -    |   |                                  |  | -      |              |  |  | (1,040  | )
|Provisions used during the year                  |  |                      | (562 | ) |                                  |  | -      |              |  |  | (5,912  | )
|At December 31, 2011                             |  |                      | -    |   |                                  |  | 19,220 |              |  |  | 59,046  |  
|Charged (credited) to the income statement:      |  |                      |      |   |                                  |  |        |              |  |  |         |  
|Provisions made during the year                  |  |                      | -    |   |                                  |  | -      |              |  |  | 7,689   |  
|Unwind of discount                               |  |                      | -    |   |                                  |  | -      |              |  |  | 1,630   |  
|Provisions reversed during the year              |  |                      | -    |   |                                  |  | (2,838 | )            |  |  | (7,109  | )
|Provisions used during the year                  |  |                      | -    |   |                                  |  | -      |              |  |  | (14,957 | )
|At December 31, 2012                             |  |                      | -    |   |                                  |  | 16,382 |              |  |  | 46,299  |  



| | (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 32).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NOTE 26 – OTHER GAINS (LOSSES):



|                                                                                                  |  | Year ended December 31 |       
|------------------------------------------------------------------------------------------------- |  | ---------------------- | ------
|                                                                                                  |  | 2010                   |       
|                                                                                                  |  | NIS in thousands       |       
|Other gains:                                                                                      |  |                        |       
|Gain from decrease in holding rate in jointly consolidated company  upon losing control (note 10) |  |                        | -     
|Gain from sale of property and equipment                                                          |  |                        | 81    
|Reversal of impairment provision, net                                                             |  |                        | 3,031 
|Other                                                                                             |  |                        | 146   
|                                                                                                  |  |                        | 3,258 
|Other losses:                                                                                     |  |                        |       
|Loss from sale of property and equipment and other assets                                         |  |                        | 6,167 
|Impairment provisions of property and equipment and intangible  assets                            |  |                        | 3,977 
|Reorganization costs                                                                              |  |                        | 2,961 
|Dor Alon acquisition transaction costs                                                            |  |                        | 2,974 
|Other                                                                                             |  |                        | 7,874 
|                                                                                                  |  |                        | 23,953



F-98







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 27 – EXPENSES BY NATURE:



|                                                                 |  | Year ended December 31 |          
|---------------------------------------------------------------- |  | ---------------------- | ---------
|                                                                 |  | 2010                   |          
|                                                                 |  | NIS in thousands       |          
|Change in inventories                                            |  |                        | 49,910   
|Net purchases                                                    |  |                        | 5,960,106
|Wages salaries and related expenses                              |  |                        | 838,511  
|Depreciation, amortization and impairment charges                |  |                        | 206,945  
|Transportation and storage expenses                              |  |                        | 112,340  
|Advertising costs                                                |  |                        | 118,461  
|Rent and maintenance expenses                                    |  |                        | 303,730  
|Other expenses                                                   |  |                        | 510,772  
|                                                                 |  |                        |          
|Total cost of sales, selling general and administrative expenses |  |                        | 8,100,775



NOTE 28– EMPLOYEE BENEFIT EXPENSES:



|                                                 |  | Year ended December 31 |         
|------------------------------------------------ |  | ---------------------- | --------
|                                                 |  | 2010                   |         
|                                                 |  | NIS in thousands       |         
|Wages, salaries, including social security costs |  |                        | 789,275 
|Share options granted to managers and employees  |  |                        | 6,834   
|Post-employment benefits*                        |  |                        | 42,402  
|                                                 |  |                        | 838,511 
|Number of positions at December 31, (100%)**     |  |                        | ***9,890



| | * | Including employee benefit expenses that were charged to
finance expenses.
| | - | --------------------------------------------------------------------------

| | ** | In certain cases several employees share one 100% position,
i.e., each employee works part time.
| | -- | ------------------------------------------------------------------------------------------------

| | *** | From October 3, 2010 the expenses include Dor Alon's employees.
| | --- | ---------------------------------------------------------------



F-99







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
29 – FINANCE INCOME AND EXPENSES:



|                                                               |  | Year ended December 31 |        
|-------------------------------------------------------------- |  | ---------------------- | -------
|                                                               |  | 2010                   |        
|                                                               |  | NIS in thousands       |        
|Income:                                                        |  |                        |        
|Interests:                                                     |  |                        |        
|Interest income on short-term bank deposits                    |  |                        | 5,479  
|Interest income from bank and others                           |  |                        | 14,036 
|Changes in fair value of securities:                           |  |                        |        
|Net gain from marketable securities available for sale         |  |                        | 21,861 
|Net gain from securities at fair value through profit and loss |  |                        | 14,063 
|Changes in fair value of derivatives:                          |  |                        |        
|Conversion component                                           |  |                        | -      
|Forward contracts on the Israeli CPI                           |  |                        | 2,322  
|Diners option                                                  |  |                        | 27,859 
|Embedded derivatives                                           |  |                        | -      
|                                                               |  |                        | 85,620 
|                                                               |  |                        |        
|Expenses:                                                      |  |                        |        
|Interest and differences from linkage to the Israel CPI:       |  |                        |        
|Bank borrowings                                                |  |                        | 55,970 
|Debentures and convertible debentures                          |  |                        | 143,241
|Bank commissions and others                                    |  |                        | 7,451  
|Changes in fair value of derivatives:                          |  |                        |        
|Conversion component                                           |  |                        | 31,248 
|Forward contracts on the Israeli CPI                           |  |                        | -      
|Embedded derivatives                                           |  |                        | 3,798  
|Net of capitalization of finance expenses                      |  |                        | (8,768 
|                                                               |  |                        | 232,940
|Net finance cost                                               |  |                        | 147,320



NOTE 30 – INCOME TAX EXPENSES:



| | 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).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-100







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
30 – INCOME TAX EXPENSES(continued):



In February 2008, the Knesset
(the Israeli parliament) passed a law according to which the provisions of Inflationary adjustments law will no longer apply to
the Company in 2008 and thereafter.



| | 3. | Tax rates
| | -- | ---------



On July 14, 2009, the Knesset
passed the Economic Efficiency Law (Legislation Amendments for Implementation of the 2009 and 2010 Economic Plan) – 2009,
which provided, inter alia, an additional gradual reduction in the company tax rate to 18% as from the 2016 tax year. In accordance
with the aforementioned amendments, the company tax rates applicable as from the 2009 tax year are as follows: In the 2009 tax
year – 26%, in the 2010 tax year – 25%, in the 2011 tax year – 24%, in the 2012 tax year – 23%, in the
2013 tax year – 22%, in the 2014 tax year – 21%, in the 2015 tax year – 20% and as from the 2016 tax year the
company tax rate will be 18%.



On December 5, 2011 the Knesset
approved the Law to Change the Tax Burden (Legislative Amendments) – 2011. According to the law the tax reduction that was
provided in the Economic Efficiency Law, as aforementioned, will be cancelled and the company tax rate will be 25% as from 2012.



Current taxes for the periods
reported in these financial statements are calculated according to the tax rates specified in the Economic Efficiency Law.



Deferred tax balances as at
December 31, 2012 and 2011 are calculated in accordance with the tax rates specified in the Law to Change the Tax Burden, at the
tax rate expected on the date of reversal. The effect of the change in the tax rate on the financial statements as at December
31, 2011 is reflected in an increase in the deferred tax liability of NIS 34.4 thousand.



Capital gains are taxed at
a rate of 25% on the capital gains derived after January 1, 2003 (as to marketable securities – that were acquired after
January 1, 2006), and at the regular corporate tax rates on income derived through the aforementioned date.



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
| | -- | ---------------



| | 1. | The Company has received final
                                                                 tax assessments for tax years through 2008.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------

Some
subsidiaries have received final assessments for tax years through 2007-2008. For some of the subsidiaries, no final tax assessments
have been received since their inception.



| | 2. | As to withholding tax assessment
                                                                 for the years 2001-2004 and 2005-2008, see note 32.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------



F-101







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
30 – INCOME TAX EXPENSES(continued):



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). The Company estimates that at this stage a new
legislation shall not apply to tax years preceding 2013. The Company computed its taxable income for tax years 2007 to 2012
based on Israeli accounting standards applicable prior to adoption of IFRS in Israel, subject to certain adjustments.



d. Taxes on income included in the income statements:



|                                      |  | Year ended December 31 |       
|------------------------------------- |  | ---------------------- | ------
|                                      |  | 2010                   |       
|                                      |  | NIS in thousands       |       
|Current taxes:                        |  |                        |       
|Current tax on profits for the year   |  |                        | 33,231
|Adjustments in respect of prior years |  |                        | 1,351 
|Total current taxes                   |  |                        | 34,582
|Deferred taxes (note 23)              |  |                        | 4,009 
|Income tax expense                    |  |                        | 38,591



e. The
income tax charged (credited) to OCI during the year is as follows:



|                                                                     |  | Year ended December 31 |      
|-------------------------------------------------------------------- |  | ---------------------- | -----
|                                                                     |  | 2010                   |      
|                                                                     |  | NIS in thousands       |      
|Deferred tax:                                                        |  |                        |      
|Tax on actuarial loss on post employment benefits scheme             |  |                        | 15   
|Tax on fair value adjustments of available-for-sale financial assets |  |                        | 1,628
|Tax on asset revaluation reserve                                     |  |                        | -    
|                                                                     |  |                        | 1,643



The other items transferred to other comprehensive income do not have a tax affect



F-102







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
30 – INCOME TAX EXPENSES(continued):



| | f. | 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 |        
|--------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------
|                                                                                                                                  |  | 2010                   |        
|                                                                                                                                  |  | NIS in thousands       |        
|Profit before tax                                                                                                                 |  |                        | 108,026
|Theoretical tax expenses (25%, 24% and 25% respectively)                                                                          |  |                        | 27,007 
|Tax effects of:                                                                                                                   |  |                        |        
|Realization of Diners option- see note 11                                                                                         |  |                        | -      
|Change in future tax rate                                                                                                         |  |                        | -      
|Difference between the measurement basis of income for tax purposes and the measurement basis of income for book purposes, net    |  |                        | (7,344 
|Expenses not deductible for tax purposes, net                                                                                     |  |                        | 5,155  
|Utilization of previously unrecognized tax losses                                                                                 |  |                        | (482   
|Tax losses for which no deferred income tax asset was recognized                                                                  |  |                        | 5,517  
|Increase (decrease) in taxes resulting from computation of deferred taxes at a rate which is different from  the theoretical rate |  |                        | (1,847 
|Non-taxable financial (income) expenses*                                                                                          |  |                        | 7,689  
|Capital losses (gains) for which no deferred tax was recognized                                                                   |  |                        | 1,524  
|Tax impact relating to associates' results                                                                                        |  |                        | -      
|Adjustment in respect of prior years                                                                                              |  |                        | 1,351  
|Other                                                                                                                             |  |                        | 21     
|Tax charge                                                                                                                        |  |                        | 38,591 



* Mainly resulting from changes in
value of conversion component in convertible debentures.



NOTE 31 – EARNINGS 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 18).



|                                                                                                   |  | 2010 |            |   | 2011 |  |            | 2012 | 
|-------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- |  | ---------- | ---- | 
|Profit attributable to equity holders of the Company (NIS in thousands) from continuing operations |  |      | 54,665     |   |      |  | 78,122     |      | 
|Loss attributable to equity holders of the Company (NIS in thousands) from discontinued operations |  |      | (6,826     | ) |      |  | (18,609    | )    | 
|Net profit (loss) attributable to equity holders of the Company (NIS in thousands)                 |  |      | 47,839     |   |      |  | 59,513     |      | 
|Weighted average number of ordinary shares in issue                                                |  |      | 49,589,822 |   |      |  | 65,939,848 |      | 



F-103







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 31 – EARNINGS PER SHARE(continued):



| | 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 has two categories of dilutive potential ordinary shares: convertible debt and share options. The
convertible debt is assumed to have been converted into ordinary shares, and the net profit is adjusted to eliminate the interest
expense less the tax effect. For the share options, a calculation is made to determine the number of shares that could have been
acquired at fair value (determined as the average annual market share price of the Company’s shares) based on the monetary
value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with
the number of shares that would have been issued assuming the exercise of the share options.



|                                                                                   |  | 2010             |        |   | 2011* |  |        | 2012 | 
|---------------------------------------------------------------------------------- |  | ---------------- | ------ | - | ----- |  | ------ | ---- | 
|                                                                                   |  | NIS in thousands |       
|Profit (loss) attributable to equity holders of the Company                        |  |                  | 47,839 |   |       |  | 59,513 |      | 
|Gain from conversion feature and Interest expense on convertible debt (net of tax) |  |                  | -      |   |       |  | (7,150 | )    | 
|Effect of options in subsidiary                                                    |  |                  | (108   | ) |       |  | -      |      | 
|Profit (loss) used to determine diluted earnings per share                         |  |                  | 47,731 |   |       |  | 52,363 |      | 



|                                                                                                                            |  | Number of shares |           
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------
|Weighted average number of ordinary shares in issue adjustments for:                                                        |  |                  | 49,589,822
|Assumed conversion of convertible debt                                                                                      |  |                  | -         
|Assumed exercise of options                                                                                                 |  |                  | 224,358   
|Weighted average number of ordinary shares for diluted earnings per share                                                   |  |                  | 49,814,180
|Options which were not included in the computation diluted earnings per share due to anti-dilutive effect                   |  |                  | 342,000   
|Convertible debentures which were not included in the computation of diluted earnings per share due to anti-dilutive effect |  |                  | 2,000,694 



In addition there are convertible
debentures in Company's subsidiary BSRE that had no dilutive effect on the Company's earnings per share.

| | * | The
                                                                                                      effect of potential ordinary
                                                                                                      shares was not taken into
                                                                                                      account in 2011 because
                                                                                                      it had anti-dilutive effect
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-104







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES:



Contingencies
related to Mega Retail



| | a. | In December 2010, a claim and a
                                                               request to recognize it as a class action was filed against the
                                                               Company and Mega Retail Ltd. ("Mega") relating to the
                                                               sale of different cheese and butter products in the supermarkets
                                                               operated by Mega. According to the claimant, the Company sells
                                                               surrogate cheese and butter products as if they were real cheese
                                                               and milk products, and in that way misleads the customers. The
                                                               claimant quantifies his damage at approximately NIS 700 and estimates
                                                               the damage to the group of claimants for the purpose of the claim
                                                               at NIS 456 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



| | b. | In August, 2010 the Company and
                                                               subsidiaries were served with a claim in which it is being
                                                               sued by a former supplier of fruits and vegetables claiming that
                                                               the company breached the agreements between the parties regarding
                                                               the supply of fruits and vegetables, a breach that allegedly resulted
                                                               in damages assessed by the plaintiff at approximately NIS 178 million.
                                                               As mentioned in the claim, due to court fees, it was filed for
                                                               the sum of NIS 100 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company
denies all above allegations. The Company believes it acted according to all binding agreements and is not liable to any damages
claimed. The Company further denies that any damages were at all caused to the plaintiff. 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.



| | c. | In September 2011, a lawsuit was
                                                               filed against Mega and Shufersal along with a request to be approved
                                                               as a class action in relation to the issuance and sale of purchase
                                                               vouchers. The action consists of two claims: 1. The designation
                                                               of an expiration date to the vouchers constitutes a "depriving
                                                               condition" in a standard contract and is therefore invalid;
                                                               and 2. The voucher provision that a consumer who uses vouchers
                                                               to pay for his purchase can be given change only in vouchers redeemable
                                                               in the same store constitutes a "depriving condition"
                                                               and is therefore invalid. The claimant asked for declaratory relief
                                                               that these provisions are invalid, as well as for damages calculated
                                                               by the court, taking into account all holders of vouchers and/or
                                                               shoppers who have used the vouchers over the past 7 years. In the
                                                               opinion of the Company, based on the opinion of its legal advisers,
                                                               the chances that the claim will be rejected exceed 50%. However
                                                               the Company has agreed to enter into a mediation process, which
                                                               as of the date of the report is still pending. If the mediation
                                                               will be successful then the impact on the Company's profit or loss
                                                               will be immaterial. The company has made sufficient provisions
                                                               for this mediation in its financial statements..
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | In October 2011, a letter of claim
                                                               and a motion for approval of action as a class action was filed
                                                               against the Company, alleging that the Company does not deduct
                                                               the weight of the package in which it sells different products,
                                                               such as various meat and poultry products, fruit and vegetables.
                                                               If the claim is approved as a class action, the approximate claim
                                                               is estimated by the plaintiff at approximately NIS 181 million.
                                                               In the opinion of the Company, based on the opinion of its legal
                                                               advisors, 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-105







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



| | e. | In March 2012, a claim and a request
                                                               to recognize it as a class action were filed against the Company,
                                                               alleging that it misleads its customers in special sales it holds
                                                               regarding food products that are sliced or cut to the customers
                                                               request, and are priced per weight. The plaintiff claims that the
                                                               Company does not give full and correct details regarding the terms
                                                               of the special sales, violating requirements of law in connection
                                                               with product marking and price display. The plaintiff claims, among
                                                               other claims, that customers choosing to buy such products under
                                                               special sales in accordance with the Company's advertisements are
                                                               required to purchase not willingly an extra weight of the product,
                                                               for the full price. If the Claim is approved as a class action,
                                                               the approximate claim is estimated by the plaintiff at approx.
                                                               NIS 72 million. The plaintiff further requests court to issue a
                                                               decree ordering the Company to fulfill the requirements of the
                                                               law. 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f. | On July 26, 2012, a letter of claim
                                                               and motion for approval as a class action was filed against Mega,
                                                               for an aggregate amount of approximately NIS 18 million. The Plaintiff
                                                               claims that Mega failed to properly mark certain delicatessen and
                                                               bakery products, which are baked and packed prior to sale within
                                                               Mega's supermarket stores, with information regarding their ingredients,
                                                               nutrition facts, expiry date, etc. 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | On September 24, 2012, a letter
                                                               of claim and motion for approval as a class action was filed against
                                                               a subsidiary of Mega Dr. Baby Marketing and Distribution (888)
                                                               Ltd., Company's subsidiary Bee Group Retail Ltd, and a manufacturer
                                                               of baby products, for an aggregate amount of approximately NIS
                                                               135 million. The plaintiff claims that baby mattresses sold by
                                                               the defendants as bearing a safety certificate issued by the Standards
                                                               Institution of Israel, never received any such approval. The Company
                                                               is currently reviewing the claim and denying all the plaintiff's
                                                               allegations. 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | In January 2013, a letter of claim
                                                               and motion for approval as a class action was filed against Mega
                                                               for an aggregate amount of approximately NIS 9 million. The
                                                               Plaintiff alleges that the description of certain products sold
                                                               at Mega's internet site for online shopping, containing words such
                                                               as "Fresh", "Natural" and/or "Without
                                                               Sugar" is misleading and does not meet standards required
                                                               by law. 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i. | In March 2013, a letter of claim
                                                               and motion for approval as a class action was filed against Mega. The
                                                               Plaintiff alleges that Mega overcharged certain diary products
                                                               which are subject to price control regulation. The claim does not
                                                               state the amount sought if it is approved as a class action. The
                                                               Company is currently reviewing the Claim and denying all above
                                                               allegations. However, at this time, given that this matter is preliminary
                                                               in nature, our financial statements currently do not provide for
                                                               any amount. We will continue to assess this matter as the request
                                                               for the class action develops.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-106







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



| | j. | As part of the ordinary course
                                                               of business the Company 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 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Contingencies
related to the YOU customer club ("YOU")



| | a. | In December 2010, a claim and a
                                                              request to recognize it as a class action was filed against the
                                                              YOU, claiming that discounts for filling the car with petrol at
                                                              Dor Alon petrol stations, which the club supposedly promised were
                                                              not given. If the claim were to be accepted as a class action, the
                                                              claimant assesses his claim at NIS 894 million. 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | In November 2010, a claim and a
                                                              request to recognize it as a class action was filed against YOU,
                                                              claiming that discounts for filling the car with diesel at Dor Alon
                                                              petrol stations, which the club supposedly promised as well as wrongly
                                                              advertised were not given in reality. If the claim were to be accepted
                                                              as a class action, the claimant assesses his claim at NIS 54 million.
                                                              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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | In November 2011, a letter of claim
                                                              and a motion for approval of action as a class action was filed
                                                              against Mega, alleging that Mega is misleading its "YOU"
                                                              card holder customers, by charging prices higher than advertised
                                                              for products offered within its customers' loyalty plan. If the
                                                              claim is approved as a class action, the approximate claim is estimated
                                                              by the plaintiff at approximately NIS 10 million. In the opinion
                                                              of the Company, should it be obligated to pay any amount with regard
                                                              to this matter, it is not expected to be a material sum. In the
                                                              opinion of the Company and
its advisors, the provisions included in the Company's financial statements are sufficient to cover the potential liabilities.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | On November 1, 2012, a letter of
                                                              claim and motion for approval as a class action was filed against
                                                              Mega, the You Customer Club, Diners Club Israel Ltd., and Credit
                                                              Cards for Israel Ltd., for an aggregate amount of approximately
                                                              NIS 120 million.   The Plaintiff claims that the defendants
                                                              mislead the holders of a certain You credit card named "CalChoice."
                                                              The You credit card "CalChoice" enables its holders to
                                                              obtain extra credit by way of charging a minimum of NIS 200 for
                                                              every NIS 5,000 spent. The remaining balance is postponed and is
                                                              charged in the next month, while the holder of the card can provide
                                                              each month the amount he would like to pay out of such balance.
                                                              The Plaintiff alleges that the defendants do not properly notify
                                                              the client of the interest rate to be charged, and that such interest
                                                              rate is significantly higher than interest rates charged at bank
                                                              accounts or other competing credit cards. The plaintiff further
                                                              claims that the defendants do not properly notify the card holder
                                                              of his option to determine the amount to be charged each month,
                                                              while automatically charging the minimum required.  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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-107







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



Restricted
practices



From April
2000 to May 2003, the Israeli Antitrust Authority conducted an investigation into alleged restrictive trade arrangements between
major supermarkets chains in Israel and dominant suppliers. During the investigation, an inquiry was conducted in the Company's
offices and a former CEO and other senior officers were questioned. On January 5, 2005, the Commissioner of the Israeli Antitrust
Authority issued his position regarding “commercial restrictive practices between the dominant food suppliers and the major
supermarket retail chains”. According to the Commissioner’s position, some of these practices were found to be restrictive
trade agreements under the antitrust laws. The Commissioner prohibited these practices unless approved by the Restrictive Trade
Practices Court or exempted by the Commissioner himself. Among the practices that were found to be restrictive according to the
Commissioner were the following: arrangements with suppliers that determine the suppliers of the retail chains, their identity
and their number; arrangements for the management of product categories in conjunction with suppliers; arrangements regarding
the retail selling price; arrangements for determining market share of a particular supplier’s products and arrangements
for determining prices made by suppliers to competing chains; arrangements with regard to the use of suppliers’ manpower
to stock merchandise on the shelves of the chain stores. Limits were imposed with regard to display areas, on financial benefits
to the chains and on special offers to chains for meeting certain sale targets. After the publication of the position paper, the
Commissioner stated his position that these directives constitute a position paper, which is “intended to provide guidance
concerning the normative status of various practices in the food retail industry as perceived by the Antitrust Authority”.
The Commissioner indicated that this document does not have normative status.



The Company
has been applying most of these directives among others, by adopting an internal compliance program. Presently the Company has
no knowledge of how, if at all, its business would be affected should the Commissioner take any action against it, with respect
to those issues under dispute, which in the Company's opinion and its legal advisers do not contravene the law. In August 2006,
the Restrictive Trade Practices Court approved a consent decree reached between the Commissioner and certain food suppliers. The
consent decree is directed at the food suppliers listed therein and stipulates various prohibitions, conditions and restrictions
that apply to these suppliers with regard to certain practices. The consent decree addresses the following arrangements: Reduction
in discounts and rebates in exchange for meeting sales targets, setting market share, exclusivity in sales, price dictation by
supplier, and shelve arrangements.



As to shelve
arrangements: whereas in his position document, the Commissioner determined that the use of suppliers’ representatives to
physically arrange the shelves in the chains’ stores constitutes a restrictive arrangement, the suppliers disagree with
this position, and the Commissioner agreed not to take enforcement measures with regard to such arrangements for 30 months, so
long as such arrangements satisfy certain conditions. In February 2009, the above period was extended by 36 months, until February
2012.



The Commissioner
has indicated that it will no longer permit such practices. In February 2012, the Company submitted a request for an exemption
from restricted agreement for 21 months (until September 2013) in order to make the appropriate preparations for self-arrangements
of shelves in the chains’ stores, although the Company believes that this is not a restrictive arrangementIn January 2013, the Commissioner granted an exemption from approval of the restrictive arrangement for a limited period. The
exemption is until the end of March 2013 with respect arrangement of soft drinks, until the end of September 2013 with respect
to the arrangement of milk products and until the end of 2013 with respect to the arrangement of "van sale" products
(such as ice cream, newspapers and bread products).



F-108







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



Tax and local authorities:



In July 2005, the Income Tax
Authority issued a notice of assessments of tax withholding for the years 2001- 2004 to the Company. The amount claimed under
these assessments totaled NIS 34 million, and primarily relates to certain benefits granted to employees in the Company’s
supermarket branches. In November 2005, several senior employees were questioned under warning, with respect to these benefits.
Following these assessments and after the rejection of the Company's position on the matter, the Income Tax Authority issued to
the Company assessment orders for the years 2001- 2004 in the amount of approximately NIS 44 million. The Company filed appeals
with the District Court contesting these assessment orders which as of the date of this Annual Report are still pending. During
2011, the Company received deduction assessment for the years 2005-2008 and the amount claimed under this assessment totaled NIS
32 million.

In July
2007, the Israeli Tax Authority issued to the Company Value Added Tax assessments for the years 2002- 2006 in the amounts of approximately
NIS 22 million in connection with the subject matter of the foregoing deduction assessments. The Israeli Tax Authority did not
accept most of the Company's position, although it agreed to deduct the total amount to approximately NIS 16.3 million. In February
2009, the Company filed an appeal with the District Court. Following negotiations held between the Company and the Israeli Tax
Authorities, a settlement agreement was approved by the court in November 2012, in terms of which the Company agreed to pay NIS
21 million. In January 2013 the Company signed an agreement with the Income Tax Authority regarding deduction assessments for
the years 2005-2008.

During 2011 the Company received
a demand from the National Insurance for additional payments based on the Income Tax Authority assessment, related to such certain
benefits granted to employees in the Company’s branches in the amount of NIS 27.5 million for the years 2001-2004. The Company's
appeal was rejected by the National Insurance. The Company received in January 2013 a demand to produce documents for the years
2005-2008 regarding this matter. The Company intends to appeal this demand with the labor court. In the opinion of the Company,
based on the opinion of its legal advisers, the chances that the Company's position will be accepted are higher than them of being
rejected. Accordingly, the Company did not make any provision in its financial statements for the years 2001-2005, and in the
opinion of the Company and its advisors, the provisions included in the Company's financial statements are sufficient to cover
the potential liabilities for the years 2006-2008.



Contingencies related
to Dor Alon



| | a. | 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 financial statements.



F-109







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



| | b. | 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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | In December 2010 an indictment was issued in the local
court in Tel Aviv against Dor Alon, a subsidiary of Dor Alon, two officers of Dor Alon and an employee a claim by the Environment
Ministry claiming they did not perform checks of the leakage of fuel tanks and pipes in a number of Dor Alon's fueling stations
and claiming that they did not pass the results of their waterproofness checks to the person in charge of the prevention of water
contamination by fuels in the Environment Ministry (as described above), claiming omission of reporting of an oil leak, non-treatment
of a facility that was not waterproof and the non-installation of a piezometer, in accordance with 1959 Water Law and the 1977
(prevention of water contamination regulations)(fueling stations) Regulations. The relevant period for performing the waterproofing
checks in the statement of claim was between 2000 and 2004 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Dor Alon received claims for additional
                                                               retroactive municipality taxes for four of its fueling 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 17 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%. Accordingly, the Company
                                                               did not make any provision for this claim in its financial statements.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | 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 compromise agreement
that was submitted to Court's approval.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

However,
the Court rejected the two compromise agreements and therefore the legal procedures continue. In any case, 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.



F-110







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES(continued):



| | f. | On June 27, 2010, a statement of
                                                               claim and a request to approve the claim as a class action and
                                                               as a derivative claim was lodged against Dor Alon, members of the
                                                               Board of Directors of Dor Alon and Alon. The
claim was lodged by holders of Series A debentures of Dor Alon that wish to represent the holders of Series A Dor Alon debentures
as of February 7, 2010, who did not convert the debentures into Dor Alon shares. In their claim, the plaintiffs claim that the
distribution (on February 9, 2010) of the shares of Alon Natural Gas Exploration Ltd. to Dor Alon's shareholders was an unlawful
distribution. The plaintiffs also claim that Dor Alon should have adjusted the Series A debentures' conversion rate following
the distribution of shares as above. The plaintiffs request that the Court would oblige Alon and the members of Dor Alon's Board
of Directors to return to Dor Alon the shares that were distributed as above; alternatively, the plaintiffs request that Dor Alon
will be required to adjust the conversion rate of the debentures to the "Ex rate" subsequent to the distribution; alternatively,
the plaintiffs seek damages for non-adjustment of the conversion rate. The matter is at the stage of the provision of evidence
by the parties. 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | In February 2011 a claim and an
                                                               application for approval of the claim as a class action was filed
                                                               against Dor Alon and other fuel companies. The issue in the claim
                                                               is differences between the temperature of the LPG and the energy
                                                               it provides as a result of burning. 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | h. | A class action was lodged against
                                                               a subsidiary of Dor Alon and other fuel companies in December 2007.
                                                               The total amount of the claim is NIS 132 million (the subsidiary's
                                                               share in this amount is NIS 8.8 million). The claimant asserts
                                                               that the defendants charged each customer NIS 2 for fueling on
                                                               Saturdays and on holidays. 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.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | i. | 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 financial statements.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | j. | 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 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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-111







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



| | k. | On June 24, 2012, a letter of claim
                                                               and motion for approval as a class action was filed against New
                                                               Dorgas Ltd., a subsidiary of Dor Alon ("Dorgas"), at
                                                               an aggregate amount of approximately NIS 42 million. The plaintiff
                                                               claims that Dorgas is in breach of the Arrangements in the State
                                                               Economy Regulations that require that at the time of termination
                                                               of a contract between a gas supplier and a client that the deposit
                                                               payments be returned linked to the Israeli Consumer Prices Index. 
                                                               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.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l. | On September 3, 2012, a letter
                                                               of claim and motion for approval as a class action was filed against
                                                               Dor Alon and a subsidiary of Dor Alon, for an aggregate amount
                                                               of NIS 50 million. The plaintiff claims that Dor Alon failed to
                                                               comply with law requirements regarding sanitarian standards of
                                                               lavatories at its petrol stations, particularly cleaning requirements
                                                               and intactness of facilities 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m. | 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 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | n. | On September 13, 2012, a letter
                                                               of claim and motion for approval as a class action was filed against
                                                               a subsidiary of Dor Alon and other defendants, for an aggregate
                                                               amount of NIS 77 million. The letter of claim states that the defendants
                                                               have breached the provisions of the product and service regulation
                                                               order (maximum prices in gas stations – 2002 (herein, "the
                                                               Order") as regards conditions for collection of extra charge
on full service, nighttime service and rest days service, as well as the provisions of article 3(D) of the of the product and
service regulation order (maximum prices in gas stations) (amendment) – 2006 (herein, "the Amended Order") as
regards the signage of self-service fuelling pumps. The claimants argue that the order has set criteria for a minimum rate of
self-service pumps in the gas stations out of the total number of pumps in the gas station, and that whenever the criterion is
not met, it is prohibited to collect service fee in that station. The claimants further allege that according to the Amended order,
whenever a pump is not marked in accordance with the Order, it cannot be regarded as a self-service pump. As a result, the Defendants
did not meet the criterion stipulated in the Order in certain stations and are therefore prohibited from collecting service fee
in those gas stations. 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-112







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 32 – CONTINGENCIES (continued):



Contingencies
related to Bee Group



In January 2012, a claim and
a request to recognize it as a class action were filed against the Company, regarding the sale of toy and other products by its
"Kfar Hashashuim" chain of stores. The claim alleges that the company fails to mark in Hebrew required details such
as identifying details of the importer of the products, the manufacturer, supplier, country of manufacturing, as well as the range
of ages the product is designated for, and certain warnings required by law. If the Claim is approved as a class action, the approximate
claim is estimated by the plaintiff at approximately NIS 18 million. The plaintiff further requests court to issue a decree ordering
the Company to fulfill the requirements of the law and mark its products accordingly. 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.



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 the wholly owned subsidiary, Mega, which operates all of the Company's supermarket activity. 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 actions. However, the Company does not anticipate that not obtaining the necessary permits will have
a material adverse effect on its business. As of December 31, 2012, some of the Company's supermarket stores have no valid business
permits/license. 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.



Claims
that have been resolved during the period



In November
2012 the Company signed an agreement with the Income Tax Authority regarding deduction assessments for prior years, see Tax and
local authorities above.



During 2012
part of the claims have been closed, the amounts settled by the court were not material.



NOTE 33 – COMMITMENTS:



| | a. | Operating lease commitments - the
                                                              Company leases 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-113







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – COMMITMENTS(continued):



The Company also leases cars
under cancellable operating lease agreements. The Company is required to give up to two month notice for the termination of these
agreements.



Future minimum payments under
non-cancelable operating leases for the years subsequent to the statement of position dates are as follows:



|                          |  | December 31      |          
|------------------------- |  | ---------------- | ---------
|                          |  | 2011             |          
|                          |  | NIS in thousands |          
|First year                |  |                  | 341,859  
|Second year               |  |                  | 311,375  
|Third year                |  |                  | 263,107  
|Fourth year               |  |                  | 230,574  
|Fifth year                |  |                  | 196,031  
|Sixth year and thereafter |  |                  | 846,675  
|                          |  |                  | 2,189,621



| | b. | Capital commitments
| | -- | -------------------



Capital expenditure contracted
(including associates of BSRE, City Core Tel Aviv Ltd) for at the statement of financial position date but not yet incurred is
as follows:



|                                    |  | December 31,     |       
|----------------------------------- |  | ---------------- | ------
|                                    |  | 2011             |       
|                                    |  | NIS in thousands |       
|Property and equipment              |  |                  | 25,154
|Investment property and real estate |  |                  | 90,634



| | c. | Tel Aviv Parking lots Ltd.
| | -- | --------------------------



Tel Aviv Parking lots Ltd.
(a jointly controlled entity) entered into an agreement with a performing contractor to carry out works to construct the parking
lot, development work, constructing a circle at a cost of NIS 120 million (BSRE's share is NIS 60 million).



The contracting agreement and
the establishment agreement contain schedules and milestones with respect to carrying out the works and their completion.



The total estimated costs of
developing and constructing the parking lot, including related costs are approximately NIS 144 million, of which BSRE's share
is 50%.

Performance guarantees were
provided by the partners and the constructor in the amount of NIS 20 million.



F-114







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – COMMITMENTS(continued):



On November 21, 2011, the board
of directors of BSRE approved that the finance of the project will be delivered partly by equity (in equal portions by the shareholders)
and partly by a bank corporation (hereby: "The Bank"). The principals of the agreement are as follows:

The bank will provide a 4 years
credit line of NIS 115 million. In certain conditions, the bank may extend the credit line by 5%. At the end of the fourth year,
the bank will replace the outstanding credit balance with a loan with the same terms, that will be payable over a period of 16
years from the end of the construction of the project. To secure the loan, a lien on the property and the accompanying rights
will be registered in favor of the bank. Furthermore, BSRE will provide guarantees in an unlimited amount to the bank and up to
50% from the joint venture's liabilities. The joint venture is committed to reserve the ownership, corporate and the equity structure.
Violating any of the last commitments will cause a breach of the agreement and the bank will have the right to an immediate repayment.

As of December 31, 2012 the
credit line wasn't used.



| | d. | 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. As of December 31, 2012, 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); any excess of costs will be bore by the purchasers. 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
parking places.



| | 2. | Financing of the project
| | -- | ------------------------



As part of the purchase agreements
signed in 2010, the purchasers produced to the sellers a Firm Commitment Letter (F.C.L) according to which the bank confirms to
the purchasers that it shall grant them, provided that certain conditions are met, financing to complete the purchase of the leasehold
rights in the complex.



F-115







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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – COMMITMENTS (continued):



To pay the consideration's
balance, the FCL was realized and the purchasers received loan from the bank. The loan was extended for 18 months ending on November
30, 2013 when the principal is to be repaid in one payment at the end of the period and the interest payments are to be paid every
quarter. The purchasers may repay the principal by early repayment pursuant to the loan agreement. The loan bears interest at
an annual interest rate equal to the "Prime" rate plus 2% (as of December 31, 2012, the interest rate is 5.25%). The
loan is designated to turn into a long term loan upon signing an agreement between the Mall Company and the bank concerning the
financing of construction on the project's real estate.



As of December 31, 2012, confirmation
was received from the lending bank that as long as no financing agreement is signed until the original repayment date, the bank
agrees to extend a new loan to the Company in the amount equal to the loan principal for an additional 45 days.



The loan agreement sets forth
various provisions enabling the bank to put the loan for immediate repayment in bank loans.



To secure the bank credit,
BSRE was required to guarantee with unlimited amount to secure 50% of debts and obligations of the residential company and the
mall company towards the banks.



| | 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% 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, 2012 balance stands at NIS 55.4 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, an amount of NIS 15 million will be
                                                                 paid over five years from the date of the acquisition agreement
                                                                 subject to the bank's approval.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | As for updating the agreement
                                                                 of principles from June 2012, and decrease in holding rate in
                                                                 the City Core Tel Aviv Ltd, see note 11.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | On May 13, 2012, BSRE signed a memorandum
                                                              of understanding with a third party (the lessee), pursuant to which
                                                              the Company agreed to erect a 23,000 square-meter office building
                                                              on a part of real property it owns in Ra'anana and also to construct
                                                              a 2,300 square-meter basement (the structure), both of which will
                                                              be leased to the lessee for 10 years for monthly rental fees of
                                                              NIS 1,660 thousand linked to the CPI with a renewal option for an
                                                              additional 5 years. The rental fees in this period shall increase
                                                              by 7.5%. BSRE has undertaken to erect a surrounding structure at
                                                              estimated cost of NIS 200 million and to perform all of the finishing
                                                              work, as far as requested by the lessee, which is estimated at a
                                                              cost NIS 75 million. BSRE will be entitled to receive from the lessee
                                                              a payment equal to 7.5% of the cost of the finishing work in addition
                                                              to monthly rental fees if BSRE will perform the finishing work.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-116







ALON HOLDINGS BLUE SQUARE – ISRAEL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – COMMITMENTS(continued):



BSRE has undertaken to finish
the construction work and to transfer the building at the end of the final quarter of 2014. BSRE and the lessee have determined
acceptable compensation mechanisms. As of the reporting date, BSRE obtained building permits to erect the building and the construction
work has begun. Following the earthwork in the project, in September 2012, the Company entered into an agreement with another
contractor who commenced the construction work. On January 21, 2013, BSRE entered into an agreement for the sale of half of its
rights in the property to Harel Investments, Insurance and Financial Services Ltd. in return for NIS 51 million and shall bear
50% of the remaining establishment costs. In addition, BSRE is entitled to an additional consideration for building rights of
2,500 sq.m that were not yet utilized and according to the agreement such consideration is to be payable in a later date.

The agreement further determines
that if the building rights in the real estate are increased, Harel shall have the option to purchase 50% of these rights at a
consideration to be determined according to the value of the rights. A collaboration agreement was signed between BSRE and Harel.



| | f. | On June 5, 2012, BSRE entered into
                                                              a loan agreement with a group of institutional companies to finance
                                                              the building of the addition to the Hadar Mall, which is currently
                                                              under construction. The lenders will extend 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 charge
                                                              on its rights in the Hadar Mall.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | 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 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).



F-117







ALON HOLDINGS BLUE SQUARE – ISRAEL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 33 – COMMITMENTS(continued):



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.



| | h. | 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
                                                              agreement is 15 years or the end of consuming the contractual quantity,
                                                              whichever is earlier, and is expected to commence at the beginning
                                                              of 2014.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i. | In July 2002, Dor Alon transferred
                                                              its offices to a site close to Kibbutz Yakum. The lease agreement
                                                              was signed for a period up to July 2013 and was extended during
                                                              2012 to July 2014 with the option for the extension of one year.
                                                              The annual rental is NIS 2,622 thousand, linked to the December
                                                              2001 CPI.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | j. | Dor Alon has agreements with the
                                                              owners of land for the building and operation of 21 fueling stations
                                                              and three 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 fueling
                                                              station or commercial center has started providing services to the
                                                              public. As of December 31, 2012, two commercial centers and two
                                                              filling stations had started operation.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | k. | 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. 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 fueling 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. According to Dor Alon's management, Dor
                                                              Alon will install such system in approximately 18 fueling stations
                                                              that it operates. The cost of such an investment amounts to approximately
                                                              U.S.$ 70 thousand per fueling station. Dor Alon expects that its
                                                              investment in the relevant equipment, in order to implement the
                                                              provisions of the said Regulations, in each of the next two years
                                                              will be approximately NIS 13 million. In addition, Dor Alon expects
                                                              that it will be required to invest further amounts also in future
                                                              years.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-118







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 - LIENS AND GUARANTEES:



LIENS:



BSRE



| | a. | As of December 31, 2010 there are charges on fifteen of
properties transferred to BSRE by Mega for the purpose of securing the liabilities of the vendors of the above properties acquired
by BSRE to third parties (mainly banks). The balance of loans as of December 31, 2012, for which the liens were placed amounted
to approximately NIS 211 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition to the above, at
the date of approval of these financial statements on five of the assets which were transferred as part of the split off from
Alon Holdings 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 Alon Holdings.



Also, charges have been registered
on nine 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, 2012 a BSRE subsidiary had a loan in an
amount of NIS 71 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, 2012 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. In addition, a charge has been registered on one further property transferred by Mega to BSRE in favor
of a third party. In the latter case, however, Mega Retail has received "exclusion letter" from the holders of the above
property.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 33.d.2).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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%).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f. | As security for the financing arrangement for the development
of the parking area in Giv'on, Tel Aviv Parking lots Ltd. has registered a fixed and floating charges on all the assets and rights
of the lender, including BSRE's shareholding in the lender.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-119







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 - LIENS AND GUARANTEES(continued):



Dor Alon



In order to secure the liabilities
of Dor Alon and its subsidiaries to banks, the balance of which as of December 31, 2012 amounted to NIS 1,058 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 proportionally consolidated 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 proportionally consolidated entities.



BEE Group



The BEE Group and some of its
subsidiaries (excluding Na'aman and Vardinon) 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 and other benefits in favor of
banks to secure their liabilities to banks, amounting as of December 31, 2012 to NIS 98 million.



In order to secure the liabilities
of Na’aman and Vardinon, the companies have undertaken not to pledge any of their assets and/or provide any kind of guarantee
to a third party without prior approval of the banks



GUARANTEES:



| | a. | The Company has provided bank guarantees for third parties
such as service suppliers, for gift certificates and customers in an aggregate amount of approximately NIS 3.5 million.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Mega has issued the following guarantees:
| | -- | -----------------------------------------



| | i. | Mega has provided bank guarantees for its subsidiary, Eden
Teva Briut, in an aggregate amount of approximately NIS 110.3 million.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------

| | ii. | Mega provided a bank guarantee
                                                                  to a third party in an amount of approximately NIS 3.8 million.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 33d.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii. | In an unlimited amount to a bank
                                                                for its 50% share in the credit and loan agreement for the wholesale
                                                                market project and for the bank guarantees provided to purchasers
                                                                of apartments from the residence company in an amount of NIS 800
                                                                million as of March 2013. See note 33d.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | iii. | A guarantee for a bank loan to
                                                                 the logistic center company of NIS 71 million.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------



F-120







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 34 - LIENS AND GUARANTEES(continued):



| | iv. | A guarantee for its 50% share
                                                                in the credit facility and financing agreement for the building
                                                                of the Giv'on car park (see note 33c).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | In the amount of NIS 4.5 million
                                                               to the Tel-Aviv municipality and the building contractor for the
                                                               Tel Aviv parking lots.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | vi. | In the amount of NIS 0.4 million
                                                                to the Netanya development organization as part of its liabilities
                                                                in a development agreement.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | vii. | In an unlimited amount for its
                                                                 50% share to a bank as part of the credit and loan agreement
                                                                 for Eyal Baribua Ltd, a proportionately consolidated company.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Dor Alon provided guarantees in the amount of NIS 76.5
million in connection with tenders in which it participates as a bidder and in connection with legal proceedings to which it is
a party.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | Dor Alon provided a guarantee of NIS 9.2 million to secure
its debentures.
| | -- | --------------------------------------------------------------------------



NOTE 35 – 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
and BEE Group.



The principal
related parties of the Company are: Alon Retail Ltd., Alon Israel Oil Company Ltd., Alon USA LP, 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.



| | a. | Transactions with related parties:
| | -- | ----------------------------------



|                                        |  | Year ended December 31 |        
|--------------------------------------- |  | ---------------------- | -------
|                                        |  | 2010                   |        
|                                        |  | NIS in thousands       |        
|Fuel sales to related parties(a)        |  |                        | 59,806 
|Fuel sales to joint control entities(a) |  |                        | 82,355 
|Rental income (b)                       |  |                        | 3,115  
|Management fees to parent company (c)   |  |                        | 1,430  
|Directors' fees (d)                     |  |                        | 3,070  
|Legal consulting (e)                    |  |                        | 2,434  
|Purchases (f)                           |  |                        | 814,583
|Commissions (g)                         |  |                        | 4,988  
|Discounts (h)                           |  |                        | 495    



F-121







|ALON HOLDINGS BLUE SQUARE – ISRAEL LTD.   
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – RELATED-PARTY DISCLOSURES(continued):



| | a. | Relate to transactions that are
                                                               carried out in the normal course of business in accordance with
                                                               regular market prices and credit.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 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 14c.). 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.

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 2012 and 2011, respectively (NIS 6.6 million).



| | c. | In December 2010, Alon and Dor
                                                               Alon entered into a 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. As consideration
                                                               for the Services, since 2011, 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 1,500 thousand on a quarterly
                                                               basis, linked to the consumer price index. In both 2011 and 2012,
                                                               Alon received approximately NIS 5.9 million for the Services.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | Commencing November 15, 2005, the
                                                               Company's Chief Executive Officer,
                                                               Mr. David Wiessman receives 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-122







ALON HOLDINGS BLUE SQUARE – ISRAEL
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – RELATED-PARTY DISCLOSURES(continued):



| | f. | Goods purchase from related parties
| | -- | -----------------------------------



Mega purchases
goods from Tnuva and Dor Alon. 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.



| | g. | Service agreement
| | -- | -----------------



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. 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.



| | h. | 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 2011 were:
12% at the Mega In Town stores, 12% at Mega on-line, 6% at the Zol Beshefa stores and Mega Bool stores, 50% in Vardinon and 30%
in Na'aman.



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's wholly-owned subsidiary Bee Group as the manager of the Bee Group
internet sites. Ms. Wiessman is the daughter of Mr. David Wiessman, the Company's Chief Executive Officer. As of December 31,
2012, Ms. Wiessman receives a monthly salary of NIS 16,000, a cell phone at the expense of Bee Group, and Bee Group assigned a
car to Ms. Wiessman as is customary in Bee Group for employees at the same level. In addition, Ms. Wiessman is entitled to
standard social allocations by Bee Group (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.



Salary increases
or bonuses shall be granted as is customary in Bee Group based on the professional performance of Ms. Wiessman. Ms. Wiessman's
monthly salary may be increased by



F-123







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – RELATED-PARTY DISCLOSURES(continued):



Bee Group
management up to 20% annually, but any monthly salary (on an average basis) above NIS 18,000 requires the approval of the audit
committee, board of directors and general meeting of shareholders. Bee Group management is entitled to grant Ms. Wiessman an annual
bonus as is customary in Bee Group of only up to six monthly salaries a year. The grant requires the approval of the audit committee
that will confirm that the bonus was given according to the grant's policy in Bee Group.



The employment
agreement with Ms. Wiessman was approved by the audit committee, board of directors and the general meeting of shareholders.



Acquisition
of apartment



During the year
2010 the Company's Co-Chief Executive Officer acquired an apartment from a proportionally consolidated company for NIS 2,330 thousand.



Purchase of
natural gas



Regarding purchase
of natural gas from a third party see note 33.h.



| | b. | Balances with related
                                                                       parties
| | -- | ----------------------------------------------------------------------------------------------------



Year-end balances
arising from sales/purchases of goods/services:



|                                |  | December 31,     |        
|------------------------------- |  | ---------------- | -------
|                                |  | 2011             |        
|                                |  | NIS in thousands |        
|Diners credit card customers    |  |                  | 36,062 
|Other receivables               |  |                  | 168,642
|Loan to related party           |  |                  | 38,291 
|Loans to joint control entities |  |                  | 55,908 
|                                |  |                  | 298,903
|Trade payables                  |  |                  | 52,060 
|Other payables                  |  |                  | 18,266 
|Loan to parent Company          |  |                  | 55,000 
|                                |  |                  | 125,326



The receivables
from related parties arise mainly 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 16.



F-124







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 35 – RELATED-PARTY DISCLOSURES(continued):



| | 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).



| | d. | 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.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Key management compensation



|                                                |  | Year ended December 31 |       
|----------------------------------------------- |  | ---------------------- | ------
|                                                |  | 2010                   |       
|                                                |  | NIS in thousands       |       
|Salaries and other short-term employee benefits |  |                        | 21,825
|Share-based payments                            |  |                        | 3,040 
|Total                                           |  |                        | 24,865



F-125







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE
36 – EVENTS SUBSEQUENT TO DECEMBER 31, 2012:



| | a. | In November 2012, BSRE granted an
                                                              option to purchase the property in Petach Tikva subject to certain
                                                              conditions in return for NIS 56 million. On March 6, 2013, the option
                                                              was exercised and a sale agreement was signed under which 20% of
                                                              the consideration was paid and the balance shall be paid in two
                                                              equal installments after 120 days and 150 days.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | In January 2013, BSRE entered into
                                                              an agreement for the sale of half of its rights in the property
                                                              to Harel Investments, Insurance and Financial Services Ltd. in return
                                                              for NIS 51 million and shall bear 50% of the remaining establishment
                                                              costs. In addition, BSRE is entitled to an additional consideration
                                                              for building rights of 2,500 sq.m that were not yet utilized and
                                                              according to the agreement such consideration is to be payable in
                                                              a later date. The agreement further determines that if the building
                                                              rights in the real estate are increased, Harel shall have the option
                                                              to purchase 50% of these rights at a consideration to be determined
                                                              according to the value of the rights. A collaboration agreement
                                                              was signed between BSRE and Harel.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Dividend:
| | -- | ---------

BSRE announced
on a dividend distribution in the amount of NIS 50 million, the share of the Company NIS 39 million. The dividend was paid on
April 23, 2013.

Dor Alon
announced on a dividend distribution in the amount of NIS 20 million, the share of the Company NIS 15.7 million. The dividend
was paid on April 9, 2013.

| | d. | On April 2013, the name of the Company
                                                              was changed to "Alon Blue Square Israel Ltd."
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------



# # # # # #



F-126







ALON HOLDINGS BLUE SQUARE – ISRAEL
LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DETAILS
OF PRINCIPAL SUBSIDIARIES, PROPORTIONALLY CONSOLIDATED COMPANIES AND ASSOCIATES AT DECEMBER 31, 2012



APPENDIX

|Holding Company                       |  | Name of Company                                           |  | Percentage of ownership and control by holding Company as of December 31, 2012 |       |   | 
|------------------------------------- |  | --------------------------------------------------------- |  | ------------------------------------------------------------------------------ | ----- | - | 
|Alon Holdings Blue Square-Israel Ltd. |  | Mega Retail Ltd.                                          |  |                                                                                | 100   | % | 
|                                      |  | Blue Square Real Estate Ltd.                              |  |                                                                                | 78.22 | % | 
|                                      |  | BEE Group Ltd.                                            |  |                                                                                | 100   | % | 
|                                      |  | Diners Club Israel Ltd.                                   |  |                                                                                | 36.75 | % | 
|                                      |  | Dor Alon Energy in Israel (1988) Ltd.                     |  |                                                                                | 78.43 | % | 
|                                      |  | Alon Cellular Ltd.                                        |  |                                                                                | 100   | % | 
|Mega Retail Ltd.                      |  | Eden Briut Teva Market Ltd.                               |  |                                                                                | 51    | % | 
|                                      |  | Doctor Baby Marketing Ltd.                                |  |                                                                                | 100   | % | 
|                                      |  | Loyalty plan-partnership "YOU"                            |  |                                                                                | 75    | % | 
|                                      |  | Radio Non-Stop Ltd.                                       |  |                                                                                | 33    | % | 
|                                      |  | Radio "Zafon" Ltd.                                        |  |                                                                                | 12    | % | 
|Blue Square Real Estate Ltd.          |  | Kenyon Hadar Management Company Ltd.                      |  |                                                                                | 50    | % | 
|                                      |  | Hyper Lod Center Ltd.                                     |  |                                                                                | 100   | % | 
|                                      |  | Gamda trade Ltd.                                          |  |                                                                                | 100   | % | 
|                                      |  | Joint venture Blue Square - Hadar                         |  |                                                                                | 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.                        |  | Na'aman Group Porcelain Ltd                               |  |                                                                                | 77    | % | 
|                                      |  | Kfar Hasha'ashuim Marketing Ltd.                          |  |                                                                                | 90    | % | 
|Na'aman Group Porcelain Ltd.          |  | Vardinon Textile Ltd.                                     |  |                                                                                | 100   | % | 
|                                      |  | Sheshet Chain of Stores for Household Utensils Ltd.       |  |                                                                                | 100   | % | 
|Dor Alon Energy in Israel (1988) Ltd. |  | Dor Alon Gas Technologies Ltd.                            |  |                                                                                | 100   | % | 
|                                      |  | Dor Alon retail sites management LTD                      |  |                                                                                | 100   | % | 
|                                      |  | Alon fuel management and operation networks (1999) Ltd.   |  |                                                                                | 100   | % | 
|                                      |  | Loyalty plan-partnership "YOU"                            |  |                                                                                | 25    | % | 
|                                      |  | Dor energy holdings (2004) ltd                            |  |                                                                                | 100   | % | 
|                                      |  | Diners Club Israel Ltd.                                   |  |                                                                                | 12.25 | % | 
|                                      |  | Mercury Aviation                                          |  |                                                                                | 31    | % | 



F-127







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 HOLDINGS BLUE SQUARE - ISRAEL LTD.
| | ---------------------------------------
| | By:                                    
| |                                        
| |                                        
| |                                        
| | By:                                    
| |                                        
| |                                        
| |                                        
| | By:                                    
| |                                        
| |                                        



Date:  April 29, 2013