Our
principal executive offices are located at 25 Hasivim Street, Petach Tikva 49170, Israel,
and our telephone number is + 972-72-2002111. We were incorporated under the laws of the
State of Israel in 1999 as Gold E Ltd., changed our name to Goldtrade Electronic
Trading Ltd. in 2006, changed our name to Smile.Communications Ltd. in 2006 and changed
our name to 012 Smile.Communications Ltd. in 2007 following our acquisition of 012 Golden
Lines. We are a public limited liability company under the Israeli Companies Law,
5739-1999 and operate under such law and associated legislation. Our website address is
www.012.net
. The information on our website is not incorporated by reference into
this annual report.
We
are a growth-oriented communication services provider in Israel with a leading market
position, offering a wide range of broadband and traditional voice services. Our broadband
services include broadband Internet access with a suite of value-added services,
specialized data services and server hosting, as well as new innovative services such as
local telephony via voice over broadband, or VoB, and a WiFi network of hotspots across
Israel. Our traditional voice services include outgoing and incoming international
telephony, hubbing, roaming and signaling and calling card services. As a growth-oriented
company, we continually focus on introducing new broadband services that allow us to
expand our penetration into the communication market segments in which we currently
operate, as well as access new market segments such as the large Israeli local telephony
and mobile markets.
We
offer our services to residential and business customers, as well as to Israeli cellular
operators and international communication services providers, or carriers, through our
integrated multipurpose network, which allows us to provide services to almost all of the
homes and businesses in Israel. As of December 31, 2008, we estimate our market share
of the international telephony market was 33% based on the number of incoming and outgoing
minutes in Israel. We estimate that our market share of the broadband Internet access
market as of December 31, 2008, was 32%- 33% based on our broadband market analysis.
As of December 31, 2008, we provided services to approximately one million registered
household customers and approximately 80,000 registered business customers. Our enterprise
customer base consists of many of Israels leading companies, including 62 of the 100
largest companies in Israel (as determined by Dun & Bradstreet), which includes
the two largest Israeli banks and the Government of Israel.
Internet
Gold began providing Internet access services in 1996 and began offering broadband
services in 2001 and traditional voice services in 2004. On December 31, 2006, we
acquired one of our principal competitors, 012 Golden Lines. Primarily as a result of this
acquisition, we are now one of the major communication services providers in Israel as
well as one of the three largest providers of broadband and international telephony
services. Since the acquisition, we have been granted a license to provide VoB local
telephony services on a commercial basis without any limitation on the number of
subscribers. We completed the execution of our integration plan with 012 Golden Lines in
the second quarter of 2008.
We
operate in a highly regulated industry in Israel, which has undergone significant changes
in the past decade, transitioning from a slow moving market, with a single state-owned
carrier, Bezeq, to one that, although still highly-regulated, has grown rapidly and is
highly competitive in nearly every segment. The Israeli communications market today is
dominated by three main groups: Eurocom, our indirect controlling shareholder, The IDB
Group and Bezeq, each with interests in several communications sub-sectors. The Ministry
of Communications has mandated an open access policy, which requires Bezeq and
HOT, the incumbent local cable provider, to provide access to their infrastructure,
including last-mile access to homes and offices. The Ministry of Communications has also
adopted a policy to encourage new entrants into the communications market, which has led
to increased competition in the market. We face competition in all segments of our
operations and we believe we maintain our competitive position based on the quality of our
services and competitiveness of our price.
We
offer a wide range of broadband and traditional voice services. As of December 31, 2008,
our customers on average used over three different services, whether as part of a package
of services or purchased as a separate service. In an effort to further expand our
customer base and increase penetration into new and existing markets, we plan to continue
to cross-sell our services and leverage advanced technologies to broaden our service
offerings. We believe that offering multiple complementary services allows us to increase
revenue per customer, provide greater pricing flexibility and promote customer retention.
We believe that our VoB service provides an innovative complementary service for new
customers and for our existing customer base of over 1 million households and businesses
as of December 31, 2008, and enables us to cost-effectively enter the large Israeli
market for local telephony with a versatile, feature-rich, low cost service that can be
bundled with other services we offer.
We
have made significant investments in our multipurpose network infrastructure, which has
been specifically designed and optimized to transmit data using IP. Our investment has
allowed us to build and maintain a high-capacity network that addresses the growing demand
for advanced broadband services. Our network configuration supports the convergence of
voice and data services, such as broadband Internet access, VoB and traditional voice
services, as well as advanced technologies, such as WiMAX. In addition, we use our network
to provide specialized data services to bandwidth-intensive organizations and
international carriers using a variety of technological solutions to satisfy the demands
and changing needs of our business customers. Under the open access policy
that the Ministry of Communications has mandated, Bezeq, the incumbent local telephony
provider, and HOT, the incumbent local cable provider, are required to provide access to
their infrastructure, including last-mile access to homes and offices. Our multipurpose
network and the open access policy allow us to provide a full suite of
services to almost all of the homes and businesses in Israel.
18
The Israeli
Communications Industry
Development and History of
the Israeli Communications Industry
Israels
communications market has undergone significant changes in the past decade and, although
still highly-regulated, has grown rapidly and is highly competitive in nearly every
segment. The Israeli government has encouraged competition in all facets of the
communications market and has been a significant driver of the markets development.
An
additional factor behind the industrys growth is the Israeli population, who we
believe generally tends to adopt new technology more quickly than other populations.
Regulatory Changes
Israel
traditionally had one telecom provider, the state-owned monopoly, Bezeq, which provided
fixed-line services as well as cellular communications and international communications
services. In 1994, the Israeli government began to break apart this monopoly and Bezeq was
obligated to transfer parts of its operations, which were expected to be subject to
competition, to independent subsidiaries. Although the Israeli communications industry
continues to be highly regulated and participants must operate under license restrictions
and conditional permissions, the rules are designed to reduce barriers to entry and make
the market more competitive.
In
1994, the Israeli government opened the cellular market for competition. In December 1994,
Cellcom began operations in competition with Bezeqs cellular subsidiary, Pelephone
Communications Ltd. In 1998, a third cellular operator, Partner, began operations and in
2001, a fourth license was granted to MIRS.
In
1996, the international telephony market was opened to competition and in 2004, the
Israeli government opened the international market to additional licensees, while
continuing to preclude the cellular operators from offering international telephony
services.
In
furtherance of the Israeli governments decision to open the domestic fixed-line
communications sector to competition, the Ministry of Communications has issued several
special licenses for the provision of transmission services beginning in 2000.
The
Ministry of Communications granted HOT a license in 2000 for the provision of broadband
access services to ISPs, which was replaced with a license to provide fixed-line domestic
services, including telephony, data communications, transmissions and infrastructure and
access to Internet provides in nationwide deployment.
The
Ministry of Communications policy requires Bezeq and HOT to provide ISPs with
open access to their infrastructure. Since 2005, the Ministry of
Communications has granted several general licenses for the provision of fixed-line
domestic services without a geographical deployment or universal service obligations. The
Ministry of Communications has also issued a number of limited experimental marketing VoB
licenses. In 2005, the government privatized Bezeq, further opening the market by allowing
full competition in the fixed-line telephony market and issuing domestic fixed-line, or
DFL, licenses to other market participants.
On
January 31, 2007, the Ministry of Communications published its regulatory guidelines
regarding regulation of VoB services . The main points of such guidelines are as follows:
Bezeq, or any of its subsidiaries, may not provide VoB services until such time as
Bezeqs market share in the fixed-line telephony market falls below 85% in either the
residential or business sub-sector, at which time Bezeq may seek permission from the
Ministry of Communications to provide VoB services to that sub-sector. In February 2009,
the Ministry of Communications granted a VoB service operation license to B.I.P.
Communication Solutions, a subsidiary of Bezeq International, after Bezeqs market
share of the domestic residential telephony market fell below 85%. The license will enable
Bezeq International to deliver VoB telephony services to residential customers. At such
time as Bezeqs market share of the business sector of domestic telephony market goes
below 85%, Bezeq International will also be able to provide this service to business
clients. As a result of this license and other deregulatory actions by the Ministry of
Communications, Bezeq and its subsidiaries will be able to offer packages that combine all
the different services they provide. According to publications issued by Bezeq
International, it intends to launch VoB telephony services soon and will target
subscribers of its international telephony services and Internet services. In December
2007, the Ministry of Communications number portability program became effective.
Pursuant to such program, all Israeli telecommunications operators are required to enable
customer to retain their existing telephone numbers when switching to different providers.
19
In
January 2009, the Ministry of Communications prepared a draft license for the
provision of mobile telephony services involving the use of a mobile telephony network of
another company, and established the principal conditions and requirements to apply
for an MVNO license. The Ministry of Communications has invited potential entrepreneurs,
licensees, vendors, experts on economics, technology, law and communications, consumer
organizations, user and operator unions, other relevant parties as well as the general
public, to present their positions on the license draft and its conditions and
requirements. We have applied to the Ministry of Communications for a full MVNO license
according to the principles it established although the final regulatory framework for the
grant of such a license has not yet been established.
Based
on the experience of operators in other countries and according to the conclusions of the
report prepared for the Ministry of Communications by a leading international consulting
company, we assume that the entry of an MVNO using the frequencies and antennas of an
existing mobile operator will lead to increased competition in Israel. We believe that the
entry of additional operators into the mobile sector will alter the balance that has
prevailed among the cellular operators in recent years and that increased competition will
ultimately result in lower prices for consumers. We also believe that the entry of
additional mobile operators into this market will increase the competition among the
companies in the sector and will encourage them to provide more attractive offers to their
customers.
In
March 2008, the Gronau Committee, which was appointed by the Ministry of Communications to
consider and recommend the best means to promote further sustainable competition in the
Israeli communications market, issued its recommendations to the Minister of
Communications. The Gronau Committees recommendations call for several structural
changes within the communications markets, including local loop unbundling of Bezeqs
infrastructure, which, if accepted and implemented, would allow us to compete in the MVNO
and IPTV sectors and improve our competitive position in the VoB business market, while
worsening our position in other segments, by allowing the cellular operators in Israel to
compete in the traditional long distance telephony market.
In
January 2009, the Ministry of Communications granted us a special license to conduct a
marketing experiment that will examine the provision of domestic telephony services using
the innovative VoB over cellular packet data, or VoBoC technology. Using this technology,
telephony services are provided using IP protocol over the data network of a mobile
operator. Participants in this experiment, owners of a compatible mobile device, will make
calls using the softphone software that will be installed on their devices by the licensee
for the duration of the experiment. The purpose of the experiment is to examine
implementation capabilities as well as operational and marketing models involved with
VoBoC service provision. According to a publication issued by the Ministry of
Communications, the experiments results should assist the Ministry of Communications
in planning its policy regarding VoBoC service in the mobile sector. This policy is
complementary to the VoB policy in the fixed sector, which has enabled telecom operators
to offer IP telephony services over the broadband (ADSL and cable) access networks of
Bezeq and HOT, the two domestic fixed network-owner operators.
As
of January 2009, an amendment to the Israeli Consumer Protection Law regarding fixed-term
transactions came into effect, which requires dealers to inform consumers of the date of
termination of a fixed-term transaction prior to the date of termination, and of the
conditions that will apply after the termination. In addition, dealers will be required to
obtain the affirmative consent of the consumer to continue with the contract beyond the
fixed-term. If affirmative consent is not obtained, the consumer will be disconnected from
the service, other than with respect to basic telephone services as defined in the Israeli
Communications Law. In addition, as of January 2009, another amendment to the Israeli
Consumer Protection Law came into effect allowing a private subscriber to disconnect from
ongoing service by providing notice by mail, electronic mail or telephone. As of September
2008, another amendment to the Israeli Consumer Protection Law came into effect which
imposes, in certain circumstances, fines if a technician is late for a service
appointment. As of December 2008, an additional amendment to the Israeli Communication Law
came into effect which requires, among other provisions, as a general rule, a
subscribers explicit permission to receive advertising by way of electronic mail,
facsimile, automatic dialing systems and SMS text messaging. We are implementing
procedures to comply with these amendments.
20
Market
The
Israeli communications market today is dominated by three main groups: Eurocom, our
controlling shareholder, The IDB Group and the Bezeq Group, each having interests in the
main communications sub-sectors. Of the three groups, Eurocom Communications is the only
group that does not have a major interest in a cellular operator.
ISP
market
. The three largest ISPs in Israel are us, Netvision 013 Barak (a
company owned by The IDB Group) and Bezeq International (a company owned by Bezeq). We
believe that collectively, we, along with NetVision 013 Barak and Bezeq International,
control substantially all of the Israeli broadband Internet access market.
International
long distance market
. The international long distance, or ILD, market in
Israel is also highly competitive. This market was historically dominated by 012 Golden
Lines, which we acquired in December 2006, Bezeq International and 013 Barak. In 2004, the
Ministry of Communications further deregulated the market by issuing ILD licenses to
Internet Gold, Xfone and Netvision. As a result of our acquisition of 012 Golden Lines,
and Netvisions acquisition of 013 Barak, there are currently three dominant
competitors in the market, us, NetVision 013 Barak and Bezeq International. The fourth
competitor, Xfone, has a minor share of the market.
Fixed-line
communications market
. According to a publication issued by the Ministry of
Communications in May 2009, Bezeq, which traditionally controlled the fixed-line
communications market, controlled approximately 80.7% of the residential fixed-line
communications market and 86.6% of the business fixed-line communications market as of
November 2008. Additionally, commencing November 2008, the Ministry of Communications
measured the market share using a new format recommended by the Gronau Committee, which
provides that regular lines and traffic lines must be measured separately. In accordance
with the new measuring system, Bezeqs market share based on normative income is
79.2% for regular lines and 81.2% for traffic lines. In 2001, the Ministry of
Communications issued us a point-to-point fixed-line special license for data services. In
2003, the Ministry of Communications issued a DFL license to HOT on the condition that it
builds out a national infrastructure within three years and provide its services on a
universal basis. In December 2005, our wholly owned subsidiary, 012 Telecom, was granted a
DFL license (which superseded our point-to-point fixed-line special license for data
services) without the universal service and autonomous infrastructure obligations. Similar
licenses have been issued to Globalcall and Cellcom, both subsidiaries of IDB Group, and
Partner, which is a major cellular operator unaffiliated with any of the three main
telecom groups. Due to the fact that Bezeqs market share fell below 85% in the
residential market, the Ministry of Communications will likely allow the Bezeq group to
bundle services.
According
to the policy of the Ministry of Communications, once Bezeqs market share of
domestic fixed-line telephony in a particular customer segment (business or private) falls
below 85%, Bezeqs license will be amended so as to enable it to submit an
application for the Minister of Communications approval to market a basket of
services (including broadcast services) in that customer segment, which includes
telecommunications services provided by Bezeq and by a subsidiary. The Minister of
Communications approval to market a basket of services will be granted based on the
status of competition in the area of telecommunications or broadcasts and will be subject
to certain conditions set forth in the policy.
Accordingly,
Bezeq applied to the Ministry of Communications to begin providing bundled services, which
could potentially include local and international telephony, broadband Internet access,
Internet service provider, or ISP, services, cellular services and multi-channel TV.
On
July 3, 2008, Bezeq received a draft amendment of its license and the licenses of its
subsidiary companies, Pelephone, Bezeq International and D.B.S. Satellite Services (1998)
Ltd., regarding the marketing of joint service packages. In July 2008, Bezeq submitted its
position to the Ministry of Communications, stating that the amendment of the licenses
represents an intensification of regulation in comparison to the policy document of the
Minister of Communications dated March 31, 2004, which is supposed to reflect relief for
Bezeq, and it would be appropriate to allow a model for marketing of joint packages of
services that represents relief for Bezeq now that its market share has decreased to 85%
or less, together with ministerial supervision using more moderate measures than those
proposed in the draft amendment to the license. On January 22, 2009, draft amendments to
the general licenses of Bezeq and its subsidiaries were submitted to the companies and
published on the website of the Ministry of Communications. The amendments addressed the
approval for marketing of the joint packages. On February 8, 2009, Bezeq submitted its
position, stating that its material remarks were not reflected in the draft, without
explanation. Bezeq requested material amendments to the first draft amendment.
21
The
Ministry of Communications is presently conducting several hearings that may lead to
additional amendments to Bezeq and its subsidiaries licenses that will allow them to
offer such bundled services. In the event the Ministry of Communications allows the Bezeq
group to bundle services, this may increase Bezeqs competitive position in the
communication market and increases its direct competition with us, in a manner that may
materially and adversely affect our results of operations.
Cellular
services
. There are four companies presently providing cellular service in
Israel: Cellcom, a subsidiary of The IDB Group, Partner (a company controlled by Hutchison
Whampoa), Pelephone, a wholly-owned subsidiary of Bezeq, and MIRS Communications Ltd., a
wholly-owned subsidiary of Motorola.
The
Ministry of Communications has encouraged competition in the communications market by
imposing restrictions and limitations on Bezeq and its subsidiaries, including:
|
|
a
prohibition on the abuse of its monopoly power and dominant position;
|
|
|
an
obligation to maintain complete structural separation between Bezeq and its subsidiaries
pertaining to corporate structure and management systems, including finance, marketing,
manpower, assets and data;
|
|
|
supervision
of most of Bezeq's tariffs; and
|
|
|
an
obligation to provide open access infrastructure services to other licensees
on an equal, non-discriminatory basis and a prohibition on granting its subsidiaries
advantageous terms when providing such services.
|
The
Ministry of Communications has also supported competition by:
|
|
separating
infrastructure and service providers;
|
|
|
granting
new licenses and encouraging new and innovative technologies such as VoB; and
|
|
|
mandating
number portability.
|
Our Strengths
We
believe that, because of the following competitive strengths, we will be able to maintain
and enhance our position as a leading communication services provider in Israel:
|
|
Significant
market share.
We have a diversified residential and business customer base
and we believe we have a leading market share in Israel in the broadband and the
traditional voice markets.
|
|
|
High
level of brand recognition.
We believe our brands are among the most
recognized and respected consumer brands in Israel, are associated with reliability and
quality of service and provide us with a strong platform for the introduction of new
services and expansion into new market segments.
|
|
|
Wide
range of services offered on our advanced multipurpose network infrastructure.
Our
wide range of services allows us to offer customized voice and data services that address
the specific communications needs of our customers. Our ability to offer a wide range of
enhanced communications services has allowed us to attract new customers as well as
solidify our market position by cross-selling to existing customers and thus increasing
our revenues per subscriber. Our services are offered to our customers on an individual
basis or as part of a bundle of multiple services. We provide our services in a
cost-efficient manner over our advanced multipurpose network infrastructure, which allows
us to achieve significant operating leverage in provisioning, monitoring and maintaining
the network.
|
|
|
Demonstrated
ability to capitalize on the evolving communications technology landscape.
We
believe that we are positioned to capitalize on technological changes and trends in the
dynamic communications environment. Over the past five years, we have continually
expanded our offerings to include advanced broadband services, such as VoB and WiFi.
Recently, the Ministry of Communications published draft guidelines incorporating the
main conditions and requirements necessary to apply for an MVNO license. The Ministry of
Communications has invited potential entrepreneurs, licensees, vendors, experts on
economics, technology, law and communications, consumer organizations, user and operator
unions, other relevant parties as well as the general public, to present their positions
on the license draft and its conditions and requirements. We have applied to the Ministry
of Communications for a full MVNO license according to the principles it published
although the final regulatory framework for the grant of such a license has not yet been
established.
|
22
|
|
Experienced
management team and strong equity sponsorship.
Our executive officers
have an average of 11 years of experience in the Israeli communications market,
significant experience in successfully managing fast growing companies and a solid track
record in previous managerial positions. Our immediate parent company, Internet Gold is
controlled by one of Israels major communications groups. Our parent companys
controlling shareholder, Eurocom Communications, is one of Israels largest and most
prominent communications groups with interests in most of the communication segments, as
well as in real estate, investment and finance, consumer electronics and media. We enjoy
access to the senior management of both Internet Gold and Eurocom Communications, who are
highly experienced managers.
|
Our Strategy
We
believe that there are significant opportunities to continue to grow our business. The
sources of potential growth include our ability to (i) increase our average revenue per
user, or ARPU, from existing customers, cross-selling our services and upgrading
bandwidth, (ii) attract new customers by offering advanced services based on new
technologies and cost-effective services; and (iii) leverage our network to offer new
services, such as cellular services under an MVNO license. Our growth strategy is to:
|
|
Maximize
customer satisfaction, retention and growth.
We believe that the key
factors contributing to customer satisfaction are network performance, reliability and
availability of services, customer service and technical support and the range and
quality of our services. We will continue to focus on our strong commitment to customer
satisfaction to keep churn rates low and achieve customer growth through customer
referrals.
|
|
|
Increase
penetration and cross-selling of services to existing customer base.
We
intend to leverage our large residential and business customer base of broadband and
traditional voice customers and our strong brand recognition to increase our ARPU by
cross-selling our existing services, including broadband Internet access, traditional
voice and VoB local telephony. We believe that bundling attracts new customers, adds
value for our current customers and increases our share of our customers expenditures
on communications services and significantly increases customer retention.
|
|
|
Expand
penetration into the local telephony market
.
We intend to capitalize on our
commercial license to offer VoB services to increase the number of our local telephony
customers and achieve a greater share of the local telephony market. We believe that our
VoB services provides an innovative and complementary service for new customers and for
our existing customer base of over 1.1 million households and businesses. Our VoB
services allow us to cost-effectively expand our penetration into the large local
telephony market with a versatile, feature-rich, low cost service that can be bundled
with other services we offer our customers.
|
|
|
Utilize
advanced technologies to expand our services and enter new markets.
We are
continually broadening our service offerings by leveraging advanced technologies,
specifically VoB and wireless solutions. We have also applied to the Ministry of
Communications for an MVNO license and
will also consider expanding our service
offerings in the future to include Internet protocol television, or IPTV services.
|
|
|
Selectively
pursue growth opportunities.
In addition to adding customers through our
sales and marketing efforts, we plan to pursue growth opportunities through acquisitions
or strategic alliances with entities providing services complementary or similar to ours
that will increase our customer base, allow us to take advantage of the unused capacity
of our network, enhance our ability to sell and deliver value-added services and add
revenues with minimal incremental costs. We currently have no plans, proposals or
arrangements with respect to any such acquisition.
|
Our Services
We
are a leading communication services provider in Israel offering a growing range of
services, which currently include broadband and traditional voice services. Our broadband
services include broadband Internet access with a suite of value-added services,
specialized data services, local telephony via VoB, primary rate interface services, IP
Centrex, server hosting and a WiFi network of hotspots across Israel. Our traditional
voice services include outgoing and incoming international telephony, hubbing services for
international carriers and roaming and signaling services for cellular operators. We offer
our broadband and traditional voice services to a wide audience, which includes
residential and business customers, including small office-home office, or SoHo,
customers, small-medium size enterprise, or SME, customers, and large corporate customers,
as well as international carriers and cellular operators. We provide these services
through our integrated multipurpose network that is deployed through points of presence,
or PoPs, throughout Israel and in England, Germany and the United States. As of December
31, 2008, we had approximately one million customers registered in our database.
23
Broadband Services
As
of December 31, 2008, we had over 521,000 active residential, business and carrier
customers for our broadband services, including many of the largest companies in Israel,
the Government of Israel and the two largest Israeli banks.
Access and Value-added
Services
We
are one of Israels three leading ISPs providing high speed broadband access to the
Internet via ADSL and cable networks. We estimate that our market share of the broadband
Internet access market as of December 31, 2008 was 32%- 33% based on our broadband
market analysis. We offer high-speed continuous access connections employing digital
leased lines at various bandwidths to meet customer needs. We offer broadband access at
speeds of up to 10 Megabits per second. In addition to Internet access, we offer a diverse
suite of value-added services that are incremental to our core Internet access service.
Our value-added services are focused on enhancing our customers Internet experience
by providing additional features and applications and by increasing access security. We
believe that our value-added services help retain and strengthen our relationship with our
customers.
Residential Customers
We
provide our residential Internet access customers a suite of value-added services,
including:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
e-mail,
|
|
unified messaging,
|
|
|
|
|
|
global remote access,
|
|
parental content filtering,
|
|
|
|
|
|
wireless and wired home networking,
|
|
on-line backup, and
|
|
|
|
|
|
security services, including firewall and
|
|
content services.
|
|
|
intrusion prevention, attack prevention,
|
|
|
anti-virus, anti-spam,
|
Business Customers
We
provide our business Internet access customers a suite of value-added services, including:
|
|
various
security services, such as firewall and intrusion prevention, attack prevention,
anti-virus, anti-spam, content filtering, secure socket layer
communications protocol providing end-point authentication,
|
|
|
e-mail,
including single, multiple and large mailboxes and domains,
|
|
|
virtual
private network, or VPN, services,
|
|
|
enterprise,
procurement and integration services,
|
|
|
unified
messaging, networking,
|
|
|
wireless
and wired links, and
|
Specialized Data Services
We
provide specialized data services to bandwidth-intensive organizations and international
carriers, allowing them to transmit electronic data from point to point or from point to
multi-points. Our fee structure for these services depends on three main factors: volume
of capacity, distance and the type of technology used. Most services are provided under
one to two year contracts. These services are provided using a variety of technological
solutions, including:
|
|
International
private line communication, or leased line, which allows customers to purchase bandwidth
point to point for exclusive use. Leased lines are based on E1 (2 Megabits per second),
T1 (1.5 Megabits per second), DS-3 (45 Megabits per second), STM-1 (155 Megabits per
second) and STM-4 (625 Megabits per second) transmission volume;
|
24
|
|
Ethernet
over Synchronous Digital Hierarchy, or SDH, which allows customers to connect to sites
around the globe with a private LAN connection. Speed rates range from 2 Megabits per
second up to 625 Megabits per second. Since SDH networks have bandwidth guarantees, the
connection is suitable for video, voice and data information;
|
|
|
Asynchronous
transfer mode, or ATM, connections, which offer four different quality of service levels,
and speed rates up to DS-3 (45 Megabits per second), which is suitable for video, voice
and data information;
|
|
|
Frame
relay connections based on the ATM backbone offer speed rates up to E1 (2 Megabits per
second) for voice and data information; and
|
|
|
Multi
protocol label switching, or MPLS, which offers four different quality of service levels.
MPLS also enables us to offer performance levels, efficient network management, traffic
engineering and VPN services.
|
VoB Services
As
of December 31, 2008, we had more than 90,000 VoB local telephony lines. We offer this
service through 012 Telecom Ltd. in accordance with a license issued by the Ministry of
Communications.
Our
VoB local telephony customers can make and receive calls using a standard telephone
plugged into a specialized VoB unit that can be used almost anywhere a reliable broadband
Internet connection is available. We transmit these calls using VoIP technology, which
converts voice signals into digital data packets for transmission over the Internet and
provide our service by using our customers existing broadband Internet connections.
We believe that our VoB service can be a replacement for or a complementary alternative to
fixed-line telephony services, allowing us to cost-effectively enter the Israeli local
telephony market with a product that can be bundled with the other services we offer.
PRI Services
We
have been offering primary rate interface, or PRI, services to business customers since
December 2005. This service, which offers high quality point-to-point PRI ISDN
communications lines, over which up to 30 calls can be transferred simultaneously, is
primarily used by large corporate customers, including some of Israels largest
corporations. We offer this service through 012 Telecom Ltd. in accordance with a license
issued by the Ministry of Communications.
IP-TRUNKING Services
We
have been offering IP-TRUNKING services, which provide interconnections between service
providers using session initiation protocol, or SIP, to business customers since February
2007. This service, which offers high quality point-to-point IP communications lines, over
which up to 60 calls can be transferred simultaneously, is offered to business users. We
are the first communication services provider in Israel to supply IP-TRUNKING to the
business community.
IP Centrex
Since
2005, we have been offering business customers an IP-based PBX, or telephone switching
system, which connects to the customer through a broadband connection, IP Central Office
Exchange Service, or IP Centrex, and offers VoIP and other IP-based services as well as
connectivity to the regular telephone system. Among the IP-based services offered are
4-digit internal calling, web-administration portal, free calls between different branches
world-wide, conference bridging, interactive voice response, or IVR (auto attendant), call
hold, call transfer, last number look-up and redial, call forward and three-way calling.
This service is offered by 012 Telecom in accordance with a license granted by the
Ministry of Communications.
Server Hosting and
Co-location Services
We
operate three server hosting facilities with approximately 16,000 square feet of space.
Our most recent hosting facility, opened in June 2007, is designed to provide and support
the most advanced set of communications services, where we house web servers and related
software and provide connectivity to the Internet for business customers. Many customers
utilize our services to manage their web servers, which generate a considerable amount of
traffic, ranging from thousands to hundreds of thousands of hits a day. Clients are able
to configure and operate their servers remotely and save on router, Internet connection,
security system and network administration costs. We also offer co-location services to
our business customers at our server hosting facilities. As part of our co-location
services, we house the back-up servers used by businesses to ensure that their systems do
not lose data or suffer a lengthy interruption of service because of a power outage,
computer fault, or other reasons. We supply power, lights, network bandwidth and the
physical security of the site, and our facilities have multiple power backups that are
able to provide power during lengthy power outages.
25
WiFi Network
We
currently operate a comprehensive network of hotspots covering hotels, hospitals, other
public areas and all commercial airports throughout Israel. We have entered into contracts
with many of the entities that sponsor the service in their facilities or communities and
are the exclusive provider in their premises. Many of these contracts provide for revenue
sharing arrangements. We also provide open public access WiFi services throughout central
Jerusalem. We plan to continue to expand our WiFi footprint by adding additional hotspots
at various locations in Israel.
MVNO
An
MVNO is a cellular operator that does not own its own spectrum and usually does not have
its own radio network infrastructure. Instead, MVNOs have business arrangements with
existing cellular operators to use their infrastructure and network in order to service
the MVNOs customers. In August 2007 and again in August 2008, the Israeli Government
instructed the Ministry of Communications to take all measures necessary to allow any MVNO
wishing to provide cellular services to the public using the network of a cellular
operator to do so. The 2008 resolution instructs the Ministry of Communications to enact
the necessary regulations by April 1, 2009. A proposed amendment to the Israeli
Communication Law relating to MVNOs was included in the Economic Policy bill for 2009,
which awaits adoption by the Israeli Parliament. The proposal includes a provision that in
the event that an MVNO and the cellular operator do not reach an agreement as to the
provision of service by means of MVNO within six months from the date the MVNO first
approached the cellular operator, and if the Ministry of Communications together with the
Ministry of Commerce determine that the failure to reach agreement is due to unreasonable
conditions imposed by the cellular operator, the Ministries may use their authority to
instruct the cellular operator to provide such services.
In
January 2009, the Ministry of Communications prepared draft guidelines incorporating the
main conditions and requirements necessary to apply for an MVNO license. The Ministry of
Communications has invited potential entrepreneurs, licensees, vendors, experts on
economics, technology, law and communications, consumer organizations, user and operator
unions, other relevant parties as well as the general public, to present their positions
on the license draft and its conditions and requirements. Among other matters, the hearing
process will deal with MVNO implementation pursuant to an agreement between the cellular
operator and the MVNO and will determine the conditions to receive an MVNO license,
including a restriction on a cellular operator to receive an MVNO license and the terms of
the license. Licensing of an MVNO will require additional amendments to the Israeli
Communications Law and the regulations promulgated under that law.
We
have applied to the Ministry of Communications for a full MVNO license according to the
guidelines it published although the final regulatory framework for the grant of such a
license has not yet been established. We understand that HOT informed the Ministry of
Communications in mid-2008 of their intention to request an MVNO license. In order to
comply with the Ministrys guidelines for an MVNO license, we founded a limited
partnership, 012 Mobile L.P., which is currently inactive. 012 Mobile L.P. is held by 012
Mobile GP.
Traditional Voice Services
We
offer traditional voice services to residential and business customers throughout Israel
and to international carriers and local cellular operators.
Incoming and Outgoing
International Telephony Services
We
are one of the three largest international telephony services providers in Israel,
providing global international telephony services through direct connections with
approximately 90 carriers. As of December 31, 2008, we estimate our market share of the
international telephony market was 33% based on the number of incoming and outgoing
minutes in Israel.
Our
outgoing international telephony services to our residential and business customers
include direct international dialing services, international and domestic pre-paid and
post-paid calling cards and call-back services. Post-paid cards offer the customer the
ability to use an international calling card, which is paid for through the
customers account with us. Pre-paid cards allow the customer to purchase call time
in advance. We sell pre-paid cards to our distributors, which we treat as business
customers, for distribution in the residential market. In addition, we offer our business
customers international toll-free numbers and our 012Mobile service. 012Mobile is an
international cellular service offering fixed rates on calls from anywhere in the world.
26
We
offer our incoming international telephony services to international carriers, which
include termination services for telephone calls originating outside of Israel.
Hubbing Services
We
provide hubbing-traffic routing between approximately 90 network operators. Hubbing is
defined as architecture where several network operators connect to a peering point, or a
hub, from where they are rerouted.
Roaming and Signaling
Services
We
provide roaming and signaling services for cellular operators. Signaling messages indicate
a mobile users location while roaming within Israel through our signal transfer
point, or STP, or when traveling abroad. We bill the cellular operators based on the
number of signaling messages sent and received.
Marketing and Sales
Our
focus is to present a one-stop shop solution to our residential and business
customers by offering a diverse basket of solutions and a unique service experience in a
competitive environment. We seek to strengthen our brand awareness and to create a unified
branding approach among our voice and data customers for our various service offerings. We
also actively promote and cross-sell our services to existing customers with special
bundled offerings aimed at servicing their communications needs and enhancing customer
loyalty.
This
marketing and communications strategy is executed through all levels of our business.
Marketing teams target the business and residential sub-sectors separately. Each marketing
team includes specialists who focus on marketing communications and product development
and has an economics control manager who ensures that all marketing activities are cost
effective.
We
engage in a variety of marketing and promotional activities to stimulate awareness of our
broadband access services, traditional voice services and VoB telephony services. These
efforts are directed both to consumers who have not previously subscribed to our services
and to users who may switch to our services after learning of their affordability and
reliability. We principally employ targeted high-visibility media, including television,
radio, Internet and printed media advertising to solicit new customers. We use data mining
as well as targeted market research and surveys to properly focus our marketing efforts to
our segmented customer base and to enable us to react swiftly to new demands from
customers and changes in the market.
Our
target customer segments are residential and business customers. We have identified within
the residential market several groups of customers and target marketing and sales
accordingly. The business customer base marketing and sales focus is segmented according
to business size: SoHo, SME and corporate. We also separately market our traditional voice
services to carriers.
Our
channel marketing program involves the promotion of our services by our marketing partners
to their own customers. These joint marketing programs provide us with distinct
advantages, including the ability to gain leverage from the marketing partners brand
through joint advertising and promotions and cost-savings from contributions from
marketing partners to our advertising and promotion budget. Our marketing partners
typically display our applications and logos in their retail stores, distribute our
promotional materials with their own products and services, and engage in joint promotion
and co-marketing activities with us. Registering a new customer is easily performed
through our unique on-line registration web-accessed platform. Our channel partners
include:
|
|
retail
computer chains located in the largest shopping malls in Israel that offer our Internet
services accompanied with relevant software, hardware and communication products, and
|
|
|
numerous
stand-alone PC stores that promote our Internet service and are compensated with a
success fee.
|
Customer Service and Support
We
have a strong commitment to customer satisfaction. We believe that the key factors
contributing to customer satisfaction are network performance, reliability, speed of the
Internet access, customer service and technical support.
27
Customer
service and support operations are supported by integrated customer relationship
management and computer technology integration systems. This integration allows us to
successfully leverage our marketing and sales personnel and technology resources in line
with our strategy, and to offer more efficient service to our customers. We are able to
efficiently access relevant client information (for example, the most often dialed
numbers) and determine the potential spending of a customer and cross-selling
opportunities. We also use data mining to provide call representatives with the best
possible information about a customer.
Our
sales and customer service functions are carried out by separate service centers that
respond to calls from residential and business customers. We service our customer groups
through dedicated multi-language call center personnel and multi-language technical
support staff. The business service center is responsible for sales and customer care for
the business sector. Our business service centers marketing and sales force has
three areas of focus: broadband access, traditional voice and specialized data services.
Technical
support is available to all residential and business customers on a 24-hour basis.
Customers can obtain customer support by telephone, e-mail or fax. We also publish printed
reference materials and maintain comprehensive descriptions of our customer care services
on our website as well as troubleshooting tips and configuration information.
Network and Technology
We
continuously work on developing and enhancing our technology platform and infrastructure
and aim to remain at the forefront of the communications market and to provide high
quality service to our customers with stable and robust network and technology systems.
We
have invested heavily in our multipurpose network infrastructure, which has been
specifically designed and optimized to transmit data using IP. Our investment has allowed
us to build and maintain a high-capacity network that addresses the growing demand for
advanced broadband services. Our network configuration supports the convergence of voice
and data services, such as broadband Internet access, VoB and traditional voice services,
as well as advanced technologies. In addition, we use our network to provide specialized
data services to bandwidth-intensive organizations and international carriers using a
variety of technological solutions to satisfy the demands and changing needs of our
business customers.
Our
multi-purpose network supports broadband and traditional voice services across Israel, as
well as dial-up, ADSL, ISDN and cable broadband services. Our network infrastructure is
designed to provide customers with reliability and throughput, while minimizing our costs
through efficient use of our international and domestic infrastructure. Reliability is
primarily achieved through redundancy in mission critical systems, minimizing the number
of single points of failure, that is, points where the failure of a single component of
the network could interrupt service to customers. Throughput
is achieved by deploying robust systems, diverse network architecture, multi-peered
Internet backbone connections, efficient load balancing and high-speed switching cores.
Efficient bandwidth allocation and management is achieved through constant monitoring of
Internet traffic and web caching that optimizes the flow of traffic through our multiple
Internet connections.
In
order to optimize the performance of our network and support systems, we consistently
utilize some of the most specialized and advanced communication technologies, software and
equipment, working with vendors such as Amdocs, BroadSoft, Checkpoint, Cisco,
Hewlett-Packard, IBM, Juniper, Microsoft, Nortel and PeopleSoft.
ISP Network Infrastructure
Our
ISP network infrastructure is built on the basis of three tiers: core, aggregation and
access.
Core
The
core tier of our network is built around three backbone datacenters (one in Tel Aviv and
two in Petach-Tikva, all in central Israel). These three main sites are interconnected
using a dense wavelength division multiplexing optical ring, which provides a total of 20
Gigabits per second bandwidth between the sites. The connection that links the devices to
the core tier uses 10
Gigabit Ethernet technology. Each datacenter in itself is
built in a multiple star topology (either dual star or triple star), in order to achieve
multiple levels of reliability. The network fully supports multi protocol label switching,
or MPLS, which enables us to ensure quality of service for critical applications and
utilize advanced techniques, such as traffic engineering and service level agreements, or
SLAs. MPLS also plays a crucial role in offering value-added services to business
customers, such as VPN access.
The
core edge is where our network interconnects with other ISP networks that are either
operated by other ISPs in Israel or international upstream providers. We are directly
connected to all the other major Israeli ISPs as well as to the Israeli Internet Exchange
(IIX). Our network edge spans to two of the worlds largest Internet hubs where we
co-locate edge routers in order to peer with upstream providers. Those hubs are in London
and Frankfurt. This international and local reach of our network is designed to assure
both geographical redundancy and efficient routing.
28
We
have approximately 10 Gigabits of Internet connection capacity between Israel and Europe,
and a local Internet connection capacity of 40 Gigabits. We continuously monitor capacity
demands on our network and expand network resources ahead of market demands. We operate a
24 hour, seven days a week, 365 days a year, network operations center staffed with
trained operators who utilize advanced monitoring hardware and software systems to ensure
that the quality of our service meets the standards provided in our SLAs, and immediately
handle faults if those occur. Our network operation center monitors network traffic,
quality of service and security issues, as well as the performance of the equipment
located at each of our various datacenters and points of presence.
Aggregation
The
aggregation tier aggregates the access tier into the core backbone using MPLS technology
and 10 Gigabit Ethernet links. This tier is based on carrier grade Ethernet switches in a
fully redundant topology.
Access
Our
tiered network enables access between different network functions providing customers with
three major connectivity options to access our network:
|
|
Broadband
access: provided through either Bezeq, the incumbent local telephony operator, offering
ADSL lines, or by HOT, the incumbent local cable provider that offers cable-modem access.
|
|
|
Leased
line access: provided through third party transmission providers. Our leased line
offerings include Frame Relay, E1, DS3, and Fast Ethernet lines. All business customers
using this access are connected through dedicated routers in order to provide the highest
level of service.
|
|
|
Wireless
access: provided to customers that are located within close proximity to one of our PoPs
or requiring point to point or point to multi-point connectivity.
|
International Telephony
Switching Systems
Through
our international telephony switching systems we have connections with international
carriers in North America, South America, the Middle East, Western Europe, Eastern Europe,
Asia and Africa. Our intelligent network platforms provide us with post and pre-paid
services and international toll free services. These platforms give us the ability to
build new services without using a vendors intervention. Our platforms also give us
the ability to connect with other telecommunications providers using IP connections as
well as legacy time division multiplexed, or TDM, connections.
Our
international telephony services are provided to and from Israel by means of four marine
communications cables designed for the rapid transfer of large capacity content. Most of
the communication traffic to and from Israel is routed via the Lev and Med Nautilus
submarine cable systems whose capacity far exceeds that of the other two cables, Emos-1
and CIOS. We use this infrastructure to provide our international telephony services under
agreements with the owners of the rights to these cables.
Transmission Network
An
independent transmission infrastructure is used in order to connect our sites. The network
is based on an X Display Manager platform at the core and a service delivery management
platform at the edge. All elements are actively controlled and managed with network
specific software.
Our
network implements Dense Wavelength Division Multiplexing over leased fibers throughout
our sites utilizing up to 32 wavelengths (of which currently eight are being utilized)
providing Gigabit Ethernet and SDH STM-16 connectivity between the sites.
We
provide broadband services from our Israeli sites in Petach-Tikva and Tel Aviv, which
interconnect with both international and domestic carriers. We also have PoPs in Europe
(London and Frankfurt) and the United States (New Jersey). These five sites create a
multi-technology, multi-service, fully redundant network.
Our
IP network is able to ensure the proper quality of service for each application. This has
enabled us to use the same IP network to support our international telephony operations as
well as our Internet operations. In order to increase our voice network reach, we
installed a VoIP gateway at our facility in Frankfurt. This gateway enables us to transmit
calls in a more cost efficient manner between Israel and Europe. We intend to install such
gateways at our other international facilities.
29
In
order to generate warnings, the anti-fraud system relies on a set of filters. Those
filters are manually defined by our anti-fraud team. Our anti-fraud operation center is
manned 24 hours a day, 365 days a year. The anti-fraud team investigates every warning
message produced by the system. Because of the high level of sophistication of telephony
hackers, the filters are updated manually and on regular basis to answer any new threat
that hackers may devise and to make sure that our usage policy of the telephony system is
imposed.
VoIP Local Call System
Our
integrated VoIP local call system has been designed to provide smooth scalability. We have
a class 4 switch in Petach-Tikva using a media gateway that enables connections under
European and U.S. standards and SIP, and ISDN user port signaling. This platform gives us
the ability to connect with other communications providers using IP connection as well as
legacy TDM connection.
We
have a class 5 switch in Petach-Tikva with enhanced Internet access that enables customers
to change and operate features of their telephone line by themselves. The platform offers
a wide range of services including IP Centrex multimedia, IP infrastructure and security,
provided by specialized routers, firewalls and a session boarder controller.
Competition
We
face competition in all segments of our operations. In each segment, competition to a
large extent depends on price and quality of service. Some of our competitors and
potential competitors may have greater financial, technical and marketing resources than
we do. Moreover, our services are subject to regulation by the Ministry of Communications,
whose policy is to encourage new entrants and not limit the number of licenses, which may
continue to increase competition and may lead to further reductions in prices and fees
charged to customers.
The
markets for providing broadband services and traditional voice services are highly
competitive and currently dominated by our company and two additional service providers.
We believe that we, Bezeq International and NetVision 013 Barak account for substantially
all of the traditional voice and broadband Internet access markets.
We
were the first company to provide VoB services in Israel and the first to obtain a
commercial license in Israel to offer VoB services without any limitation on the number of
subscribers. 012 Telecoms competitors in the local telephony market include Bezeq
(including Bezeq International), HOT, NetVision 013 Barak (through its subsidiary
Globalcall) and two of the local cellular operators. We also compete against established
alternative voice communication providers, such as Skype (a service of eBay Inc.). We
expect competition in this market to intensify in the future. Such competitive environment
could intensify price competition and limit our ability to maintain or increase our market
share of the local telephony market.
In
the future, we may face additional competition in the international telephone market from
cellular operators in Israel, such as Cellcom, Partner and Pelephone, if the Ministry of
Communications lifts the restrictions currently preventing them from providing
international telephony services.
Since
December 2008, we face additional competition from cellular operators in Israel, such as
Partner, which have launched additional non-cellular business lines: VoB telephony
services that compete with fixed-line telephone services and ISP services that provide
access to the Internet as well as home Wi-Fi networks. In the future, we may face
additional competition for our services from cellular operators in Israel
.
We
believe that we have competed favorably to date, based on our strong brand recognition,
achieved principally through innovative marketing programs, and our emphasis on providing
fast and reliable, high quality services and superior customer service and support.
Intellectual Property
Rights
Service
marks and trademarks, trade secrets and other intellectual property are important to our
success and competitive position. We rely on trademark law, trade secret protection,
non-competition and confidentiality and/or license agreements with our employees,
customers, partners and others to protect our intellectual property rights. Despite our
precautions, it may be possible for third parties to obtain and use our intellectual
property without authorization. Furthermore, the validity, enforceability and scope of
protection of intellectual property rights in Internet-related industries is uncertain and
still evolving. Israeli trademark registrations may be renewed based on continued use. We
also claim common law protection on certain names and marks that we have used in
connection with our business activities.
30
Government Regulation
General
The
Israeli communications market is highly regulated and as a result, a significant part of
our operations is regulated by the Israeli Communications Law, 1982, the regulations
promulgated under the Israeli Communications Law and the provisions of our licenses. The
Ministry of Communications has the regulatory authority and broad discretionary powers
under the Israeli Communication Law and our licenses. The current policy of the Ministry
of Communications is not to limit the number of licenses granted to qualified licensees.
Licenses
The
table below lists our current licenses that were granted to us, the type of services we
offer under each of such licenses and their respective terms.
|
|
|
|
|
|
License
|
|
|
Services we provide
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
International
telephony license
(general license)
|
|
Voice
|
|
June 2024 with possible extensions for 10 years
each
|
|
·
|
Outgoing and incoming international telephony
services
|
|
|
|
|
|
|
|
|
|
|
·
|
international calling cards services
|
|
|
|
|
|
|
|
|
|
|
Specialized data services
|
|
|
|
|
|
|
|
|
VoB and DFL license
|
|
Local data and voice services
|
|
December 2025 with possible
|
(granted to 012
Telecom Ltd., our wholly-owned
subsidiary)
(general license)
|
|
|
|
|
extensions for 10 years each
|
|
·
|
Local telephony using VoB access
|
|
|
|
|
|
|
|
|
·
|
Local telephony using dedicated lines based on PRI
services
|
|
|
|
|
|
|
|
|
|
|
Local infrastructure and data
services
|
|
|
|
|
|
|
|
|
ISP license
(general license)
|
|
Internet services including
broadband services (without voice)
|
|
June 2012
|
|
|
|
|
|
|
|
|
·
|
ADSL/cable/dial-up Internet access
|
|
|
|
|
|
|
|
|
|
|
·
|
Value-added services
|
|
|
|
|
|
|
|
|
|
|
·
|
WiFi
|
|
|
|
|
|
|
|
|
WiMAX technology
experimental license
|
|
Broadband, data, international and
local voice service based on the WiMAX infrastructure
|
|
The experimental license for the city of Sderot and the Negev area will expire in September2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endpoint Network
Services
|
|
Supply, install, operate and
maintain all types of endpoint network equipment, including central
switchboards, telephone cables, connection closets, etc.
|
|
January 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VoBoC experimental
license
|
|
A special license to conduct a marketing experiment that will examine the provision of domestic
telephony services using the innovative VoBoC technology.
|
|
January 2010
|
Terms of the Licenses
Generally,
the terms of the licenses granted to us are similar. In each case, under the terms of the
licenses the Ministry of Communications has discretion over the form and scope of our
customer agreements, and we may be required to revise such agreements if requested by the
Ministry of Communications. The main terms of our licenses are as follows:
31
Service
Provision
Our
international telephony license is a general license that requires us to provide our
services on a universal and non-discriminatory basis. In addition, we are required to
allow interconnections between our network and other holders of general licenses and to
furnish other licensees with all required information to do so. Any such interconnectivity
must also be offered at the rates set by the Israeli Interconnect Regulations as described
under Interconnect and other charges below. Our licenses do not allow us to
terminate or suspend services to our customers unless such termination or suspension is
based on grounds specified in the license, including, for example, a customers
default in payment. Moreover, in certain circumstances, such termination or suspension
requires the approval of the Ministry of Communications.
Under
Israeli law and the provisions of our international telephony and DFL licenses, we must
provide the Israeli security and defense forces with special services if required. Payment
for such services is to be determined by agreement, on the basis of the reasonable
expenses we incur to provide such services and the prices otherwise charged for these
services.
Local
Presence and Shareholding Requirements
Regulations
issued under the Communications Law require that our chief executive office, any member of
our board holding an executive role, as well as a majority of the members of the board, be
citizens and residents of the State of Israel. In addition, we are required to maintain
our center of operations in Israel.
Our
general licenses also require that Israeli residents and citizens have minimum
shareholdings. In that regard, throughout the term of the VoB and DFL license, at least
20% of our means of control must be held by an Israeli citizen and resident or by an
entity the controlling shareholder of which is an Israeli resident and citizen, while
under the international telephony license at least 26% of our means of control must be
held by Israelis at all times. Means of control is defined as voting rights,
the right to appoint a director or general manager, the right to receive dividends, or the
right to participate in distributions upon liquidation.
Minimum
Achievement Commitments
Our
general licenses require that we achieve and maintain certain milestones. The VoB and DFL
license requires us to provide services of a scope that will, in the aggregate, produce
proceeds of not less than NIS 50 million over an aggregated period of three years
from commencement of the services (a milestone which we expect to achieve). Under our
international telephony license, we are required to maintain an irrevocable right to use
an infrastructure system securing our ability to provide international connect services
for a period of at least five years with sufficient scope to provide for at least 25% of
our projected capacity requirements, which we have secured through our agreement with Med
Nautilus.
Obligations
in Relation to Holdings and Restrictions on Transfer
Under
the terms of our general licenses, the transfer or pledge of any of the License
Assets (defined as the assets required by us for the provision of our services)
requires the prior written consent of the Ministry of Communications. Such consent may be
subject to conditions prescribed by the Ministry of Communications, which will grant its
consent to such transfer or pledge if it finds that foreclosure of the pledge will not
cause any disruption to the provision of our services.
The
pledge of License Assets does not require the prior written consent of the Ministry of
Communications if it is made to an Israeli bank in connection with credit extended by the
bank under an agreement in which the bank undertakes that foreclosure of the pledge will
not cause any disruption to the provision of our services and provided that a prior notice
of such pledge or transfer has been given to the director general of the Ministry of
Communications.
Our
licenses require the approval of the Ministry of Communications for the acquisition of 5%
or more of our means of control. A separate approval from the Ministry of Communications
is required for the acquisition of 25% or more of our means of control or for the
acquisition of our means of control providing its holder with the direct or indirect
ability to have a significant influence over our operations, and an additional approval
from the Ministry of Communications is required for the acquisition of 50% or more of our
means of control or for acquisition of our means of control providing its holder with the
direct or indirect ability to direct our operations. In each case the ability to influence
or direct our operations may arise from our articles of association, from written or oral
agreement or from holding any means of control or otherwise, other than from holding the
position of a director or an officer, and the holder of largest share of any type of means
of control is deemed to have the ability to control our operations.
32
The
prior-mentioned provisions do not apply to the acquisition of Traded Means of
Control, defined as a mean of control listed on a stock exchange or that were
offered to the public, provided that the initial public offering was approved by the
Ministry of Communications and that the acquisition of Traded Means of Control does not
involve a change of control. We received such approval in connection with our initial
public offering in October 2007. Our general licenses require us to provide written notice
to the Ministry of Communications of the acquisition of Traded Means of Control as a
result of which any entity becomes a holder of 5% or more of our means of control within
21 days of becoming aware of such acquisition.
We
are also required to apply for the approval of the Ministry of Communications of
(i) any acquisition of our Traded Means of Control as a result of which any entity
becomes a holder of 10% or more of our means of control, or (ii) an acquisition of
25% or more of our traded means of control, or (iii) an acquisition of our Traded
Means of Control providing its holder with the direct or indirect ability to have a
significant influence over our operations, provided that in any and all such cases, the
acquisition does not result in a transfer of control over us. Moreover, within the scope
of the notice to the Ministry of Communications, we are required to apply for an approval
of such acquisition. Such application is to be filed within 21 days of us becoming aware
of such acquisitions.
Any
holding of our Traded Means of Control that requires the approval of the Ministry of
Communications will be, unless the approval is granted, regarded by us as dormant
shares, within the meaning of the Israeli Companies Law, until such approval is
obtained, such that the shares carry no rights and may not be voted at a general meeting
except for the right to receive their pro rata portion of dividends and distributions paid
to our shareholders. These provisions of our licenses are incorporated into our articles
of association.
Similarly,
our general licenses provide that a holder of means of control in us, or in our
shareholder, may not grant a pledge over its holdings if as a result of foreclosing the
pledge the pledge holder may (i) hold 5% or more of our means of control (25% or more
in the case of a pledge granted to a bank), (ii) hold 25% or more of our means of
control or means of control providing it the direct or indirect ability to have a
significant influence over our activities, or (iii) 50% or more of our means of
control or means of control providing it with the direct or indirect ability to control
our activities. These rules do not apply if the pledge agreement requires the prior
approval of the Ministry of Communications for the foreclosure of the pledge. There is no
specific regulation with respect to the enforcement of this requirement or a requirement
that the Ministry of Communications approves the pledge agreement. General provisions with
respect to breach of the licenses apply.
Furthermore,
under our general licenses, we must maintain a minimum level of shareholders equity.
Under our DFL,VoB and international telephony licenses, our shareholders equity on a
combined basis must equal or exceed NIS 25 million ($6.6 million) and NIS
20 million ($5.3 million), respectively. Approval of the Ministry of Communications
would be required under the terms of our special licenses if there is a change in our
means of control.
Under
the Communications Law, a license, including any right granted under the license, is
non-transferable, non-encumberable and incapable of being seized. However, the Ministry of
Communications may, in special circumstances, allow the transfer of a license in the case
of structural changes and upon the satisfaction of stipulated conditions, if the Ministry
of Communications is convinced that all of the conditions satisfied by the transferor are
satisfied by the transferee.
Interconnect
and Other Charges
We
are required to interconnect our network to other public communications networks in
Israel, on equal terms and without discrimination, in order to enable registered customers
of all operators to communicate with one another. Similarly, Bezeq, HOT and all of the
cellular operators must provide us with use of their networks for the purpose of
transmitting our international and local fixed-line traffic, as well as with open access
for the purpose of providing ISP services.
The
Israeli Communications Regulations (Telecommunications and Broadcasting) (Payment for
Interconnecting), 2000 issued by the Ministry of Communications establish the interconnect
tariffs among landline operators, international call operators and cellular operators as
follows:
|
|
The
maximum interconnect tariff payable by a landline operator or a cellular operator for the
completion of a call on another cellular network was decreased as of March 1, 2008 from
NIS 0.2659 per minute to NIS 0.2327 per minute. As of March 1, 2009, the tariff was
updated to NIS 0.2415, according to the increase in the Israeli consumer price index, or
the Israeli CPI.
|
33
|
|
The
interconnect tariff payable in 2008 by a landline operator for the completion of a call
on another landline network was NIS 0.0432 per minute (NIS 0.0239 per minute at
off-peak times). As of January 1, 2009, the tariff was updated to NIS 0.0423 per minute
(NIS 0.0234 per minute at off-peak times). The Ministry of Communications announced its
intent to review the symmetrical interconnect tariffs between landline operators
operating a VoB network and other landline operators not later than February 2009.
|
|
|
The
maximum interconnect tariff payable by an international call operator for the completion
of a call on a cellular network was NIS 0.2415 per minute. As of March 1, 2009, the
tariff was updated to NIS 0.2415, according to the increase in the Israeli CPI.
|
These
tariffs do not include value added tax and are updated in accordance with the regulations
in March of each year based on the change in the Israeli CPI published each January. We
have agreements with Bezeq, HOT and the cellular operators establishing procedures of
interconnecting our networks and allowing each operator to collect and remit the
interconnect tariffs.
Indemnity
and Insurance
Our
general licenses require us to fully indemnify the State of Israel with respect to any
third party claim made against it in connection with the establishment, use, deployment
and maintenance of our network and/or any other aspect of the services provided. In
addition, we must consistently maintain adequate insurance coverage to the satisfaction of
the Ministry of Communications.
Networks
We
are required to confirm, by performing periodic inspections, that our network
infrastructure and services comply with all applicable standards and technical
specifications established by the Ministry of Communications or any regulatory body in
Israel or a foreign regulatory body recognized in Israel under a license.
Termination
and Fines
The
Ministry of Communications may terminate our licenses if we materially default under the
terms of the licenses, do not comply with the Ministry of Communications
instructions or fail to cure a nonmaterial default within the prescribed grace period.
Each of the licenses may also be terminated upon our bankruptcy, voluntary dissolution or
the appointment of a receiver or liquidator, if means of control in our company are
transferred without the necessary prior approval of the Ministry of Communications, or if
the Ministry of Communications determines that it is required to terminate the license
based on public policy considerations. In certain circumstances the Ministry of
Communications may amend the terms of our licenses (for example in order to ensure the
existence of competition or to adapt to recent technological changes). Each license grants
the Ministry of Communications general access and inspection rights to our premises and
books. Upon expiration or termination of a license, we are obligated to transfer our
network infrastructure and related contracts to the subsequent license holder appointed by
the Ministry of Communications. Compensation for such transfer is established on the basis
of market prices assuming a going concern value.
The
Israeli Communications Law and our licenses allow the Ministry of Communications to impose
upon us substantial fines for breach of the terms of our licenses. Following a recent
increase in the amount of fines that may be imposed, the maximum amount per violation that
may be imposed is NIS 1.4 million plus 0.25% of our annual revenue from the preceding
year. An additional fine of 2% of the original sanction may be imposed for each day that
the violation continues. In addition, the Ministry of Communications has determined
certain service-related terms in our license as service terms. The maximum
fine per violation of a service term is up to twice the amount of any other
fine set in our license for such a violation per each period of 30 days or portion
thereof during which the violation continues.
Our
general licenses require that we provide the Ministry of Communications bank guarantees to
secure compliance with the terms of our licenses and payments of fines or indemnity we are
required to pay to the Ministry of Communications. Accordingly, as of December 31, 2008,
we have provided a bank guarantee of $4.8 million in connection with our international
telephony license and a bank guarantee of $2.3 million in connection with our VoB and DFL
license. The Ministry of Communications may call the bank guarantee if we breach a
material term of our license, do not obtain proper insurance as required under the terms
of the license, do not pay the required royalties, do not pay any fine that may be imposed
upon us, or if the Ministry of Communications suffers damages as a result of cancellation
of our license.
34
Extension
of Licenses
Our
licenses provide that the original terms of the licenses may be extended by the Ministry
of Communications for successive periods of ten years for the international telephony
license and the VoB and DFL license and five years for the call routing license, provided
that we have complied with the license and applicable law, have continuously invested in
the improvement of our service and network and have demonstrated the ability to continue
to do so in the future.
Royalty
Payments to the Ministry of Communications
Under
each of our general licenses, we are required to pay royalties to the State of Israel on
royalty-bearing revenues (defined as all of our revenues from providing services under the
licenses net of certain deductions, such as interconnect fees, amounts paid to
out-of-the-country communications providers for completing outgoing calls, revenues from
providing transmission services to other license holders, revenues from sale of equipment
and bad debts). The royalties are payable on a quarterly basis at a current rate of 2%,
which according to regulations issued by the Ministry of Communications was reduced to
1.5% as of January 1, 2009, and will be reduced further to 1.0% starting January 1,
2010.
In
June 2006, the Ministry of Communications demanded that 012 Golden Lines pay NIS
7.5 million in royalties based on its calling card income for the years 1997 through
2000. This demand was first raised in a letter from the Ministry of Communications in
January 2001, and several meetings and discussions took place in the interim. In response
to the Ministry of Communications demand, 012 Golden Lines provided a legal opinion,
or the Opinion, indicating that the demand and the provisions of the license on which it
was based are beyond the scope of authority of the Ministry of Communications. The
response by 012 Golden Lines also included a demand for the return of NIS 9.9 million
in previously made payments to the Ministry of Communications due to overcharges. On April
17, 2008 we sent a letter to the Ministry of Communications demanding that it state its
position regarding the findings included in the Opinion. On April 27, 2008 the Ministry of
Communications responded to our letter and informed us that its demand regarding our
alleged debt remains and that it has conducted several discussions on the subject and will
notify us of its position shortly. We are continuing to negotiate with the Ministry of
Communications regarding this issue.
C.
|
ORGANIZATIONAL
STRUCTURE
|
Internet
Gold owned approximately 74.79% of our outstanding ordinary shares, and Eurocom
Communications beneficially owned approximately 76.41% of our outstanding shares, as of
June 22, 2009. Internet Gold is a public company, whose shares are listed on the NASDAQ
Global Market and the Tel Aviv Stock Exchange. Internet Gold is controlled by Eurocom
Communications, which held 69.79% of its ordinary shares as of June 22, 2009. Eurocom
Communications is controlled by Mr. Shaul Elovitch, the chairman of our board of directors
and the chairman of the board of directors of Internet Gold and Eurocom Communications.
We
have one wholly-owned subsidiary, 012 Telecom Ltd., organized under the laws of the State
of Israel. All of our VoB activity is performed through 012 Telecom Ltd.
D.
|
PROPERTY,
PLANTS AND EQUIPMENT
|
Our
corporate headquarters are currently located in a 6,700 square meter leased facility
in Petach Tikva, Israel. The annual rent for the premises is NIS 6.1 million ($1.6
million) linked to the Israeli CPI and the term of the lease ends in July 2012 and is
subject to a renewal option for an additional five year period. We also rent (i) an
additional 3,000 square meters in Petach Tikva at an annual rent of NIS 2.1 million
($552,000) linked to the Israeli CPI, under a lease that terminates in September 2009 that
is subject to a renewal option for an additional ten years; (ii) an additional 4,200
square meters in Rishon Lezion at an annual rent of NIS 1.7 million ($447,000)
linked to the Israeli CPI, under a lease that terminates in January 2009 that is subject
to a renewal option for an additional five years; (iii) an additional 800 square
meters in Ramat-Gan at an annual rent of NIS 503,000 ($132,000),under a lease that
terminates in June 2011 that is subject to a renewal option for an additional five years;
and (iv) an additional 1,500 square meters in Petach-Tikva at an annual rent of NIS
1.0 million ($263,000) linked to the Israeli CPI, under a lease that terminates in January
2012 that is subject to a renewal option for an additional five years.
ITEM 4A.
|
|
UNRESOLVED STAFF COMMENTS
|
Not
applicable.
35
ITEM 5.
|
|
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|
The following discussion of our
results of operations should be read together with our audited consolidated financial
statements and the related notes, which appear elsewhere in this annual report. The
following discussion contains forward-looking statements that reflect our current plans,
estimates and beliefs and involve risks and uncertainties. Our actual results may differ
materially from those discussed in the forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below and elsewhere in
this annual report.
Overview
We
are a growth-oriented communication services provider in Israel with a leading market
position, offering a wide range of broadband and traditional voice services. Our broadband
services include broadband Internet access with a suite of value-added services,
specialized data services and server hosting, as well as new innovative services such as
local telephony via voice over broadband, or VoB, and a WiFi network of hotspots across
Israel. Our traditional voice services include outgoing and incoming international
telephony, hubbing, roaming and signaling and calling card services. As a growth-oriented
company, we continually focus on introducing new broadband services that allow us to
expand our penetration into the communication market segments in which we currently
operate, as well as access new market segments such as the large Israeli local telephony
and mobile markets. W e have frequently been a leader in our industry in introducing new,
innovative services and are the first company in Israel to provide VoB services.
We
offer our services to residential and business customers, as well as to Israeli cellular
operators and international communication services providers, or carriers, through our
integrated multipurpose network, which allows us to provide services to almost all of the
homes and businesses in Israel. As of December 31, 2008, we estimate our market share
of the international telephony market was 33% based on the number of incoming and outgoing
minutes in Israel. We estimate that our market share of the broadband Internet access
market as of December 31, 2008 was 32%- 33% based on our broadband market analysis.
As of December 31, 2008, we provided services to approximately one million registered
household customers and approximately 80,000 registered business customers. Our enterprise
customer base consists of many of Israels leading companies, including 62
of
the 100 largest companies in Israel (as determined by Dun & Bradstreet), which
includes the two largest Israeli banks and the Government of Israel.
Prior
to our initial public offering on October 30, 2007, we were a wholly-owned subsidiary of
Internet Gold, a public company traded on the NASDAQ Global Market and the Tel Aviv Stock
Exchange, whose shares are included in the TASE-100 Index. Internet Gold is controlled by
Eurocom Communications, one of Israels major communications groups. Internet Gold
began providing Internet access services in 1996, and began offering broadband services in
2001 and traditional voice services in 2004. As part of its internal restructuring in
2006, Internet Gold transferred to us its broadband and traditional voice services
businesses, which we refer to in this annual report as the Communications Business. On
December 31, 2006, we acquired one of our principal competitors, 012 Golden Lines.
our acquisition of 012 Golden Lines provided us with the size and scale of operations
necessary to effectively compete in our markets, and with significant opportunities for
cost savings and improved cash flow. Primarily as a result of this acquisition, we are now
one of the major communication services providers in Israel as well as one of the three
largest providers of broadband and international telephony services. Since the
acquisition, we have been granted a license to provide VoB local telephony services on a
commercial basis without any limitation on the number of subscribers. We have recently
applied to the Ministry of Communications for a full MVNO license according to the
guidelines it published, although the final regulatory framework for the grant of such a
license has not yet been established.
We
completed the execution of our integration plan with 012 Golden Lines in the second
quarter of 2008. As a result of the integration process, we realized projected synergies
and cost savings, primarily from the reduction of corporate overhead and advertising
expenses, elimination of overlapping functions and realization of operational efficiencies
resulting from leveraging common systems.
The
cost of our acquisition of 012 Golden Lines was NIS 599.4 million, including expenses
incurred in connection with the transaction, but not including NIS 289.6 million of
debt, which represents the outstanding debt of 012 Golden Lines as of the date of
acquisition. The consideration for the acquisition was paid in two installments in January
2007 and March 2007, including interest of 6.5% accrued from the dates the acquisition
agreements were signed. We also agreed that upon a successful completion of a public
offering of our securities, that a former minority shareholder of 012 Golden Lines will be
entitled to receive additional consideration based on a formula. The additional
consideration paid to the former minority shareholder was $262,000. In order to refinance
a portion of the short-term debt that we incurred in connection with the acquisition, we
issued an aggregate of NIS 425 million ($100 million) Series A debentures in private
placements to institutional investors in Israel in March 2007 and May 2007.
36
Primarily
as a result of our acquisition of 012 Golden Lines, our revenues increased by 222% from
NIS 343 million for the year ended December 31, 2006 to NIS 1,106 ($291 million) for
the year ended December 31, 2008. In an effort to further expand our customer base and
increase penetration into existing markets, we plan to cross-sell our services and
leverage advanced technologies to broaden our service offerings. We expect our revenues
will continue to increase as we increase our penetration of the local telephony market and
enter the mobile market in Israel by offering MVNO services, when and if such a license is
issued.
We
operate in a highly regulated industry in Israel, which has undergone significant changes
in the past decade, transitioning from a slow moving market, with a single state-owned
carrier, Bezeq, to one that, although still highly-regulated, has grown rapidly and is
highly competitive in nearly every segment. The Israeli communications market today is
dominated by three main groups: Eurocom, our indirect controlling shareholder, The IDB
Group and Bezeq, each with interests in several communications sub-sectors. The Ministry
of Communications has mandated an open access policy, which requires Bezeq and
HOT, the incumbent local cable provider, to provide access to their infrastructure,
including last-mile access to homes and offices. The Ministry of Communications has also
adopted a policy to encourage new entrants into the communications market, which has led
to increased competition in the market. We face competition in all segments of our
operations and we believe we maintain our competitive position based on the quality of our
services and competitiveness of our price.
Revenues
We
earn revenues primarily from the sale of broadband and traditional voice services, as well
as from ancillary sales of broadband equipment and products, such as routers. Our
customers can use our services on as needed basis or enter into monthly or
longer term arrangements. We bill our residential customers for our services on a monthly
basis and we are typically paid by credit card or bank debit order. Business customers are
also billed on a monthly basis, and we generally receive payment in full within ten to 70
days of invoice. We bill our cellular and carrier customers based on the number of minutes
terminated or transferred by us, and the number of signaling messages sent and received.
Our revenues are directly affected by the total number of residential and business
customers we have, the volume of traffic from our cellular and carrier customers and the
rates we charge for our service.
During
the years 2004 to 2006, both the broadband and traditional voice services markets
experienced price erosion. The effect of the price erosion was partially offset in the
broadband services market by the increased use of higher bandwidth by our customers for
which we charged higher fees, and in the traditional voice market by the continued growth
of the market and the increase in minutes used. We were able to further maintain our
operating margins and profitability in the broadband and traditional voice services
segments despite the price erosion by continued cost reductions. Broadband services
revenues primarily consist of monthly subscriptions for broadband access to the Internet.
We also earn revenues from offering a diverse suite of value-added services that are
incremental to our core broadband Internet access services, such as e-mail, global remote
access, wireless and wired home networking, various security services and virtual private
network, or VPN, services. We earn revenues for these services based either on fixed
prices for the service or a negotiated fee. We also provide specialized data services to
bandwidth-intensive organizations and international carriers, allowing them to transmit
electronic data from point to point or from point to multi-points. Our fee structure for
these services depends on three main factors: capacity, distance and the type of
technology used. Most specialized data services are provided under one to two year
contracts.
Revenues
from traditional voice services are generated from payments based on the number of minutes
the service is used by subscribers and the destination of the calls. We also offer our
traditional voice services in monthly packages. As of December 31, 2008, we had
approximately one million customers registered in our database, of which approximately
366,000 customers used our voice services and were billed by us in 2008. In addition, we
bill Israeli carriers for their customers use of our services, which in the year
ended December 31, 2008, were generated from over 695,000 lines. We provide termination
services to over 87 international carriers for their calls originating outside of Israel.
We also provide hubbing-traffic routing to our international carrier customers and roaming
and signaling services for cellular operators.
37
Over
the last three years, we have experienced significant growth, mainly in our broadband
segment, and expect this growth to continue.
Most
of our revenues are denominated in NIS, and the remainder is principally denominated in
U.S. dollars.
Customer
Concentration.
We sell our products to a large number of residential, business and
carrier customers. In the past three years, no customer accounted for more than 10.0% of
our revenues.
|
Costs and Operating
Expenses
In
2007 and 2008, our costs and operating expenses were significantly impacted by our
acquisition of 012 Golden Lines. While our costs and operating expenses increased
significantly because of the increased scope of our operations, we believe that we will be
able to enjoy significant future savings as a result of efficiencies from economies of
scale and our increased buying power.
Cost
of Revenues.
Our cost of revenues consists primarily of costs of network services,
salaries and related expenses, facilities costs and depreciation and amortization
expenses. Our network services costs include costs of connecting local telephone lines
into our points of presence, international termination costs, the use of third party
networks and leased lines to connect each of our points of presence to our regional
network operations centers, the connections between our regional network operations
centers, points of presence and the Internet backbone. We also include in our cost of
revenues telecommunication services expenses related to traditional voice services. We
have entered into interconnect agreements with several international carriers to allow us
to provide global connectivity to our customers, and have spent significant sums on
acquiring rights of use, or ROU, of international submarine fiber-optic cables to ensure
the availability of adequate domestic and international bandwidth.
We
include salary costs for our technical and technical support staff in our cost of
revenues. These employees are directly involved in providing broadband and traditional
voice services to our subscribers. Our cost of revenues also includes the costs of
facilities used to provide technical services, royalties to the Ministry of Communications
and the direct cost of the equipment sold to customers.
The
main cost items in the broadband services segment are the Internet connectivity costs and
the technical support costs. While we have been purchasing increasing amounts of capacity
to accommodate our customers bandwidth requirements, the average cost of bandwidth
has decreased significantly, and, therefore, our total Internet connectivity cost has been
stable. In the traditional voice segment, the main cost item is the international and
local termination costs. Our international termination rates have been stable and we
expect no substantial changes in the near future. Both local and cellular termination
costs have gradually decreased over the last few years under the regulations issued by the
Ministry of Communications.
Selling
and Marketing Expenses.
Our selling and marketing expenses consist primarily of media
advertisement and sales promotion costs as well as salaries, commissions and related costs
for our sales representatives and channel marketing program partners and facilities costs
related to sales and marketing.
General
and Administrative Expenses.
Our general and administrative expenses consist primarily
of salary and related costs associated with our executive and administrative functions,
lease and maintenance payments for our administrative facilities, allowances for doubtful
accounts and bad debts and other miscellaneous expenses. Staff costs include direct salary
costs and related costs such as expenses recorded for stock based compensation, severance
pay, social security and retirement fund contributions, vacation and other pay.
Since
our initial public offering in 2007, our general and administrative expenses increased
principally due to additional costs associated with our becoming an independent public
company. Among such costs are professional fees in connection with on-going compliance
associated with us being a publicly traded company, including the establishment,
documentation and testing of our internal control over financial reporting. We also
incurred additional costs, such as directors and officers insurance and
investor relations and communications. These additional costs were partially offset by the
synergies and cost savings we achieved upon the completion of our integration with 012
Golden Lines, primarily from the reduction of corporate overhead and advertising expenses,
elimination of overlapping functions and realization of operational efficiencies resulting
from leveraging common systems.
38
Depreciation
and Amortization.
Our depreciation and amortization expenses primarily relate to our
network equipment and capacity. The various income statement line items that include
depreciation and amortization and the amount of depreciation and amortization included in
each such line item for the years ended December 31, 2006, 2007 and 2008 are as
follows:
|
Year ended December 31,
|
|
2006
|
2007
|
2008
|
|
(NIS in millions)
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
18.0
|
|
|
71.7
|
|
|
76.8
|
|
|
|
|
Selling and marketing expenses
|
|
|
|
1.9
|
|
|
35.8
|
|
|
31.1
|
|
|
|
|
General and administrative expenses
|
|
|
|
1.5
|
|
|
3.5
|
|
|
3.8
|
|
A
significant portion of the expenses are allocated to our two operating segments, depending
upon the department and segment to which the depreciated asset relates. Expenses are not
allocated in circumstances where the costs have been incurred in relation to assets, such
as network components and billing systems, serving both segments. In 2007, we began to
incur additional costs resulting from the amortization of intangible assets resulting from
our acquisition of 012 Golden Lines. These amortization costs were NIS 31.9 million in
2007 and NIS 27.3 million in 2008.
Financial
Income.
Financial income includes exchange rate differences arising from changes in
the value of monetary assets and monetary liabilities stated in currencies other than the
NIS, as well as interest income on our cash and cash equivalents and short term
investments in marketable securities.
Financial
Expenses.
Financial expenses include exchange rate differences arising from changes in
the value of monetary assets and monetary liabilities stated in currencies other than the
NIS, as well as from the decrease in market value of our marketable securities and from
interest and Israeli CPI linkage differences charged on loans from banks and related
parties and on our Series A Debentures. We incurred financial expenses of NIS 32.5 million
in 2007 and NIS 40.7 million ($ 10.7 million) in 2008 attributable to our Series A
Debentures issued to partially finance the acquisition of 012 Golden Lines.
Income
Tax.
We record deferred tax assets based on the assessment of management. Management
considers whether it is more likely than not that some portion or all of the deferred tax
assets may not be realized. The assessment requires considerable judgment on the part of
management, with respect to, among other things, benefits (expenses) that could be
realized from available tax strategies and future taxable income, as well as other
positive and negative factors. The ultimate realization of deferred tax assets is
dependent upon our ability to generate the appropriate character of future taxable income
sufficient to utilize tax loss carry forwards.
On
May 9, 2007, we received authorization from the Israeli Tax Authorities for the
transfer of the Communications Business on a tax free basis. As part of this
authorization, we were able to utilize our accumulated tax losses and recognize during
2007 a deferred tax asset in respect of our tax losses. As of December 31, 2008, we had
historical operating tax loss carryforwards of approximately NIS 52.6 million ($ 13.8
million) and our 012 Telecom Ltd. subsidiary had operating tax loss carryforwards of
approximately NIS 25.2 million ($ 6.6 million). These operating loss carryforwards have no
expiration date. However, the use of such operating loss carryforwards is restricted under
the tax ruling issued to us by the Israeli Tax Authority. See Item 10E. Taxation
Israeli Tax Considerations Ruling Issued by the Israeli Tax Authority.
Our
management has assessed our deferred tax assets and the need for a valuation allowance.
Such an assessment considers whether it is more likely than not that some portion or all
of the deferred tax assets may not be realized. The assessment requires considerable
judgment on the part of management with respect to the consideration of positive and
negative factors including benefits that could be realized from available tax strategies
and future taxable income. The ultimate realization of deferred tax assets is dependent
upon our ability to generate the appropriate character of future taxable income sufficient
to utilize loss carry forwards or tax credits before their expiration.
In
determining the potential requirement to establish a valuation allowance, we have
evaluated all positive and negative evidence, including the work plans of management and
the analysis of scenarios for achieving the work plans. The underlying assumptions
utilized in forecasting our future taxable income require judgment and may be subject to
revision based on future business developments. As a result of this assessment, we have
recorded a valuation allowance against our deferred tax assets resulting from capital loss
carryforwards and our subsidiarys operating loss carryforwards.
39
On
July 25, 2005, the Israeli Parliment passed the Law for the Amendment of the Income
Tax Ordinance (No. 147 and Temporary Order) 2005, or the 2005 Amendment, which
provides for a gradual reduction in the company tax rate in the following manner: in 2006
the tax rate was 31%, in 2007, the tax rate was 29%, in 2008, the tax rate was 27%, in
2009, the tax rate is 26% and from 2010 onward the tax rate will be 25%. Furthermore, from
2010, upon reduction of our tax rate to 25%, real capital gains will be subject to tax of
25%.
Key
Performance Indicators.
Our management evaluates our performance through focusing on
our key performance indicators: number of registered and active customers, operating
income and adjusted EBITDA. These key performance indicators are affected by the
competitive and regulatory landscape in which we operate and our ability to adapt to the
challenges posed. We monitor key operating and customer service metrics to review the
overall performance of our business, improve customer service, maintain the quality of our
network and reduce costs.
Impact of Critical
Accounting Policies
We
have identified the policies below as critical to the understanding of our financial
statements. The application of these policies requires management to make estimates and
assumptions that affect the valuation of assets and expenses during the reporting period.
There can be no assurance that actual results will not differ from these estimates.
Basis
of Presentation.
Our combined and consolidated financial statements are prepared in
accordance with U.S. GAAP. The combined financial statements prior to our initial public
offering have been derived from the financial statements and accounting records of
Internet Gold using the historical results of operations and historical basis of the
assets and liabilities of the Communication Business transferred to us by Internet Gold.
Significant assumptions and estimates have been used in the determination of cost
allocations from Internet Gold included in our combined financial statements and the
preparation of our historical financial information prior to our separation from Internet
Gold. We believe the assumptions underlying the combined financial statements are
reasonable. However, the combined financial statements may not necessarily reflect our
future results of operations, financial position and cash flows, or what our results of
operations, financial position and cash flows would have been had we been a stand-alone
company during the periods presented. The combined financial statements prior to our
initial public offering include allocations of certain of Internet Golds corporate
headquarters assets, liabilities and expenses directly relating to the Communication
Business that have been transferred to us. In addition, general corporate overhead has
been allocated to us either based on the ratio of our costs and operating expenses to
Internet Golds total costs and expenses or based on our revenue as a percentage of
Internet Golds total revenue. The costs of these services charged to us are not
necessarily indicative of the costs that would have been incurred if we had performed
these functions as a stand-alone company.
Revenue
Recognition.
Substantially all of our revenue is derived from broadband and
traditional voice services. Our remaining revenue, representing less than 5% of our total
revenue in each of the three years ended December 31, 2006, 2007 and 2008, was earned
from ancillary sales of broadband equipment and products, such as routers.
Revenue
from broadband services is recognized as services are performed. Revenues from traditional
voice services are recognized based on the number of minutes the service is used by
customers and the destination of the calls. Revenues for subscriptions to our online paid
content properties are recognized monthly on a straight-line basis over the term of the
subscription. We complete our obligation to customers for these arrangements by granting
them access to our websites or by delivering e-Newsletters. We apply the provisions of
Emerging Issues Task Force, or EITF, Issue No. 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, which provides guidance on when and how an
arrangement involving multiple deliverables should be divided into separate units of
accounting. We have determined that EITF No. 00-21 requires us to account for the sale of
products and the related cost of such products as a separate unit of accounting when such
products are sold with accompanying services in a multiple element transaction. Product
sales revenue is recognized upon the delivery of the product to the customer, based on its
relative fair value only up to the amount of the consideration that is not contingent.
For
each revenue stream, evidence of the arrangement, delivery and pricing may be different.
For all revenue streams, we determine that collectability is reasonably assured through a
standardized credit review to determine each customers credit worthiness.
We
evaluate our revenue recognition policy on a frequent basis with respect to existing and
new accounting principles and new lines of business. In addition, we examine the different
parameters that may affect our revenue and its recognition, such as customer credits and
accrued revenue. According to these examinations we decide on the required changes, if
any, in our revenue recognition policy.
40
Allowance
for Doubtful Accounts.
Determining our allowance for doubtful accounts receivable
requires significant estimates. Due to the large number of customers that we serve, it is
impractical to review the creditworthiness of each of our customers, although a credit
review is performed for carrier and large business
customers.
We consider a number
of factors in determining the proper level of the allowance, including historical
collection experience, current economic trends, the aging of the accounts receivable
portfolio and changes in the creditworthiness of our customers. We evaluate our guidelines
for providing for doubtful accounts on a frequent basis and examine the material
parameters that might affect the assessment of our doubtful accounts, such as the tendency
of a customer segment to make timely payments; rate of checks returned for insufficient
payment and blocked bank accounts. Our policy has been consistent and has proven itself
over the years. Therefore, based on our past experience we believe this policy is
appropriate.
Valuation
of Long-lived Assets.
Long-lived assets and certain identifiable amortizable
intangible assets to be held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of undiscounted
future cash flows resulting from the use of the asset and its eventual disposition.
Measurement of any impairment loss for long-lived assets and certain identifiable
intangible assets that we expect to hold and use is based on the amount by which the
carrying value exceeds the fair value of the asset.
We
make significant assumptions and estimates in this process regarding matters such as
determining asset groups and estimating future cash flows, remaining useful lives,
discount rates and growth rates. We make assumptions about the remaining useful life of
our long-lived assets based on the average life of our historical capital asset additions
and our historical asset purchase trend. Because of the nature of our industry, we also
assume that the technology changes in the industry render all equipment obsolete with no
salvage value after their useful lives.
Valuation
of Goodwill.
Under Statement of Financial Accounting Standard, or SFAS, No. 142,
Goodwill and Other Intangible Assets
, goodwill and indefinite-lived
intangible assets are reviewed annually (on December 31) for impairment, or more
frequently, if impairment indicators arise.
Our
reporting units are the same as our operating segments as each segments components
have been aggregated and deemed a single reporting unit because they have similar economic
characteristics. Each component is similar in that they each provide services for which
all of the resources and costs are drawn from the same pool, and are evaluated using the
same business factors by management. Furthermore, management measures results and
allocates resources for the segment as a whole.
Goodwill
impairment is tested using a two-step process that begins with an estimation of the fair
value of each reporting unit. The first step is a screen for potential impairment by
comparing the fair value of a reporting unit with its carrying amount. The second step
measures the amount of impairment loss, if any, by comparing the implied fair value of the
reporting unit goodwill with its carrying amount.
We
generally determine the fair value of our reporting units using the expected present value
of future cash flows. If the carrying amount of a reporting unit exceeds the reporting
units fair value, we would perform the second step of the goodwill impairment test
to determine the amount of impairment loss.
Accounting
for Income Taxes.
We recognize deferred tax assets and liabilities for the expected
future tax consequences of transactions and events. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial statement
bases and the tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. If necessary, deferred tax
assets are reduced by a valuation allowance to an amount that is determined more likely
than not to be recoverable.
We
must make significant estimates and assumptions about future taxable income and future tax
consequences when determining the amount of the valuation allowance, including the
evaluation of all positive and negative evidence, our work plans and the analysis of
scenarios for achieving these work plans. The underlying assumptions utilized in
forecasting our future forecasted taxable income require judgment and may be subject to
revision based on future business developments.
Significant
judgment is required in evaluating our uncertain tax positions and determining our
provision for income taxes in accordance with Financial Accounting Standards Board, or
FASB, Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109,
or FIN 48. FIN 48 contains a
two-step approach to recognizing and measuring uncertain tax positions accounted for in
accordance with SFAS No. 109,
Accounting for Income Taxes,
or
SFAS 109. The first step is to evaluate the tax position for recognition by
determining if the weight of available evidence indicates that it is more likely than not
that the position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as the largest
amount that is more than 50% likely of being realized upon settlement.
41
Although
we believe we have adequately reserved for our uncertain tax positions, no assurance can
be given that the final tax outcome of these matters will not be different. We adjust
these reserves in light of changing facts and circumstances, such as the closing of a tax
audit, the refinement of an estimate or changes in tax laws. To the extent that the final
tax outcome of these matters is different than the amounts recorded, such differences will
impact the provision for income taxes in the period in which such determination is made.
The provision for income taxes includes the impact of reserve provisions and changes to
reserves that are considered appropriate, as well as the related interest and penalty.
Accounting
for tax positions requires judgments, including estimating reserves for potential
uncertainties. We also assess our ability to utilize tax attributes, including those in
the form of carry forwards for which the benefits have already been reflected in the
financial statements. We do not record valuation allowances for deferred tax assets that
we believe are more likely than not to be realized in future periods. While we believe the
resulting tax balances as of December 31, 2008 and 2007 are appropriately accounted
for in accordance with FIN 48 and SFAS 109 as applicable, the ultimate outcome of such
matters could result in favorable or unfavorable adjustments to our consolidated financial
statements and such adjustments could be material. See Note 16 to our consolidated
financial statements for further information regarding income taxes. We have filed or are
in the process of filing tax returns that are subject to audit by the respective tax
authorities. The amount of income tax we pay is subject to ongoing audits by the tax
authorities, which often result in proposed assessments. We believe that we adequately
provided for any reasonably foreseeable outcomes related to tax audits and settlement.
However, our future results may include favorable or unfavorable adjustments to our
estimated tax liabilities in the period the assessments are made or resolved, audits are
closed or when statutes of limitation on potential assessments expire.
Equity-based
compensation expense.
We account for equity-based compensation in accordance with SFAS
No. 123(R),
Share-Based Payment
. Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as an expense over the requisite
service periods. Determining the fair value of stock-based awards at the grant date
requires the exercise of judgment, including the amount of stock-based awards that are
expected to be forfeited. If actual forfeitures differ from our estimates, equity-based
compensation expense and our results of operations would be impacted.
We
estimate the fair value of employee stock options using a Black-Scholes-Merton valuation
model. The fair value of an award is affected by our stock price on the date of grant as
well as other assumptions, including the estimated volatility of our stock price over the
expected term of the awards, and the estimated period of time that we expect employees to
hold their stock options.
Valuation
of financial instruments
. Effective January 1, 2008, we adopted SFAS 157,
Fair Value Measurements
, and effective October 10, 2008, adopted
FSP No. SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active
, except as it applies to the non-financial
assets and non-financial liabilities subject to FSP 157-2. SFAS 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based on
assumptions that market participants would use in pricing an asset or a liability. As a
basis for considering such assumptions, SFAS 157 establishes a three-tier value hierarchy,
as set forth below, which prioritizes the inputs used in the valuation methodologies in
measuring fair value:
|
|
Level 1
Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.
|
|
|
Level 2
Include other inputs that are directly or indirectly observable in the
marketplace.
|
|
|
Level 3
Unobservable inputs which are supported by little or no market activity.
|
The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
42
The
actual value at which such securities could actually be sold or settled with a willing
buyer or seller may differ from such estimated fair values depending on a number of
factors, including, but not limited to, current and future economic conditions, the
quantity sold or settled, the presence of an active market and the availability of a
willing buyer or seller.
Valuation
of investments
. Based on our intention with respect to a particular investment at the
time of investment, we are generally required to classify our investments into one of
three investment categories under GAAP: trading, held-tomaturity, or
available-for-sale. The classification of the investment may affect our reported results.
For investments classified as trading, we are required to recognize changes in the fair
values into income for the period reported. Changes in the fair value of investments
classified as available-for-sale are not recognized to income during the period, but
rather are recognized as a separate component of equity until realized. We classify part
of our investments as available-for-sale and trading. As of December 31, 2008, we did not
hold investments classified as held-to-maturity.
We
periodically review our marketable securities for impairment. If we conclude that any of
these investments are impaired, we determine whether such impairment is
other-than-temporary, as defined under FSP 115-1. Factors we consider to make
such a determination include our intent and ability to hold the investment for a period of
time sufficient for any anticipated recovery in market value, the length of time and
extent to which the fair value has been less than its cost basis, the credit ratings of
the securities, the nature of underlying collateral as applicable and the financial
condition and near-term prospects of the issuer. If any impairment is considered
other-than-temporary, we will write down the asset to its fair value and take
a corresponding charge to our Consolidated Statement of Income.
Contingencies.
We are involved in legal proceedings and other claims from time to time. We are
required to assess the likelihood of any adverse judgments or outcomes to these
matters, as well as potential ranges of probable losses. A determination of the
amount of any reserves required for any contingencies are made after careful
analysis of each individual claim. The required reserves may change due to
future developments in each matter or changes in approach, such as a change in
the settlement strategy in dealing with any contingencies, which may result in
higher net loss. If actual results are not consistent with our assumptions and
judgments, we may be exposed to gains or losses. We evaluate whether a liability
must be recorded for contingencies based on whether a liability is probable and
reasonably estimable.
Acquisition
of 012 Golden Lines.
We accounted for the acquisition of 012 Golden Lines utilizing
the purchase method of accounting. The application of purchase method accounting under
SFAS 141 requires that the total purchase price be allocated to the fair value of assets
acquired and liabilities assumed based on their fair values at the acquisition date, with
amounts exceeding the fair values being recorded as goodwill. The assets and liabilities
of 012 Golden Lines have been appraised for inclusion in the balance sheet by BDO Ziv Haft
Consulting & Management Ltd., an independent valuation expert. Long-lived assets such
as property and equipment will reflect a value of replacing the assets, which takes into
account changes in technology, usage, and relative obsolescence and depreciation of the
assets.
In
addition, assets and liabilities that would not normally be recorded in ordinary
operations will be recorded at their acquisition values, for example, customer
relationships that were developed by the acquired company. Debt instruments and
investments are valued in relation to current market conditions and other assets and
liabilities are valued based on the acquiring companys estimates. After all values
have been assigned to assets and liabilities, the remainder of the purchase price is
recorded as goodwill.
The
allocation process requires an analysis of acquired property and equipment, contracts,
customer lists and relationships, contractual commitments, legal contingencies and brand
value to identify and record the fair value of all assets acquired and liabilities
assumed. In valuing acquired assets and assumed liabilities, fair values were based on,
but not limited to, future expected discounted cash flows for customer relationships,
current replacement cost for similar capacity and obsolescence for certain property and
equipment, comparable market rates for contractual obligations and certain investments and
liabilities, expected settlement amounts for litigation and contingencies, and appropriate
discount rates and growth rates.
Determining
the particular economic life for intangible assets and for tangible fixed assets involves
the exercise of judgment and can materially affect the reported amounts for amortization
of intangible assets and for depreciation for tangible fixed assets.
We
have not identified any material unrecorded pre-acquisition contingencies where the
related asset, liability or impairment is probable and the amount can be reasonably
estimated.
43
Results of Operations
The
following table sets forth our results of operations in NIS in thousands and as a
percentage of revenues for the periods indicated:
|
Year ended December 31,
|
|
2006
|
2007
|
2008
|
|
NIS
|
%
|
NIS
|
%
|
NIS
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Broadband
|
|
|
|
183,096
|
|
|
53.4
|
|
|
478,703
|
|
|
43.4
|
|
|
548,979
|
|
|
49.6
|
|
Traditional voice
|
|
|
|
159,990
|
|
|
46.6
|
|
|
624,185
|
|
|
56.6
|
|
|
557,224
|
|
|
50.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
343,086
|
|
|
100.0
|
|
|
1,102,888
|
|
|
100.0
|
|
|
1,106,203
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and operating expenses:
|
|
|
Cost of revenues
|
|
|
|
224,565
|
|
|
65.5
|
|
|
762,205
|
|
|
69.1
|
|
|
753,416
|
|
|
68.1
|
|
Selling and marketing
|
|
|
|
59,864
|
|
|
17.4
|
|
|
157,304
|
|
|
14.3
|
|
|
162,274
|
|
|
14.7
|
|
|
|
|
General and administrative
|
|
|
|
22,921
|
|
|
6.7
|
|
|
57,984
|
|
|
5.3
|
|
|
55,913
|
|
|
5.1
|
|
Impairment and other charges
|
|
|
|
10,187
|
|
|
3.0
|
|
|
10,433
|
|
|
0.9
|
|
|
6,705
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and operating expenses
|
|
|
|
317,537
|
|
|
92.6
|
|
|
987,926
|
|
|
89.5
|
|
|
978,308
|
|
|
88.4
|
|
Income from operations
|
|
|
|
25,549
|
|
|
7.4
|
|
|
114,962
|
|
|
10.6
|
|
|
127,895
|
|
|
11.6
|
|
Financial income
|
|
|
|
1,829
|
|
|
0.5
|
|
|
4,694
|
|
|
0.4
|
|
|
7,640
|
|
|
0.7
|
|
Financial expenses
|
|
|
|
19,095
|
|
|
5.5
|
|
|
56,737
|
|
|
5.1
|
|
|
64,879
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income after financial expenses
|
|
|
|
8,283
|
|
|
2.4
|
|
|
62,919
|
|
|
5.8
|
|
|
70,656
|
|
|
6.4
|
|
Income tax expenses (income)
|
|
|
|
10,315
|
|
|
3.0
|
|
|
23,027
|
|
|
2.1
|
|
|
22,174
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
(2,032
|
)
|
|
(0.6
|
)
|
|
39,892
|
|
|
3.6
|
|
|
48,482
|
|
|
4.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2007 Compared with Year Ended December 31, 2008
Revenues
.
Our revenues increased slightly from NIS 1,102.9 million for the year ended
December 31, 2007 to NIS 1,106.2
million ($291 million) for the year
ended December 31, 2008. The increase was primarily due to the growth in our
broadband segment, including our new local telephony services, which was
partially offset by a decrease in our traditional voice segment, primarily in
hubbing services. We expect the growth in revenues to continue in 2009 mainly
due to increased revenues from our broadband segment.
Revenues
from our broadband services, including Internet access services and related value-added
services, provided to residential and business customers, which represented 49.6% of our
total revenues for the year ended December 31, 2008, increased by 15% from NIS 478.7
million for the year ended December 31, 2007 to NIS 549 million ($144.4 million) for
the year ended December 31, 2008. The increase was primarily due to our new local
telephony services and the continued growth of our broadband customers base, which will
continue to be the main growth drivers in 2009.
Traditional
voice services revenues, which represented 50.4% of our total revenues for the year ended
December 31, 2008, decreased by 11% from NIS 624.2 million for the year ended
December 31, 2007 to NIS 557.2 million ($146.6 million) for the year ended December 31,
2008. The decrease was primarily due to the decrease in hubbing services and the
appreciation of the NIS against the U.S. dollar in 2008, which reduced the NIS value of
our hubbing services revenues that are paid in U.S. dollars. We do not expect traditional
voice services revenues to further decrease in 2009, however we cannot predict the
influence of currency fluctuations on this segments revenues.
Cost
of Revenues.
Our cost of revenues decreased by 1.2% from NIS 762.2 million for the
year ended December 31, 2007 to NIS 753.4 million ($198.2
million) for the
year ended December 31, 2008. The decrease is related primarily to the growth of the
broadband segment which enjoys a lower level of expenses and to the decrease in hubbing
services, which generate a high level of direct termination costs. Our cost of revenues as
a percentage of revenues decreased from 69.1% for the year ended December 31, 2007 to
68.1% for the year ended December 31, 2008, primarily as a result of the decrease in the
percentage of revenues from traditional voice services out of total revenues. The
provision of traditional voice services entails a higher cost of revenues compared to the
provision of broadband services. Cost of revenues as a percentage of revenues is expected
to decrease slightly in 2009, due to the increasing contribution of broadband services to
our revenues mix.
44
Cost
of revenues for broadband services increased by 16% from NIS 266.3 million for the year
ended December 31, 2007 to NIS 308
.
6 million ($81.2 million) for the year ended
December 31, 2008. The increase is attributable to expenses related to the growth of our
broadband services in such period.
Cost
of revenues for traditional voice services decreased by 10% from NIS 495.9 million for the
year ended December 31,2007 to NIS 444.8 million ($117.0 million) for the year ended
December 31, 2008. The decrease is related primarily to the decrease of hubbing services
in 2008, which services generate a high level of direct termination costs.
Gross
Profit.
Our gross profit increased by 3.6% from NIS 340.7 million for the year ended
December 31, 2007 to NIS 352.8 million ($ 92.8 million) for the year ended December
31, 2008. The increase is related primarily to the increasing contribution of broadband
services to our revenues mix. Our gross profit as a percentage of revenues increased from
30.9% for the year ended December 31, 2007 to 31.9% for the year ended December 31, 2008.
Gross
profit for our broadband services increased by 13% from NIS 212.4 million for the year
ended December 31, 2007 to NIS 240.4 million ($63.2 million) for the year ended December
31, 2008. The increase is primarily due to the growth of our broadband services.
Gross
profit for our traditional voice services decreased by 12% from NIS 128.3 million for the
year ended December 31, 2007 to NIS 112.4 million ($29.6 million) for the year ended
December 31, 2008. The decrease is primarily due to the decrease in hubbing services and
the appreciation of the NIS against the U.S. dollar in 2008, which reduced the NIS value
of our hubbing services revenues that are paid in U.S. dollars.
Selling
and Marketing Expenses.
Our selling and marketing expenses increased by 3.2% from NIS
157.3 million for the year ended December 31, 2007 to NIS 162.3 million ($42.7
million) for the year ended December 31, 2008. Our selling and marketing expenses as a
percentage of revenues increased from 14.3% for the year ended December 31, 2007 to 14.7%
for the year ended December 31, 2008. We expect our selling and marketing expenses to
remain constant in 2009, which will become a smaller percentage of our growing revenues.
General
and Administrative Expenses.
Our general and administrative expenses decreased by 3.6%
from NIS 58.0 million for the year ended December 31, 2007 to
NIS 55.9 million ($14.7 million) for the year ended December 31, 2008. Our
general and administrative expenses as a percentage of revenues decreased from 5.3% for
the year ended December 31, 2007 to 5.1% for the year ended December 31, 2008. The
decrease was a result of the reduction in management costs and administrative expenses
achieved as a part of our integration efforts following the acquisition of 012 Golden
Lines. Excluding the expenses recorded for stock-based compensation of NIS 3.4 million
($0.9 million) in 2008, the decrease from 2007 to 2008 was 9.5%. We expect our general and
administrative expenses to remain similar to the level of the third and fourth quarters of
2008, which will become a smaller percentage of our growing revenues.
Impairment
and Other Charges.
Our impairment and other charges were NIS 10.4 million for the
year ended December 31, 2007 and NIS 6.7 million ($1.8 million) for the year ended
December 31, 2008. The other charges represent non-recurring expenses relating to our
acquisition of 012 Golden Lines. The final charge in respect of the acquisition was
recorded in the second quarter of 2008.
Income
from Operations
. Our income from operations increased by 11.2% from
NIS 115.0 million for the year ended December 31, 2007 to NIS 127.9 million
($33.6 million) for the year ended December 31, 2008. The increase was primarily due
to the improved gross profit and the reduction in other charges related to the acquisition
of 012 Golden Lines, and the lower amortization of intangible assets resulting from the
acquisition of 012 Golden Lines.
Financial
Income.
Our financial income increased from NIS 4.7 million for the year ended
December 31, 2007 to NIS 7.6 million ($2.0 million) for the year ended December
31, 2008. The increase is primarily attributable to the investment of a portion of the
proceeds from our initial public offering in short-term bank deposits.
Financial
Expenses.
Our financial expenses increased from NIS 56.7 million for the year
ended December 31, 2007 to NIS 64.9 million ($17.1 million) for the year ended
December 31, 2008. The increase was due to financing expenses attributable to the NIS 425
million of debentures that we issued during the period March to May, 2007. We expect our
financial expenses attributable to our outstanding debt to decrease gradually over the
years as a result of the decreasing debt, however we cannot predict the influence of
currency fluctuations and consumer price index adjustments on our debt.
45
Income
Tax Expenses.
Our income tax expenses decreased from NIS 23.0 million for
the year ended December 31, 2007 to NIS 22.2 million ($5.8 million) for the year
ended December 31, 2008, principally due to the lower applicable tax rate in Israel.
Net
Income
. Our net income increased from NIS 39.9 million for the year ended
December 31, 2007 to NIS 48.5 million ($12.8 million) for the year ended
December 31, 2008. The increase is primarily attributable to the increase in income from
operations, derived mainly by the improved gross margin and lower impairment and other
charges.
Year Ended December 31,
2006 Compared with Year Ended December 31, 2007
Revenues
.
Our revenues increased by 221% from NIS 343.1 million for the year ended
December 31, 2006 to NIS 1,102.9 million for the year ended December 31,
2007. The increase was primarily due to the consolidation of 012 Golden
Lines results for the first time.
Revenues
from our broadband services, including Internet access services and related value-added
services, provided to residential and business customers, which represented 43.4% of our
total revenues for the year ended December 31, 2007, increased by 161% from NIS 183.1
million for the year ended December 31, 2006 to NIS 478.7 Million for year ended
December 31, 2007. The increase was primarily due to the consolidation of 012 Golden
Lines results for the first time.
Traditional
voice services revenues, which represented 56.6% of our total revenues for the year ended
December 31, 2007, increased by 290% from NIS 160 million for the year ended December
30, 2006 to NIS 624.2 million for the year ended December 31, 2007. The increase was
primarily due to the consolidation of 012 Golden Lines results for the first time.
Cost
of Revenues.
Our cost of revenues increased by 239.4% from NIS 224.6 million for the
year ended December 31, 2006 to NIS 762.2 million for the year ended December
31, 2007. The increase is related primarily to the consolidation of 012 Golden Lines
results for the first time. Our cost of revenues as a percentage of revenues increased
from 65% for the year ended December 31, 2006 to 69% for the year ended December 31, 2007
primarily from the increase in the percentage of revenues from traditional voice services
out of total revenues. The provision of traditional voice services entails a higher cost
of revenues than the provision of broadband services.
Cost
of revenues for broadband services increased by 187.9% from NIS 92.5 million for the year
ended December 31, 2006 to NIS 266.3 million for the year ended December 31, 2007. The
increase is related primarily to the consolidation of 012 Golden Lines results for
the first time. The increase is attributable to expenses related to the growth in
broadband services.
Cost
of revenues for traditional voice services increased by 275.5% from NIS 132.1 million for
the year ended December 31,2006 to NIS 495.9 million for the year ended December 31, 2007.
The increase is related primarily to the consolidation of 012 Golden Lines results
for the first time, and is attributable to higher termination costs resulting from the
substantial growth in traditional voice services.
Gross
Profit
. Our gross profit increased by 187.4% from NIS 118.5 million for the year ended
December 31, 2006 to NIS 340.7 million for the year ended December 31, 2007. The
increase is related primarily to the consolidation of 012 Golden Lines results for
the first time. Our gross profit as a percentage of revenues decreased from 35% for the
year ended December 31, 2006 to 31% for the year ended December 31, 2007 primarily due to
the increase in the percentage of revenues from traditional voice services out of total
revenues. The provision of traditional voice services entails a lower gross profit than
the provision of broadband services.
Gross
profit for our broadband services increased by 134.5% from NIS 90.6 million for the year
ended December 31, 2006 to NIS 212.4 million for the year ended December 31, 2007. The
increase is primarily due to the consolidation of 012 Golden Lines results for the
first time and to the growth in broadband services.
Gross
profit for our traditional voice services increased by 359.1% from NIS 27.9 million for
the year ended December 31, 2006 to NIS 128.3 million for the year ended December 31,
2007. The increase is primarily due to the consolidation of 012 Golden Lines results
for the first time and to the substantial growth in traditional voice services.
Selling
and Marketing Expenses.
Our selling and marketing expenses increased by 162.6% from
NIS 59.9 million for the year ended December 31, 2006 to NIS 157.3 million for
the year ended December 31, 2007. The increase is related primarily to the consolidation
of 012 Golden Lines results for he first time. Our selling and marketing expenses as
a percentage of revenue decreased from 17.4% for the year ended December 31, 2006 to 14.3%
for the year ended December 31, 2007.
46
General
and Administrative Expenses.
Our general and administrative expenses increased by
153.3% from NIS 22.9 million for the year ended December 31, 2006 to
NIS 58.0 million for the year ended December 31, 2007. The increase is related
primarily to the consolidation of 012 Golden Lines results for the first time. Our
general and administrative expenses as a percentage of revenues decreased from 6.7% for
the year ended December 31, 2006 to 5.3% for the year ended December 31, 2007. The
decrease was a result of the reduction in management costs and administrative expenses
achieved as a part of our integration efforts.
Impairment
and Other Charges.
Our impairment and other charges were NIS 10.2 million for the
year ended December 31, 2006 and NIS 10.4 million for the year-ended December 31, 2007.
These charges represent non-recurring expenses relating to charges incurred in connection
with the acquisition of 012 Golden Lines.
Income
from Operations
. Our income from operations increased by 350.9% from
NIS 25.5 million for the year ended December 31, 2006 to NIS 115.0 million
for the year ended December 31, 2007. The increase was primarily due to the consolidation
of 012 Golden Lines results for the first time.
Financial
Income.
Our financial income increased from NIS 1.8 million for the year ended
December 31, 2006 to NIS 4.7 million ($1.2 million) for the year ended December
31, 2007. The increase is primarily attributable to the investment of a portion of the
proceeds from our initial public offering in short-term bank deposits.
Financial
Expenses.
Our financial expenses increased from NIS 19.1 million for the year
ended December 31, 2006 to NIS 56.7 million ($14.7 million) for the year ended
December 31, 2007. The increase is related to the consolidation of 012 Golden Lines
results for the first time and was also due to financing expenses attributable to the NIS
425 million of debentures that we issued during the period March to May, 2007. Our
financial expenses net as a percentage of revenues decreased from 5.0% for the year ended
December 31, 2006 to 4.7% for the year ended December 31, 2007.
Income
Tax Expenses.
Our income tax expenses increased from NIS 10.3 million for
the year ended December 31, 2006 to NIS 23.0 million for the year ended December
31, 2007. Income taxes for the year ended December 31, 2007 include 012 Golden Lines
income tax expenses. On May 9, 2007, the Israeli Tax Authorities issued a ruling
authorizing the transfer of the Communications Business to be treated on a tax-free basis.
Under the ruling, we will be able to utilize our accumulated tax losses.
Net
Income
(Loss). For the year ended December 31, 2006 we incurred a net loss of
NIS 2.0 million compared with a net income of NIS 39.9 million ($10.4
million) for the year ended December 31, 2007. The improvement is primarily attributable
to the consolidation of 012 Golden Lines results for the first time.
Seasonality
We
have experienced seasonal variations in the revenues and operating results of our
traditional voice segment. Historically, we have generated more revenues and profit in the
third quarter of the fiscal year, which we believe is the result of extensive use of
international telephony and roaming and signaling services during the summer vacation
season, mainly in outgoing minutes and roaming services. Therefore, revenues from our
traditional voice segment may continue to be higher in the third quarter, which in turn
could result in our revenues being consistent or slightly down in the fourth quarter.
Impact of Currency
Fluctuations and Inflation
We
report our financial results in NIS and receive payments in NIS for most of our sales,
while a significant amount of our expenses, primarily purchases of international bandwidth
and other international transactions, are paid in U.S. dollars. Therefore, we are subject
to risks caused by fluctuations in the exchange rate between the NIS and the U.S. dollar.
The
following table presents information about the rate of inflation in Israel, the rate of
depreciation or appreciation of the NIS against the U.S. dollar, and the rate of inflation
in Israel adjusted for the depreciation or appreciation:
Year ended
December 31,
|
Israeli inflation
rate %
|
NIS depreciation
(appreciation)
rate %
|
Israeli inflation
adjusted for
depreciation
(appreciation) %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
1.2
|
|
|
(1.6
|
)
|
|
2.8
|
|
|
2005
|
|
|
2.4
|
|
|
6.8
|
|
|
(4.3
|
)
|
|
2006
|
|
|
(0.1
|
)
|
|
(8.2
|
)
|
|
8.1
|
|
|
2007
|
|
|
3.4
|
|
|
(9.0
|
)
|
|
12.4
|
|
|
2008
|
|
|
3.8
|
|
|
(1.1
|
)
|
|
4.9
|
|
47
A
depreciation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S.
dollar value of any of our expenses or liabilities which are payable in NIS, unless those
expenses or payables are linked to the dollar. This depreciation also has the effect of
decreasing the U.S. dollar value of any asset which consists of NIS or receivables payable
in NIS, unless the receivables are linked to the dollar. Conversely, the appreciation of
the NIS in relation to the U.S. dollar has the effect of increasing the dollar value of
any unlinked NIS assets and the dollar value of any unlinked NIS liabilities and expenses.
During 2007 and 2008, the NIS appreciated against the U.S. dollar, which resulted in a
decrease in the NIS value of our U.S. dollar revenues and expenses.
From
time to time we use derivative financial instruments, such as forward currency contracts
to hedge certain of our risks associated with foreign currency fluctuations. These
derivative financial instruments are carried at fair value.
Because
exchange rates between the NIS and the U.S. dollar fluctuate continuously, exchange rate
fluctuations, particularly larger periodic depreciations, may have an impact on our
profitability and period-to-period comparisons of our results in U.S. dollars. We cannot
assure you that in the future our results of operations may not be materially adversely
affected by currency fluctuations. We recommend comparing our results between periods
based on our NIS reports.
Conditions in Israel
We
are incorporated, based in and currently derive substantially all of our revenues from
markets within the State of Israel. See Item 3.D. Key Information Risk
Factors Risks Relating to Our Operations in Israel for a description of
governmental, economic, fiscal, monetary or political polices or factors that have
materially affected or could materially affect our operations.
Trade Relations
Israel
is a member of the United Nations, the International Monetary Fund, the International Bank
for Reconstruction and Development and the International Finance Corporation. Israel is a
member of the World Trade Organization and 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 products covered by such programs either duty-free or at reduced tariffs.
Israel
and the European Union Community concluded a Free Trade Agreement in July 1975, which
confers certain advantages with respect to Israeli exports to most European countries and
obligates Israel to lower its tariffs with respect to imports from these countries over a
number of years. In 1985, Israel and the United States entered into an agreement to
establish a Free Trade Area. The Free Trade Area has eliminated all tariff and specified
non-tariff barriers on most trade between the two countries. On January 1, 1993, an
agreement between Israel and the European Free Trade Association, known as EFTA,
established a free-trade zone between Israel and the EFTA nations. In November 1995,
Israel entered into a new agreement with the European Union, which included a redefinement
of rules of origin and other improvements, including providing for Israel to become a
member of the research and technology programs of the European Union. 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.
Recently Issued
Accounting Standards
In
December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in Consolidated
Financial Statements
, or SFAS 160. SFAS 160 amends ARB 51,
Consolidated
Financial Statements,
to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest.
SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parent
owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The adoption of SFAS 160 is not expected to have a material
effect on our consolidated financial statements.
48
In
December 2007, the FASB issued SFAS 141(revised),
Business
Combinations
, or SFAS 141(R). SFAS 141(R) replaces SFAS No. 141,
Business Combinations,
and requires an acquirer to recognize the assets
acquired, the liabilities assumed, including those arising from contractual contingencies,
any contingent consideration, and any noncontrolling interest in the acquiree at the
acquisition date, measured at their fair values as of that date, with limited exceptions
specified in the statement. SFAS 141(R) also requires the acquirer in a business
combination achieved in stages (sometimes referred to as a step acquisition) to recognize
the identifiable assets and liabilities, as well as the noncontrolling interest in the
acquiree, at the full amounts of their fair values (or other amounts determined in
accordance with SFAS 141(R)). In addition, SFAS 141(R)s requirement to measure the
noncontrolling interest in the acquiree at fair value will result in recognizing the
goodwill attributable to the noncontrolling interest in addition to that attributable to
the acquirer. SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. The adoption of SFAS 141(R) is not
expected to have a material effect on our consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position, or FSP, No. FAS 157-2,
Effective Date of FASB Statement No. 157
., or FSP No. FAS 157-2.
The Staff Position defers the effective date of SFAS 157 to fiscal years beginning after
November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for items
that are recognized or disclosed at fair value on a recurring basis at least annually, and
amends the scope of SFAS 157. We adopted SFAS 157 and the related FASB staff positions
except for those items specifically deferred under FSP No. FAS 157-2. We are
currently evaluating the potential impact, if any, of the adoption of FSP No.
FAS 157-2 on our consolidated financial statements.
In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative
Instruments and Hedging Activities an Amendment of FASB Statement No.
133
, or SFAS 161. SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. SFAS 161 requires entities to provide enhanced
disclosures about how and why an entity uses derivative instruments; how derivative
instruments and related hedged items are accounted for under SFAS 133 and its related
interpretations; and how derivative instruments and related hedged items affect an
entitys financial position, financial performance and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. We are currently evaluating the impact, if any, that SFAS 161 may
have on our financial condition and results of operations. Our adoption of SFAS 161 will
change our disclosures for derivative instruments and hedging activities beginning in
2009.
In
April 2008, the FASB issued FSP No. FAS 142-3,
Determination of the Useful
Life of Intangible Assets,
or FSP FAS 142-3. FSP FAS 142-3
amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under FASB
SFAS No. 142,
Goodwill and Other Intangible Assets
. FSP
FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and
early adoption is prohibited. We are currently evaluating the potential impact, if any, of
the adoption of FAS 142-3 on our consolidated financial statements.
In
May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted
Accounting Principles
, or SFAS No. 162. SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are presented in
conformity with U.S. GAAP. SFAS No. 162 will be effective from November 13, 2008. We do
not expect the adoption of SFAS No. 162 to have a material impact on our consolidated
financial statements.
B.
|
LIQUIDITY
AND CAPITAL RESOURCES
|
From
our inception in 1999 until our initial public offering in October 2007 we operated as a
subsidiary of Internet Gold. From the commencement of our operations until 2003, when we
began to generate positive operating cash flow, our operations were financed by our parent
from its financial resources. Our parent company has historically financed our principal
acquisitions and investments through intercompany loans. In connection with our
acquisition of 012 Golden Lines, Internet Gold provided us with additional long-term
financing, which amounted to NIS 111.3 million ($29.3million) at December 31, 2008,
bearing an interest rate of the prime interest published from time to time by the Bank of
Israel, which was 4.0% as of December 31, 2008. Prior to our acquisition of 012 Golden
Lines, 012 Golden Lines financed its investments and operations principally from cash flow
from operations and through short-term bank loans and revolving short-term bank credit. As
of December 31, 2006, 012 Golden Lines had cash and cash equivalents of NIS
8.7 million ($2.0 million) and a working capital deficit of NIS 328.1 million
($85.3 million). During the year ended December 31, 2007, we raised NIS 425 million by
issuing debentures, as further described below.
49
During
the period from March 2007 to May 2007, we issued a total of NIS 425 million of Series A
Debentures. The Series A Debentures were issued to repay the indebtedness we incurred in
connection with the acquisition of 012 Golden Lines. The Series A Debentures, together
with the accrued interest, are payable in eight equal payments on March 15 of each
year starting from March 15, 2009 and are linked to the Israeli CPI. The Series A
Debentures bear annual interest at the rate of 5.85%, which was decreased to an annual
interest rate of 4.75% when they were listed for trading on the Tel Aviv Stock Exchange
following our dual listing on the TASE after our initial public offering.
The
Series A Debentures allow us to issue additional series on the same terms, providing that
such actions do not cause the credit rating of the Series A Debentures to decrease below
the rating existing prior to the issuance of the additional series. We are prohibited from
creating any liens on our assets without the prior approval of a majority of the holders
of the Series A Debentures. We may not repay any loans from Internet Gold as long as our
ratio of net debt, not including the shareholder loans, to EBITDA (defined as operating
income before financial expenses, taxes on income, depreciation and amortization), is more
than two for the last four quarters. We are entitled to make an early redemption of the
Series A Debentures, in whole or in part, in the last two weeks of each quarter upon
payment of the higher of the principal, accrued interest and linkage differences as of
that date, or the present value of future cash flows as of that date based on a yield of
Israeli Government Bonds + 0.3%. The Series A Debenture holders are entitled to demand the
immediate repayment of the Series A Debentures or are obligated to do so if a resolution
is passed in a general meeting of the Series A Debenture holders by a majority vote in the
event of a winding-up, dissolution or liquidation of our company, non-payment of any
amounts due and payable, foreclosure of our principal assets, or a breach of a material
provisions of the Series A Debenture agreement. As of the date of this annual report we
are in compliance with all of the above covenants.
On
July 14, 2008, Midrug Ltd., an Israeli financial rating company which is affiliated with
Moodys, reissued the A1 rating originally awarded to our Series A Debentures that
were issued in 2007. Midrug concluded that the A1 rating would continue if we issue new
debt of up to NIS 320 million (approximately $84 million).
In
November 2008, our Board of Directors authorized the repurchase of up to NIS 100 million
(approximately U.S. $26 million) of our Series A Debentures. The purchases will be made
from time to time by us or one of our wholly-owned subsidiaries in the open market on the
Tel Aviv Stock Exchange. The timing and amount of any purchases will be determined by our
management based on its evaluation of market conditions and other factors. As of December
31, 2008, we had repurchased NIS 16,150,943 Series A Debentures under the program at a
total purchase price of approximately NIS 15.9 million (approximately $4.2 million), or an
average price of NIS 0.985 per bond. As of December 31, 2008, NIS 408,848,857 of Series A
Debentures were outstanding.
As
of December 31, 2007 and 2008, we had cash and cash equivalents of NIS
229.9 million and NIS 60.7
million ($ 16.0 million), respectively. The
decrease is due to our investments in marketable securities and the repurchase of Series A
Debentures.
As
of December 31, 2008, we had no outstanding borrowings from banking institutions, and the
unutilized portion of our lines of credit was NIS 78 million (approximately $ 20.5
million). The lines of credit provide for interest at annual average rate of 5.2%. In
connection with our credit lines, we have agreed not to pledge any of our assets to any
person. In addition, pursuant to the terms of our credit lines, Internet Gold is required
to maintain its ownership position in our company above 51%. These credit lines do not
have a specified maturity date, but they may be called by each bank at any time.
As
of December 31, 2008, we also owed NIS 111.3 million ($29.3million) to Internet Gold
pursuant to a long-term loan. As of December 31, 2008, the effective interest rate on the
loan was 5.2%. We may not repay any loans from Internet Gold as long as our ratio of net
debt, not including the shareholder loans, to EBITDA (defined as operating income before
financial expenses, taxes on income, depreciation and amortization), is more than two for
the previous four quarters. See Item 7B, Major Shareholders and Related Party
Transactions Related Party Transactions.
Over
the next 12 months, we expect cash flows from our operating activities, along with our
existing cash and cash equivalents and marketable securities, to be sufficient to fund our
operations.
50
We
made capital expenditures for property and equipment of NIS 11.2 million in the year
ended December 31, 2006, NIS 50.8 million in the year ended December 31, 2007
and NIS 56.1 million ($14.8 million ) in the year ended December 31, 2008. The
increase in our property and equipment as of December 31, 2008 resulted mainly from
our investments in network equipment and computers.
We
have entered into agreements for the purchase of ROU in international fiber optic cables
to service the increasing bandwidth requirements of our broadband services customers. We
made cash payments for ROU of international fiber optic cables of NIS 35.4 million in
the year ended December 31, 2006, and NIS 50.2 million in the year ended
December 31, 2007 and NIS 25.8 million ($ 6.8 million) in the year ended
December 31, 2008.
Our
capital expenditure plans for the year ending December 31, 2009 are estimated to be around
NIS 60 million ($15.8 million), mainly for continued investment in our network and
hosting premises.
Cash Flows
The
following table summarizes our cash flows for the periods presented:
|
|
Year ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
(NIS in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
|
|
38,105
|
|
|
222,150
|
|
|
208,886
|
|
|
Net cash used in investing activities
|
|
|
|
(16,293
|
)
|
|
(636,444
|
)
|
|
(313,942
|
)
|
|
Net cash provided by (used in)
|
|
|
|
financing activities
|
|
|
|
16,175
|
|
|
614,542
|
|
|
(44,155
|
)
|
|
Net (decrease) increase in cash and
|
|
|
|
cash equivalents
|
|
|
|
37,987
|
|
|
200,248
|
|
|
(149,211
|
)
|
|
Effect of exchange rate changes
|
|
|
|
-
|
|
|
(8,340
|
)
|
|
(20,032
|
)
|
|
Cash and cash equivalents at
|
|
|
|
beginning of period
|
|
|
|
-
|
|
|
37,987
|
|
|
229,895
|
|
|
Cash and cash equivalents at end of
|
|
|
|
period
|
|
|
|
37,987
|
|
|
229,895
|
|
|
60,652
|
|
|
|
|
|
|
Operating Activities
Net
cash provided by operating activities in 2006, 2007 and 2008 was
NIS 38.1 million, NIS 222.2 million and NIS 208.9 ($54.9
million),
respectively. Primarily as a result of our acquisition of 012 Golden Lines, our revenues
increased by 221% from NIS 343.1 million for the year ended December 31, 2006 to NIS
1,102.9 million for the year ended December 31, 2007 and to NIS 1,106.2 million ($291
million) for the year ended December 31, 2008. During this period, our cash balances have
been materially affected on both a quarterly and annual basis by our net income from
operations and by other changes in our working capital.
Investing Activities
Net
cash used in our investing activities was NIS 16.3 million in 2006, NIS
636.4 million in 2007 and NIS 313.9 million ($82.6 million) in 2008. The increase in
the net cash used in investing activities in the year ended December 31, 2007 was mainly
due to the payment of NIS 585.6 million of payables related to the 012 Golden Lines
acquisition. In 2008, most of the cash used in investing activities was due to investment
in marketable securities and the remainder was used for the purchase of property and
equipment and other fixed assets.
Financing Activities
Net
cash provided by financing activities in 2006 and 2007 was NIS 16.2 million and NIS
614.5 million respectively. Net cash used in financing activities in 2008 was NIS
44.2 million. During 2007, our financing activities included changes in short-term bank
debt, the receipt of loans and a contribution from our parent company, the issuance of NIS
425 million of Series A Debentures and net proceeds of $77.7 million from our initial
public offering. In 2008, most of the cash used in financing activities was for payments
in respect of long-term finance arrangements and the repurchase of NIS 15.9 million ($4.2
million) of Series A Debentures.
C.
|
RESEARCH
AND DEVELOPMENT
|
We
did not engage in any research and development during the last three fiscal years.
51
We have
experienced significant growth in the last few years. As part of our growth strategy, we
acquired one of our principal competitors, 012 Golden Lines on December 31, 2006.
With this acquisition, our total assets increased from NIS 223.4 million as at
December 31, 2005 to NIS 1,371.6 million as at December 31, 2006. As of
December 31, 2007 and 2008, our total assets increased to NIS 1,554.0 million and NIS
1,603.0 million ($421.6 million), respectively. Our revenues increased to
1,102.9 million ($290.1 million) for the year ended December 31, 2007 from NIS
343.1 million for the year ended December 31, 2006, primarily due to our acquisition of
012 Golden Lines, and to NIS 1,106.2 ($291) million for the year ended December 31, 2008,
due to the growth in our broadband segment, including our new local telephony services,
which was partially offset by a decrease in our traditional voice segment, primarily in
hubbing services.
E.
|
OFF-BALANCE
SHEET ARRANGEMENTS
|
We
are not a party to any material off-balance sheet arrangements.
In addition, we
have no unconsolidated special purpose financing or partnership entities that are likely
to create material contingent obligations.
F.
|
TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|
The
following table summarizes our minimum contractual obligations and commercial commitments
as of December 31, 2008 and the effect we expect them to have on our liquidity and cash
flow in future periods:
|
|
2009
|
2010-2011
|
2012-2013
|
|
Contractual Obligations
|
Total
|
less than 1
year
|
1-3 Years
|
3-5 Years
|
more than 5
years
|
|
(NIS in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations including
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest
|
|
|
|
670,050
|
|
|
212,077
|
|
|
143,907
|
|
|
133,461
|
|
|
180,605
|
|
Obligations for operations and maintenance
|
|
|
on fiber optic cables
|
|
|
|
401,710
|
|
|
26,194
|
|
|
53,558
|
|
|
55,018
|
|
|
266,940
|
|
Payments in respect of long-term financial
|
|
|
arrangements
|
|
|
|
82,985
|
|
|
22,207
|
|
|
38,998
|
|
|
21,780
|
|
|
-
|
|
Purchase of ROU's of fiber optic
|
|
|
cables
|
|
|
|
76,059
|
|
|
22,195
|
|
|
33,999
|
|
|
14,448
|
|
|
5,417
|
|
Operating lease obligations
|
|
|
|
61,146
|
|
|
15,733
|
|
|
27,267
|
|
|
8,580
|
|
|
9,566
|
|
Purchase obligations
|
|
|
|
3,915
|
|
|
3,915
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
1,295,865
|
|
|
302,321
|
|
|
297,729
|
|
|
233,287
|
|
|
462,528
|
|
ITEM 6.
|
|
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|
A.
|
DIRECTORS
AND SENIOR MANAGEMENT
|
Set
forth below are the name, age, principal position and a biographical description of each
of our directors and executive officers:
Name
|
Age
|
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
Shaul Elovitch
|
61
|
Chairman of the Board of Directors
|
Eli Holtzman
|
59
|
Vice Chairman of the Board of Directors
|
Hana Rado (1)(2)
|
50
|
Outside Director
|
Debbie Saperia (1)(2)
|
42
|
Outside Director
|
Aliza Schloss(2)
|
55
|
Director
|
Doron Turgeman
|
41
|
Director
|
Anat Winner (1)(2)
|
49
|
Director
|
Stella Handler
|
47
|
Chief Executive Officer
|
Doron Ilan
|
41
|
Chief Financial Officer
|
Yaackov Nadborny
|
44
|
Vice President of Marketing
|
Ori Watermann
|
34
|
Vice President of Residential Division
|
Max Blumberg
|
36
|
Chief Technology Officer
|
Tal Granot
|
32
|
Vice President of Human Resources
|
Yaron Steinberg
|
44
|
Vice President of Business Division
|
Sharon Mishel
|
41
|
Vice President of Carrier Relations and
International Business Development Division
|
|
|
|
|
(1)
Member of our Audit Committee.
|
|
(2)
Member of our Investment Committee.
|
52
Mr.
Shaul Elovitch, Mr. Eli Holtzman, Ms. Aliza Schloss, Mr. Doron Turgeman and Ms.
Anat Winner will serve as directors until our 2009 annual general meeting of
shareholders. Ms. Hana Rado and Ms. Debbie Saperia will each serve as an
outside director pursuant to the provisions of the Israeli Companies Law for an
initial three-year term until January 2011 (see Item 6C. Directors,
Senior Management and Employees Board Practices Outside and
Independent Directors Outside Directors). There are no family
relationships among any of our directors or executive officers.
Shaul
Elovitch
has served as the chairman of our board of directors since March 2000 and as
chairman of Internet Gold since its inception in 1992. Mr. Elovitch is the controlling
shareholder of Eurocom Communications and its affiliated companies, one of Israels
largest private communications groups. Mr. Elovitch has served as the chairman of the
board of directors and chief executive officer of Eurocom Holdings (1979) Ltd., or Eurocom
Holdings, and Eurocom Communications, the parent company of Internet Gold, since 1985. Mr. Elovitch also serves as a member of the board of directors of Space Communication Ltd. Satcom Systems
Ltd. and E.G.R.E. Ltd.
Eli
Holtzman
has served as the vice chairman of our board of directors since January 2007,
and prior thereto served as our chief executive officer and a director from March 2000
until January 2007. Mr. Holtzman co-founded and has been the chief executive officer
of Internet Gold since 1992 and a director of Internet Gold since July 1999.
Mr. Holtzman also serves as chief executive officer of Smile.Media, our sister
company. Mr. Holtzman holds a B.Sc. degree in Chemistry and Pharmaceuticals from Illinois
University.
Hana
Rado
has served as an outside director since January 2008 and is a member of our audit
committee. Ms. Rado has served as the chief operating officer and chief financial officer
of McCann Erickson Israel, an advertising group, since 2000. From 1995 to 2000, Ms. Rado
was employed by the Strauss group in several positions, such as the financial manager of
sales and distribution division, SAP project manager and the finance manager of the food
division. Ms. Rado serves as an outside director of Excellence Nessuah Brokerage Services
Ltd. Ms. Rado holds a B.A. degree in biology, an M.B.A. degree in accountancy and finance,
and is a certificated teacher, all from Tel Aviv University.
Debbie
Saperia
has served as an outside director since January 2008 and is a member of our
audit committee. Ms. Saperia has served as the general manager of Yarden Nahara Ltd., a
private company that is engaged in marketing and sale of products to Evangelical
Christians, since 2005. From 1993 to 1999, Ms.
Saperia was an associate at Rosensweig & Co Law Offices. From 2000 to 2004, Ms.
Saperia served as the business development manager of Promedico Limited and served as a
director of a number of companies within the Promedico group. From 2001 to 2004, Ms.
Saperia served as director and general manager of Vitamedic (1999) Limited. Ms. Saperia
holds a LL.B (Hons.) degree from the University of Manchester.
Aliza
Schloss
has served as a director since 2008. Ms. Schloss has served as a director of
Internet Gold since July 2005. Ms. Schloss has served as an Executive Vice President of
the Eurocom group since March 2009 and as director and/or officer of various other
companies within the Eurocom group since 2005. Ms. Schloss also serves as a member of the board of directors of Satcom Systems Ltd.
From 2002 to 2005, Ms. Schloss served as an
independent director, chairman of the audit committee and member of various committees of
the Israel Electric Company Ltd. From October 2000 to October 2003, Ms. Schloss served as
a director, chairman of the audit committee and member of various committees of Bezeq
The Israel Telecommunication Corp. Ltd. From 2000 to 2003, Ms. Schloss served as an
independent director and member of the audit committee of several companies, including
Hiram Gat Engineering & Construction Co., Ltd. and F.I.B.I Lamelcha The First
International Bank Ltd. and LAHAK Management of Trust Funds Ltd. Bank Hapoalim. Ms.
Schloss holds a Ph.D. degree in political science and public administration from the
Hebrew University of Jerusalem. Ms. Schloss also holds an M.A. degree in political science
and M.P.A. degree in public administration, both from the Hebrew University of Jerusalem,
and a B.Sc. degree in biology from the Ben-Gurion University of the Negev.
Doron
Turgeman
has served as a director since January 2008. Mr. Turgerman has served as
Internet Golds deputy chief executive officer since October 2004 and as its chief
financial officer since May 2001. Mr. Turgeman also serves as deputy chief executive
officer and chief financial officer of Smile.Media, our sister company. Mr. Turgeman also
serves as chief financial officer of Eurocom Digital Communications Ltd., which is
controlled by the Eurocom group. Mr. Turgeman holds a B.A. degree in economics and
accounting from the Hebrew University of Jerusalem and he is a certified public accountant
(CPA) in Israel.
53
Anat
Winner
has served as a director since October 2007 and is a member of our audit
committee. Ms. Winner has been self employed as a business advisor since July 2003 and
serves as a director of Internet Gold and Magal Security Systems Ltd., publicly traded on
the NASDAQ Global Market and Tel Aviv Stock Exchange. From October 2001 to July 2003,
Ms. Winner served as chief executive officer and chief financial officer of Israel
News Ltd. From 1999 to October 2001, Ms. Winner served as chief financial officer of
DBS Satellite Services (1998) Ltd. (YES), an Israeli company that is engaged in
setting up and operating direct broadcasting satellite television systems. Ms. Winner
holds a B.A. degree in Accounting and Economics from Haifa University and has been a
certified public accountant (CPA) since 1986.
Stella
Handler
has served as our chief executive officer since January 2007. Prior thereto
and from 1997, Ms. Handler was employed by 012 Golden Lines and served as its chief
executive officer from 2002. From 1992 to 1997, Ms. Handler served as the Head of
Subsidiary Companies Division of Bezeq The Israel Telecommunication Corp., Ltd.,
responsible for control, management and operations of all subsidiary companies. Ms.
Handler holds an M.B.A. in Business Administration and an M.A. in Economics from the
Hebrew University of Jerusalem.
Doron
Ilan
has served as our chief financial officer since January 2007. Prior thereto and
from 1998, Mr. Ilan was employed by 012 Golden Lines and served as its chief financial
officer and vice president-finance since 2003. Prior to joining 012 Golden Lines, he
worked for five years at Kesselman & Kesselman, a member of
PriceWaterhouseCoopers. Mr. Ilan holds an M.B.A. and a B.A. in Economics and Accounting,
both from Bar-Ilan University, Tel Aviv. Mr. Ilan is also a certified public
accountant (CPA) in Israel.
Yaackov
Nadborny
has served as our vice president of marketing since January 2007. Prior
thereto, Mr. Nadborny was employed by 012 Golden Lines as the business development
manager from 2004 and was appointed vice president-marketing in 2005. From 2001 to 2003,
Mr. Nadborny served as the senior financial advisor to the Director General of the
Israeli Ministry of Industry and Trade, and from 1998 to 2001 Mr. Nadborny was the
hi-technlogy division manager for the Israeli Export Institute. For ten years, commencing
in 1987, Mr. Nadborny served as branch chief in the Israeli General Security
Services. Mr. Nadborny holds a B.A. degree in business administration from the
College of Management Academic in Rishon Lezion, specializing in computer and information
technology.
Ori
Waterman
has served as our vice president of the residential division since January
2007. Prior thereto, Mr. Waterman served as the customer division manager for Internet
Gold from 2005. From 2002 to 2005, Mr. Waterman managed the business services and customer
relations division of Office Depot (Israel) and prior to that was manager of the SME
business sector for Pelephone Communication and served in management capacities for Leumi
Card and Eurocom-Nokia. Mr. Waterman holds a B.A. degree in business administration
from the Ruppin Academy.
Max
Blumberg
has served as our chief technology officer since January 2007. Prior to that
and from 2002, Mr. Blumberg served as the chief technical officer of Internet Gold, having
joined Internet Gold in 2000 as the information systems manager. Mr. Blumberg holds
a B.A. degree in computer science and mathematics from Netanya College.
Tal
Granot
has served as our vice president of human resources since January 2007. Prior
thereto and from 2006, Ms. Granot held the same position at Internet Gold. Prior to that
and from 2000, Ms. Granot served as a team leader, area manager and customer sales manager
for Internet Gold. Ms. Granot holds a B.A. degree in business management from Tel
Avivs Management Institute.
Yaron
Steinberg
has served as our vice president of the business division since January
2007. Prior thereto, Mr. Steinberg was employed by 012 Golden Lines from 1997 as the
manager of the business sector (sales and service department) and was appointed vice
president of the business sector (sales and customer relations) in 2003. From 1996 to
1997, Mr. Steinberg served as vice president-new business development for Adir
International Services Corp. Ltd., having started there in 1994 as the director of their
northern district. Mr. Steinberg holds a B.A. degree in business management from the
branch of Derby University in Israel.
Sharon
Mishel
has served as our vice president of carrier relations and international
business development division since January 2009. Prior thereto and from January 2008,
Mr. Mishel served as our Executive Director, Head of Division Carrier Relations
and Business Development. From 2003 to 2007, Mr. Mishel served as Director of Carrier
Relations and Revenue Assurance at Pelephone, and from 2000 to 2003 Mr. Mishel served as
Director of Carrier Relations at Barak. Mr. Mishel holds an M.A. degree in Business
Economics from Bar-Ilan University and a B.A. degree in Economics from the Hebrew
University of Jerusalem.
54
The
aggregate direct compensation we paid to our directors and executive officers as a group
(14 persons) for the year ended December 31, 2008 was approximately NIS
10.1 million ($2.7million). This amount includes expenses incurred for cars made
available to officers and expenses related to salaries, but does not include expenses such
as business travel, professional and business association dues and expenses reimbursed to
officers and other fringe benefits commonly reimbursed or paid by companies in Israel. As
of December 31, 2008, the aggregate amount set aside or accrued for pension, retirement,
recreation payments and vacation or similar benefits for our directors and executive
officers was approximately NIS 1.5 million ($0.4 million).
During
the year ended December 31, 2008, we paid to our outside directors, as well as to our
independent director, an annual fee of NIS 49,807 ($13,100) and a per meeting attendance
fee of NIS 1,916 ($500). Such fees are paid based on the fees detailed in regulations
promulgated under the Israeli Companies Law. Our other non-employee directors do not
receive compensation for their services on our board of directors or any committee of our
board of directors. We are exempt from the requirements of the NASDAQ Marketplace Rules
with regard to the process for compensation of officers, since we are a controlled
company, within the meaning of NASDAQ Marketplace Rule 4350(c)(5). See below in this Item
6C. Directors, Senior Management and Employees Board Practices NASDAQ
Exemptions for a Controlled Company.
Board of Directors and
Officers
According
to the Israeli Companies Law-1999, or the Israeli Companies Law, and our articles of
association, the management of our business is vested in our board of directors. Our board
of directors may exercise all powers and take all actions that are not specifically
granted to our shareholders. Our executive officers are responsible for our day-to-day
management and have individual responsibilities established by our chief executive officer
and the board of directors. Executive officers are appointed by and serve at the
discretion of our board of directors, subject to any applicable agreements.
Election of Directors
Our
articles of association provide for a board of directors consisting of no less than two
and no more than ten directors or such other number as may be determined from time to time
at a general meeting of shareholders. Our current board of directors consists of seven
directors.
In
accordance with our articles of association and the Israeli Companies Law, all of our
directors (other than our outside directors) are elected at annual meetings of our
shareholders, which are required to be held at least once during every calendar year and
not more than 15 months after the last preceding meeting. Except for our outside
directors, our directors are elected by a vote of the holders of a majority of the voting
power represented and voting at such meeting and hold office until the next annual meeting
of shareholders following the annual meeting at which they were appointed. The general
meeting of shareholders may remove any director from office by an ordinary resolution,
subject to applicable law. Our board of directors may temporarily fill vacancies in the
board until the next general meeting at which directors are appointed, provided that the
total number of directors will not exceed the maximum number permitted under our articles
of association. The board of directors is entitled to remove from office any director
appointed by it.
The
board of directors of an Israeli public company is required to determine that at least one
or more directors will have accounting and financial expertise, as defined by
regulations promulgated under the Israeli Companies Law. Our board of directors
determined, accordingly, that at least two directors must have accounting and
financial expertise. Our Board of Directors has further determined that Mr. Shaul
Elovitch, Ms. Aliza Schloss Ms. Hana Rado and Ms. Anat Winner have the requisite
accounting and financial expertise.
As
a controlled company within the meaning of NASDAQ Marketplace Rules, we are exempt from
the NASDAQ requirement regarding the nomination process of directors, and instead, follow
Israeli law and practice, in accordance with which directors may be recommended by our
board of directors for election by our shareholders. See below in this Item 6C.
Directors, Senior Management and Employees Board Practices NASDAQ
Exemptions for a Controlled Company.
55
Outside Directors
Under
the Israeli Companies Law, companies incorporated under the laws of the State of Israel
whose shares have been offered to the public are required to appoint at least two outside
directors. The Israeli Companies Law provides that a person may not be appointed as an
outside director if the person, or the persons relative, partner, employer or an
entity under that persons control, has or had during the two years preceding the
date of appointment any affiliation with the company, or any entity controlling,
controlled by or under common control with the company. The term relative
means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of
the above. The term affiliation includes an employment relationship, a
business or professional relationship maintained on a regular basis, control and service
as an office holder, as defined in the Israeli Companies Law. Under the Israeli Companies
Law, the term office holder includes a director, general manager, chief
business manager, deputy general manager, vice general manager, or any person filling any
of these positions in a company even if he or she holds a different title, and also
includes any other manager directly subordinate to the general manager. Regulations
promulgated under the Israeli Companies Law include certain additional relationships that
would not be deemed an affiliation with a company for the purpose of service
as an outside director.
In
addition, no person may serve as an outside director if the persons position or
other activities create, or may create, a conflict of interest with the persons
responsibilities as director or may otherwise interfere with the persons ability to
serve as director. If, at the time an outside director is appointed all members of the
board of directors are of the same gender, then that outside director must be of the other
gender. A director of one company may not be appointed as an outside director of another
company if a director of the other company is acting as an outside director of the first
company at such time.
At
least one of the outside directors must have accounting and financial
expertise and any other outside director must have accounting and financial
expertise or professional qualification, as such terms are defined by
regulations promulgated under the Israeli Companies Law. However, Israeli companies listed
on certain stock exchanges outside Israel, including The NASDAQ Global Market, such as our
company, are not required to appoint an outside director with accounting and
financial expertise if a director with accounting and financial expertise who
qualifies as an independent director for purposes of audit committee membership under the
laws of the foreign country in which the stock exchange is located serves on its board of
directors. All of the outside directors of such a company must have professional
qualification.
The
outside directors are elected by shareholders at a general meeting, provided that either:
|
|
The
majority of shares voting on the matter (not including abstentions), including at least
one-third of the shares of the non-controlling shareholders voting on the matter, vote in
favor of the outside director; or
|
|
|
The
majority of shares voting on the matter (not including abstentions) vote in favor of the
outside director and the total number of ordinary shares held by non-controlling
shareholders that voted against the election of the outside director does not exceed one
percent of all of the voting rights in the company.
|
In
general, outside directors serve for a three-year term and may be reelected to one
additional three-year term, if certain conditions are met. However, Israeli companies
listed on certain stock exchanges outside Israel, including the NASDAQ Global Market, such
as our company, may appoint an outside director for additional terms of not more than
three years subject to certain conditions. Such conditions include the determination by
the audit committee and board of directors, that in view of the directors
professional expertise and special contribution to the companys board of directors
and its committees, the appointment of the outside director for an additional term is in
the best interest of the company.
Outside
directors can be removed from office only by the same special percentage of shareholders
as can elect them, or by a court, and then only if the outside directors cease to meet the
statutory qualifications with respect to their appointment or if they violate their duty
of loyalty to the company. If an outside directorship becomes vacant, the board of
directors is required under the Israeli Companies law to convene a shareholders meeting
immediately to appoint a new outside director.
Each
committee of the board of directors that is authorized to exercise powers vested in the
board of directors must include at least one outside director, and the audit committee
must include all the outside directors. An outside director is entitled to compensation as
provided in regulations adopted under the Israeli Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in connection
with such service.
56
A
company may not engage an outside director as an office holder and may not employ or
receive services from that person for consideration, either directly or indirectly,
including through a corporation controlled by that person, for a period of two years from
the termination of his or her service as an outside director.
Ms.
Rado and Ms. Saperia each serve as an outside director pursuant to the
provisions of the Israeli Companies Law for an initial three-year term until
January 2011. Ms. Rado has accounting and financial expertise, and
Ms. Saperia has professional qualification, as such terms are
defined under the Israeli Companies Law.
Independent Directors
NASDAQ
Marketplace Rules require us to establish an audit committee comprised of at least three
members and only of independent directors each of whom satisfies the respective
independence requirements of the Securities and Exchange Commission and NASDAQ
Marketplace Rules.
Because
Internet Gold owns more than 50% of our ordinary shares, we are considered a
controlled company within the meaning of NASDAQ Marketplace Rules.
Accordingly, we are exempt from certain requirements under NASDAQ Marketplace Rules, such
as the requirement to have a majority of independent directors on our board of directors.
See Item 16G. Corporate Governance. If the controlled company
exemption would cease to be available to us under NASDAQ Marketplace Rules, we may instead
elect to follow Israeli law and would not be required to elect any additional independent
directors.
Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company whose shares are
publicly traded, may elect to adopt a provision in its articles of association pursuant to
which a majority of its board of directors will constitute individuals complying with
certain independence criteria prescribed by the Israeli Companies Law.
Our
Board of Directors has determined that each of Ms. Rado and Ms. Saperia (both outside
directors under Israeli law) and Ms. Winner qualifies as an independent director under the
requirements of the Securities and Exchange Commission and NASDAQ.
Audit Committee
Under
the Israeli Companies Law, the board of directors of any public company must establish an
audit committee. The audit committee must consist of at least three directors and must
include all of the outside directors. The audit committee may not include the chairman of
the board of directors, any director employed by the company or providing services to the
company on an ongoing basis, or a controlling shareholder or any of the controlling
shareholders relatives.
In
addition, the NASDAQ Marketplace Rules require us to establish an audit committee
comprised of at least three members, all of whom must be independent directors, each of
whom is financially literate and satisfies the respective independence
requirements of the Securities and Exchange Commission and NASDAQ and one of whom has
accounting or related financial management expertise at senior levels within a company.
Our
audit committee assists our Board of Directors in overseeing the accounting and financial
reporting processes of our company and audits of our financial statements, including the
integrity of our financial statements, compliance with legal and regulatory requirements,
our independent registered public accountants qualifications and independence, the
performance of our internal audit function and independent registered public accountants,
finding any defects in the business management of our company and proposing to our Board
of Directors ways to correct such defects, approving related-party transactions as
required by Israeli law, and such other duties as may be directed by our Board of
Directors.
Our
audit committee consists of three members of our Board of Directors who satisfy the
respective independence requirements of the Securities and Exchange
Commission, NASDAQ and Israeli law for audit committee members. Our current audit
committee members are Ms. Rado and Ms. Saperia, our outside directors under Israeli law,
and Ms. Winner, who serves as the chairperson of the audit committee. Our board of
directors has determined that Ms. Winner qualifies as an audit committee financial
expert, as defined by rules of the Securities and Exchange Commission. The audit committee
meets at least once each quarter. The audit committee has adopted an audit committee
charter as required by the NASDAQ regulations.
Investment Committee
Our
Board of Directors has established an Investment Committee, which is responsible for the
execution of our companys investment policy, as determined by our Board of Directors
from time to time. Our Investment Committee currently consists of four members of our
Board of Directors, Ms. Hana Rado, Ms. Debbie Saperia, Ms. Anat Winner and Ms. Aliza
Schloss.
57
Internal Auditor
Under
the Israeli Companies Law, the board of directors of a public company must appoint an
internal auditor nominated by the audit committee. The role of the internal auditor is,
among other things, to examine whether a companys actions comply with applicable law
and orderly business procedure. The internal auditor must meet certain statutory
requirements of independence. In determining the ownership or voting interest of a person,
Israeli law is expansive and aggregates that persons direct and indirect holdings,
including the holdings of certain affiliates, relatives and associates. Mr. Ilan Chaikin
currently serves as our internal auditor.
Directors Service
Contracts
There
are no arrangements or understandings between us and any of our subsidiaries, on the one
hand, and any of our directors, on the other hand, providing for benefits upon termination
of their employment or service as directors of our company or any of our subsidiaries.
Fiduciary Duties;
Approval of Related Party Transactions under Israeli Law
Fiduciary Duties of
Office Holders
The
Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holder
is defined in the Israeli Companies Law as a director, general manager, chief business
manager, deputy general manager, vice general manager, other manager directly subordinate
to the general manager or any other person assuming the responsibilities of any of the
foregoing positions without regard to such persons title. An office holders
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care
requires an office holder to act at a level of care that a reasonable office holder in the
same position would employ under the same circumstances. This includes the duty to utilize
reasonable means to obtain (i) information regarding the appropriateness of a given
action brought for his approval or performed by him by virtue of his position and
(ii) all other information of importance pertaining to the foregoing actions. The
duty of loyalty includes (i) avoiding any conflict of interest between the office
holders position in the company and any other position he holds or his personal
affairs, (ii) avoiding any competition with the companys business,
(iii) avoiding exploiting any business opportunity of the company in order to receive
personal gain for the office holder or others, and (iv) disclosing to the company any
information or documents relating to the companys affairs that the office holder has
received due to his position as an office holder.
Disclosure of Personal
Interests of an Office Holder
The
Israeli Companies Law requires that an office holder promptly, and no later than the first
board meeting at which such transaction is considered, disclose any personal interest that
he or she may have and all related material information known to him or her and any
documents in their position, in connection with any existing or proposed transaction by
us. In addition, if the transaction is an extraordinary transaction, that is, a
transaction other than in the ordinary course of business, other than on market terms, or
likely to have a material impact on the companys profitability, assets or
liabilities, the office holder must also disclose any personal interest held by the office
holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing, or by any corporation in which the
office holder or a relative is 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.
Approval of Transactions
with Office Holders
Under
the Israeli Companies Law, all arrangements as to compensation of office holders who are
not directors require approval by the board of directors, and exculpation, insurance and
indemnification of, or an undertaking to, indemnify an office holder who is not a director
requires both board of directors and audit committee approval. The compensation of office
holders who are directors must be approved by our audit committee, board of directors and
shareholders and in specific circumstances only by our audit committee and our board of
directors.
Some
transactions, actions and arrangements involving an office holder (or a third party in
which an office holder has an interest) must be approved by the board of directors or as
otherwise provided for in a companys articles of association, however, a transaction
that is adverse to the companys interest may not be approved. In some cases, such a
transaction must be approved by the audit committee and by the board of directors itself,
and under certain circumstances shareholder approval may be required. A director who has a
personal interest in a transaction that is considered at a meeting of the board of
directors or the audit committee may not be present during the board of directors or audit
committee discussions and may not vote on the transaction, unless the transaction is not
an extraordinary transaction or the majority of the members of the board or the audit
committee have a personal interest, as the case may be. In the event the majority of the
members of the board of directors or the audit committee have a personal interest, then
the approval of the general meeting of shareholders is also required.
58
Disclosure of Personal
Interests of a Controlling Shareholder; Approval of Transactions with Controlling
Shareholders
The
disclosure requirements which apply to an office holder also apply to such transaction
with respect to his or her personal interest in the transaction. The Israeli Companies Law
provides that an extraordinary transaction with a controlling shareholder or an
extraordinary transaction with another person in whom the controlling shareholder has a
personal interest or a transaction with a controlling shareholder or his relative
regarding terms of service and employment, must be approved by the audit committee, the
board of directors and shareholders. The shareholder approval for such a transaction must
include at least one-third of the shareholders who have no personal interest in the
transaction who voted on the matter (not including abstentions). The transaction can be
approved by shareholders without this one-third approval if the total shareholdings of
those shareholders who have no personal interest and voted against the transaction do not
represent more than one percent of the voting rights in the company.
Under
the Companies Regulations (Relief from Related Party Transactions), 5760-2000, promulgated
under the Israeli Companies Law, as amended, certain extraordinary transactions between a
public company and its controlling shareholder(s) do not require shareholder approval.
Such extraordinary transactions must be approved by both the Board and the audit committee
and (i) must involve the extension of an existing transaction that was duly approved
and does not involve any significant change in the terms of the existing transaction or
the change is solely for the benefit of the company; (ii) is solely for the benefit
of the company; (iii) is with the controlling shareholder or another person in which
the controlling shareholder has an interest and the transaction is in accordance with the
terms of a master agreement that was duly approved; (iv) is with the controlling
shareholder or another person in which the controlling shareholder has an interest, the
purpose of which is a transaction of theirs with a third party or a joint proposal to
enter into a transaction with a third party, and the terms of the transaction that apply
to the controlling shareholder are not significantly different from the terms that apply
to the controlling shareholder or an entity controlled by him (while taking into account
the extent of their respective involvement in the transaction); or (v) is among
companies controlled by the controlling shareholder, or between the public company and the
controlling shareholder or another person in which the controlling shareholder has a
personal interest, and the transaction is on market terms, within the ordinary course of
business and does not harm the company. In addition, under such regulations,
directors compensation and employment arrangements in a public company do not
require the approval of the shareholders if both the audit committee and the board of
directors agree that such arrangements are solely for the benefit of the company. Also,
employment and compensation arrangements for an office holder that is a controlling
shareholder of a public company do not require shareholder approval if certain criteria
are met. The foregoing exemptions from shareholder approval will not apply if one or more
shareholders holding at least 1% of the issued and outstanding share capital of the
company or of the companys voting rights, objects to the use of these exemptions
provided that such objection is submitted to the company in writing not later than
fourteen days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities Law. If
such objection is duly and timely submitted, then the transaction or compensation
arrangement of the directors will require shareholders approval as detailed above.
In
addition, a private placement of securities requires the approval of the board of
directors and shareholders of the company if (i) the private placement will cause a person
to become a controlling shareholder or (ii) 20% or more of the companys outstanding
share capital prior to the private placement are offered and the payment for which (in
whole or in part) is not in cash or not under market terms, and the private placement will
increase the relative holdings of a shareholder that holds 5% or more of the
companys outstanding share capital or will cause any person to become a holder of
more than 5% of the companys outstanding share capital.
The
Israeli Companies Law 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 25% or greater shareholder of the company. This rule does not apply if there is
already another 25% or greater shareholder of the company. Similarly, the Israeli
Companies Law 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 hold greater
than a 45% interest in the company, unless there is another shareholder holding more than
a 45% interest in the company. These requirements do not apply if, in general, the
acquisition was made in a private placement that received shareholder approval,
(i) was from a 25% or greater shareholder of the company which resulted in the
acquirer becoming a 25% or greater shareholder of the company, if there is not already a
25% or greater shareholder of the company, or (ii) was from a shareholder holding a
45% interest in the company which resulted in the acquirer becoming a holder of a 45%
interest in the company if there is not already a 45% or greater shareholder of the
company.
59
If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a public
companys outstanding shares or a class of shares, the acquisition must be made by
means of a tender offer for all of the outstanding shares or a class of shares. If less
than 5% of the outstanding shares are not tendered in the tender offer, all the shares
that the acquirer offered to purchase will be transferred to the acquirer. The Israeli
Companies Law provides for appraisal rights if any shareholder files a request in court
within three months following the consummation of a full tender offer. If more than 5% of
the outstanding shares are not tendered in the tender offer, then the acquirer may not
acquire shares in the tender offer that will cause his shareholding to exceed 90% of the
outstanding shares.
Exculpation,
Indemnification and Insurance of Directors and Officers
Exculpation of Office
Holders
The
Israeli Companies Law provides that an Israeli company cannot exculpate an office holder
from liability with respect to a breach of his duty of loyalty, but may, if permitted by
its articles of association, exculpate in advance an office holder from his liability to
the company, in whole or in part, with respect to a breach of his or her duty of care.
However, a company may not exculpate in advance a director from his or her liability to
the company with respect to a breach of his duty of care in the event of distributions.
Insurance for Office
Holders
The
Israeli Companies Law provides that a company may, if permitted by its articles of
association, enter into a contract for the insurance of liability of any of its office
holders arising from their acts or omissions performed in such capacity for:
|
|
A
breach of his or her duty of care to the company or to another person;
|
|
|
A
breach of his or her 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 companys interests; and
|
|
|
A
financial liability imposed upon the office holder in favor of another person.
|
Indemnification of Office
Holders
The
Israeli Companies Law provides that a company may, if permitted by its articles of
association, indemnify an office holder for acts or omissions performed by the office
holder in such capacity for:
|
|
A
financial liability imposed on the office holder in favor of another person by any
judgment, including a settlement or an arbitrators award approved by a court;
|
|
|
Reasonable
litigation expenses, including attorneys fees, actually incurred by the office
holder as a result of an investigation or proceeding instituted against him or her by a
competent authority, provided that such investigation or proceeding concluded without the
filing of an indictment against the office holder or the imposition of any financial
liability in lieu of criminal proceedings, or concluded without the filing of an
indictment against the office holder and a financial liability was imposed on the officer
holder in lieu of criminal proceedings with respect to a criminal offense that does not
require proof of criminal intent; and
|
|
|
Reasonable
litigation expenses, including attorneys fees, incurred by such office holder or
which were imposed on him by a court, in proceedings the company instituted against the
office holder or that were instituted on the companys behalf or by another person,
or in a criminal charge from which the office holder was acquitted, or in a criminal
proceeding in which the office holder was convicted of a crime which does not require
proof of criminal intent.
|
In
accordance with the Israeli Companies Law, a companys articles of association may
permit the company to:
|
|
Undertake
in advance to indemnify an office holder, except that with respect to a financial
liability imposed on the office holder by any judgment, settlement or court-approved
arbitration award, the undertaking must be limited to types of occurrences, which, in the
opinion of the companys board of directors, are, at the time of the undertaking,
foreseeable due to the companys activities and to an amount or standard that the
board of directors has determined is reasonable under the circumstances; and
|
|
|
Retroactively
indemnify an office holder of the company.
|
60
Limitations on
Exculpation, Insurance and Indemnification
The
Israeli Companies Law provides that neither a provision of the articles of association
permitting the company to enter into a contract to insure the liability of an office
holder, nor a provision in the articles of association or a resolution of the board of
directors permitting the indemnification of an office holder, nor a provision in the
articles of association exempting an office holder from duty to the company shall be
valid, where such insurance, indemnification or exemption relates to any of the following:
|
|
a
breach by the office holder of his duty of loyalty, except with respect to insurance
coverage or indemnification if the office holder acted in good faith and had reasonable
grounds to assume that the act would not prejudice the company;
|
|
|
a
breach by the office holder of his duty of care if such breach was committed
intentionally or recklessly, unless the breach was committed only negligently;
|
|
|
any
act or omission committed with intent to derive an unlawful personal gain; and
|
|
|
any
fine or forfeiture imposed on the office holder.
|
In
addition, pursuant to the Israeli Companies Law, exemption of, procurement of insurance
coverage for, an undertaking to indemnify or indemnification of an office holder must be
approved by the audit committee and the board of directors and, if such office holder is a
director or a controlling shareholder or a relative of the controlling shareholder, also
by the shareholders general meeting. A special majority at the general meeting is required
if a controlling shareholder is interested in such transaction as an office holder or as a
relative of an office holder, as described above.
Our
articles of association allow us to insure, indemnify and exempt our office holders to the
fullest extent permitted by law, subject to the provisions of the Israeli Companies Law.
We maintain a directors and officers liability insurance policy with liability
coverage of up to $5 million per claim and in the aggregate. In addition, our officers and
directors are covered by the directors and officers liability insurance policy
of Internet Gold that provides coverage of not more than $5 million for any one matter and
in the aggregate. We have undertaken to indemnify each of our directors and officers
to the extent permitted by law, in an aggregate amount not to exceed $5 million, to
the extent that their liability is not covered under our directors and
officers liability insurance policy.
On
December 31, 2008, we had 504 full-time employees and 1,211 part-time employees, while on
December 31, 2007, we had 511 full-time employees and 1,200 part-time employees, and at
December 31, 2006, we had 553 full-time employees and 1,313 part-time employees. All
of such employees were located in Israel
.
Israeli
labor laws and regulations are applicable to all of our employees. Israeli labor laws
govern the length of the workday, minimum wages for employees, procedures for hiring and
dismissing employees, determination of severance pay, annual leave, sick days and other
conditions of employment. Israeli law generally requires severance pay upon the retirement
or death of an employee or termination of employment by our company. For those of our
employees who are entitled to a pension arrangement, we fund future severance pay
obligations by contributing to managers insurance or other pension arrangements in
the amount of up to 8.3% of the employees wages. A provision in our financial
statements covers severance pay to those employees who are not entitled to managers
insurance or other pension arrangements. Furthermore, we and our employees are required to
make payments to the National Insurance Institute, which is similar to the U.S. Social
Security Administration. Such amounts also include payments by the employee for health
insurance. The total payments to the National Insurance Institute are equal to
approximately 17.7% of an employees wages (up to a specified amount), of which the
employee contributes approximately 12% and the employer contributes approximately 5.7%.
We
enter into personal employment agreements with our employees on either a monthly (in most
cases, full-time positions) or hourly basis. Employment agreements with most of our
employees are at will. Substantially all of our employees have signed non-disclosure and
non-competition agreements, although the enforceability of non-competition agreements is
limited under Israeli law.
Our
employees are not represented by any labor union. Since our inception, we have not
experienced any labor-related work stoppages and believe that our relations with our
employees are good.
61
As
of June 22, 2009, none of our directors and executive officers beneficially owns any of
our ordinary shares, other than Mr. Shaul Elovitch, the chairman of our board of
directors, who is deemed to beneficially own 19,363,603 or 76.41% of our ordinary shares
as of such date through his controlling interest in Eurocom Communications (assuming
25,340,770 ordinary shares were outstanding as of such date, excluding 19,230 ordinary
shares held as treasury stock).
As
of June 22, 2009, Eurocom Communications held of record 410,000 or 1.62% of our ordinary
shares, and Internet Gold, our controlling shareholder, held of record 18,953,603 or
74.79% of our outstanding ordinary shares. Eurocom Communications is the controlling
shareholder of Internet Gold, holding 69.79% of its ordinary shares as of such date.
Eurocom Communications is 50.33% owned by Eurocom Holdings and 49% of its shares are held
by four holding companies, which are 80% owned by Mr. Shaul Elovitch. The remaining 0.67%
interest in Eurocom Communications is directly owned by Mr. Shaul Elovitch. Mr. Shaul
Elovitch holds 80% of Eurocom Holdings shares and 75% of Eurocom Holdings
management shares. Mr. Shaul Elovitch also serves as the chairman of the board of
directors of Internet Gold, Eurocom Communications and Eurocom Holdings. Accordingly, Mr.
Shaul Elovitch may be deemed to have the sole voting and dispositive power over our
ordinary shares beneficially owned by Eurocom Communications. See also Item 7A.
Major Shareholders and Related Party Transactions Major Shareholders.
2007 Equity Incentive
Plan
Our
2007 Equity Incentive Plan, or the 2007 Plan, allows us to grant awards that qualify under
Section 102 of the Israeli Income Tax Ordinance, or Section 102, which provides
certain tax benefits in connection with share-based compensation to employees, officers
and directors. Our 2007 Equity Incentive Plan received the approval of the Israeli Tax
Authority.
Under
the 2007 Plan, we may grant our directors, officers and employees restricted shares,
restricted share units and options to purchase our ordinary shares under Section 102. We
may also grant consultants awards under the 2007 Plan; however, such persons will not be
entitled to the tax benefits provided by Section 102. Up to 2,250,000 ordinary shares
may be issued under the 2007 Plan, which will be reduced by two ordinary shares for each
restricted share unit or restricted share that we grant under the 2007 Plan with a per
share or unit purchase price lower than 100% of fair market value of our ordinary shares
on the date of grant and by one share for each option that we grant under the 2007 Plan.
Based
on Israeli law currently in effect and the election of the capital gains tax track, and
provided that options, restricted shares and restricted shares units granted or, upon
their exercise or vesting, the underlying shares, issued under the plan are held by a
trustee for the two years following the date in which such awards are granted, our
employees, officers and directors will be (i) entitled to defer any taxable event
with respect to the awards until the underlying shares are sold, and (ii) subject to
capital gains tax of 25% on the sale of the shares. However, if we grant awards at a value
below the underlying shares market value at the date of grant, the 25% capital gains
tax rate will apply only with respect to capital gains in excess of the underlying
shares market value at the date of grant and the remaining capital gains will be
taxed at the grantees regular tax rate. We intend to grant awards at fair market
value. We may not recognize expenses pertaining to the employees restricted shares,
restricted share units and options that qualify under Section 102 for tax purposes.
Restricted
shares, restricted share units and options granted under the 2007 Plan will generally vest
over four years from the grant date. Any option not exercised within seven years of the
grant date will expire. If we terminate the employment of an employee for cause, all of
his or her vested and unvested options expire immediately and all unvested restricted
shares and unvested restricted share units expire immediately. If we terminate the
employment of an employee for any other reason, the employee may exercise his or her
vested options within sixty days of the date of termination and shall be entitled to any
rights upon vested restricted shares and vested restricted share units to be delivered to
the employee to the extent that they were vested prior to the date his or her employment
terminates.
If
during the sixty-day period after termination of employment, the employee is subject to a
blackout period pursuant to our insider trading policy or otherwise, during
which, the employee may not sell underlying shares, then the employee may exercise any
unexercised options, which were vested on the date of termination of employment, until the
later of (a) twenty-five days after the blackout period is lifted; or (b) sixty
days from the date of termination of employment.
62
An
employee who terminates his or her employment with us due to retirement or disability may
exercise his or her vested options within one year of the date of retirement or within two
years of the date of the disability. Any such employee with a right to compensation
pursuant to vested restricted shares or vested restricted share units at the time of such
termination shall receive such compensation within thirty days of the termination. Any
expired or unvested options, restricted shares, or restricted share units immediately
return to the 2007 Plan for reissuance.
As
of December 31, 2008, options to purchase 1,100,000 ordinary shares had been granted under
the 2007 Plan. During the year ended December 31, 2008, no options were exercised.
ITEM 7.
|
|
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|
Internet
Gold owned 18,953,603 or approximately 74.79% of our outstanding ordinary shares, and
Eurocom Communications beneficially owned 19,363,603 or approximately 76.41% of our
outstanding shares, as of June 22, 2009. Internet Gold is a public company, whose shares
are listed on the NASDAQ Global Market and the Tel Aviv Stock Exchange. Internet Gold is
controlled by Eurocom Communications, which held 69.79% of its ordinary shares as of June
22, 2009. Eurocom Communications is controlled by Mr. Shaul Elovitch, the chairman of our
board of directors and the chairman of the board of directors of Internet Gold and Eurocom
Communications.
The
following table sets forth certain information as of June 22, 2009, regarding the
beneficial ownership by all shareholders known to us to own beneficially 5% or more of our
ordinary shares:
Name
|
Number of
Ordinary Shares
Beneficially Owned (1)
|
Percentage of
Ownership (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Eurocom Communications Ltd. (3)
|
|
|
|
19,363,603
|
|
|
76.41
|
%
|
Internet Gold
|
|
|
|
18,953,603
|
|
|
74.79
|
%
|
Clal Insurance Enterprises Holdings Ltd.(4)
|
|
|
|
2,545,938
|
|
|
10.04
|
%
|
Wellington Management Company, LLP (5)
|
|
|
|
1,371,005
|
|
|
5.41
|
%
|
(1)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this table, are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
|
(2)
|
The
percentages shown are based on 25,340,770 ordinary shares outstanding as of
June 22, 2009 (not including 19,230 shares held as treasury stock).
|
(3)
|
Eurocom
Communications holds of record 410,000 of our ordinary shares, and
Internet Gold, our controlling shareholder, holds of record 19,363,603 of
our ordinary shares. Eurocom Communications is the controlling shareholder
of Internet Gold, holding 69.79% of its ordinary shares. Eurocom
Communications is 50.33% owned by Eurocom Holdings and 49% of its shares
are held by four holding companies, which are 80% owned by Mr. Shaul
Elovitch. The remaining 0.67% interest in Eurocom Communications is
directly owned by Mr. Shaul Elovitch. Mr. Shaul Elovitch holds 80% of
Eurocom Holdings shares and 75% of Eurocom Holdings management
shares. Mr. Shaul Elovitch also serves as the chairman of the board of
directors of Internet Gold, Eurocom Communications and Eurocom Holdings.
Accordingly, Mr. Shaul Elovitch may be deemed to have the sole voting and
dispositive power over our ordinary shares beneficially owned by Eurocom
Communications.
|
63
(4)
|
Based
solely upon, and qualified in its entirety with reference to, a Schedule
13G filed with the Securities and Exchange Commission on May 7, 2009. The
Schedule 13G reflects that of the 2,545,938 Ordinary Shares reported as
beneficially owned by Clal Insurance Enterprises Holdings Ltd., or Clal,
(i) 226,259 Ordinary Shares are beneficially held for its own account; and
(ii) 2,319,679 Ordinary Shares are held for members of the public through,
among others, provident funds, mutual funds, pension funds and insurance
policies, which are managed by subsidiaries of Clal, each of which
subsidiaries operates under independent management and makes independent
voting and investment decisions. Under the Schedule 13G, Clal and Clal
Finance Ltd., or Clal Finance, a majority-owned subsidiary of Clal,
disclaim beneficial ownership of the remaining 2,319,679 ordinary shares.
In addition, the Schedule 13G states that by reason of the ownership
interest of IDB Development Corporation Ltd. and IDB Holding Corporation (IDB
Holding) in Clal, and by reason of the interests in, and
relationships among them, with respect to IDB Holding, of Mr. Nochi
Dankner, Mrs. Shelly Bergman, Mrs. Ruth Manor and Mr. Avraham Livnat, such
entities and persons may each be deemed a beneficial owner of the
2,545,938 ordinary shares deemed beneficially owned by Clal; however such
persons and entities disclaim beneficial ownership of the 2,545,938
ordinary shares beneficially owned by Clal. In addition, the Schedule 13G
reflects that Clal Finance beneficially holds 100,240 ordinary shares, of
which 58,846 ordinary shares are held for its own account, and Clal
Finance disclaims beneficial ownership of the remaining 41,394 ordinary
shares.
|
(5)
|
Based
solely upon, and qualified in its entirety with reference to, a Schedule
13G/A filed with the Securities and Exchange Commission on February 17,
2009. The Schedule 13G/A indicates that Wellington Management Company,
LLP, or Wellington Management, in its capacity as investment adviser, may
be deemed to beneficially own the 1,371,005 ordinary shares, which are
held of record by clients of Wellington Management.
|
Significant Changes in
the Ownership of Major Shareholders
We
know of no significant changes in the percentage ownership held by any major shareholders
during the past three years, other than changes in the percentage ownership of our major
shareholders resulting from our initial public offering in the United States in October
2007.
Major Shareholders
Voting Rights
Our
major shareholders do not have different voting rights.
Record Holders
Based
on a review of the information provided to us by our transfer agent, as of June 23, 2009,
one record holder holding approximately 27.58% of our ordinary shares had a registered
address in the United States. Such numbers are not representative of the portion of our
shares held in the United States nor are they representative of the number of beneficial
holders residing in the United States, since such ordinary shares were held of record by
one U.S. nominee company, CEDE & Co.
B.
|
RELATED
PARTY TRANSACTIONS
|
We
provide broadband and traditional voice services to companies affiliated with the Eurocom
group at our customary rates and charges. During the years ended December 31, 2006,
2007 and 2008, our revenues from the Eurocom group, not including Internet Gold, were NIS
1.3 million, NIS 2.5 million and NIS 5.3million ($1.4 million), respectively. Our
revenues from Internet Gold and Smile.Media were NIS 1.2 million, NIS 0.4 million and NIS
1.5 million ($0.4 million) , respectively. We expect to continue to provide such
services in the future.
Internet
Gold has historically financed our principal acquisitions and investments through
intercompany loans. In connection with our acquisition of 012 Golden Lines, Internet Gold
provided us with a long-term loan of NIS 100.6 million ($26.5 million) at
March 31, 2007, bearing the prime interest rate published from time to time by the
Bank of Israel. The loan is callable as of December 31, 2008 ; however, we may not
repay any loans from Internet Gold as long as our ratio of net debt, not including the
shareholder loans, to EBITDA (defined as operating income before financial expenses, taxes
on income, depreciation and amortization), is more than two for the last four quarters.
For more detail, see Item 5B. Operating and Financial Review and Prospects
Liquidity and Capital Resources. As of December 31, 2008, we also have an
outstanding payable balance with Internet Gold of NIS 1.4 million ($371,000), which bears
no interest.
We
have entered into a registration rights agreement with Internet Gold granting it the right
to register our ordinary shares it owns under the Securities Act of 1933, as amended.
Under the registration rights agreement, we have granted to Internet Gold
demand registration rights that allow it, at any time after one year following
the consummation of our initial public offering in October 2007, to request that we
register under the Securities Act of 1933, as amended, some or all of our ordinary shares
it owns. Internet Gold is entitled to an aggregate of five demand registrations. We are
not required to effect any demand registration unless such demand registration is for a
number of ordinary shares with a market value that is equal to at least $7.5 million. We
are also not required to effect more than one demand registration during the first 12
months following our initial public offering or more than one demand registration during
any 12-month period thereafter. We are not obligated to grant a request for a demand
registration within 90 days of any other demand registration. Internet Gold also has
piggyback registration rights that allow it to include our ordinary shares it
owns in any public offering of equity securities initiated by us (other than those public
offerings pursuant to registration statements on Forms F-4, S-8 or any other successor
forms). The piggyback registration rights are subject to proportional cutbacks
based on the manner of the offering and the identity of the party initiating such
offering. We have also granted Internet Gold the right to request a shelf registration on
Form F-3, provided that we shall be eligible to utilize a registration statement on such
form, providing for an offering to be made on a continuous basis but for no longer than
one year without the consent of our audit committee.
64
Under
the registration rights agreement we have agreed to indemnify Internet Gold against any
losses or damages resulting from any untrue statement or omission of material fact in any
registration statement or prospectus pursuant to which they sell ordinary shares, unless
such liability arose in reliance upon and in strict conformity with information furnished
in writing from Internet Gold. We will pay all expenses incident to any demand
registration, and Internet Gold will pay its respective portions of all underwriting
discounts, commissions and fees attributable to the sale of our ordinary shares it owns
under the registration rights agreement.
We
have agreed that, for as long as Internet Gold is required to consolidate our results of
operations and financial position or account for its investment in our company pursuant to
the equity method of accounting, we will maintain the same fiscal year end and accounting
periods as Internet Gold, and to the extent possible conform our financial presentation
with that of Internet Gold. We have agreed to use our best efforts to enable our
independent auditors to complete their audit of our financial statements in a timely
manner so to permit timely filing of Internet Golds financial statements. We have
also agreed to provide to Internet Gold and its independent auditors all information
required for Internet Gold to meet its schedule for the filing and distribution of its
financial statements and to make available to Internet Gold and its independent auditors
all documents necessary for the annual audit of our company as well as access to the
responsible company personnel so that Internet Gold and its independent auditors may
conduct their audits relating to our financial statements. We have also agreed to adhere
to certain specified Internet Gold accounting policies and to notify and consult with
Internet Gold regarding any changes to our accounting principles and estimates used in the
preparation of our financial statements, and any deficiencies in, or violations of law in
connection with, our internal control over financial reporting.
On
December 31, 2006, we transferred certain media assets, including P1000.co.il, an
Internet commerce website, to our sister company, Smile.Media, as part of our internal
restructuring for no consideration. In connection with the transfer, we agreed to hold
Smile.Media harmless for any liabilities relating to such assets which accrued prior to
the transfer.
Internet
Gold, Smile.Media and we have agreed to mutually share certain information in order to
comply with reporting, filing, audit or tax requirements, for use in judicial proceedings,
and in order to comply with our respective obligations after the separation. We have also
agreed to provide mutual access to historical records relating to businesses that may be
in our possession.
We
have entered into an agreement with Internet Gold and Smile.Media under which we will
provide each of Internet Gold and Smile.Media, at its request, with those communication
services that it may wish to utilize at market prices. Smile.Media has agreed to provide
us, at our request, with all media and content services that Smile.Media provides at
market prices. Provisions of this agreement relating to services may be terminated upon
three months notice. During the years ended December 31, 2006, 2007 and 2008,
our revenues from Internet Gold and Smile.Media were NIS1.2, NIS 0.4 million and NIS 1.5
million ($0.4 million), respectively.
In
February 2008, we entered into an execution services agreement with Eurocom Capital
Finance Ltd., or Eurocom Capital, which is controlled by Mr. Shaul Elovitch, our
controlling shareholder and the chairman of our Board of Directors, under which Eurocom
Capital provides us with various financial services. Under the agreement, Eurocom Capital
handles the execution of our financial investments pursuant to direct instructions from
our Chief Financial Officer, which is based on a policy that was established by our
management and approved by our Board of Directors. In consideration for these services, we
agreed to pay Eurocom Capital fees which are customary for such agreements and on market
terms. We paid Eurocom Capital an aggregate amount of NIS 261,000 ($69,000) in fees for
its services in 2008.
In
June 2008, we acquired, effective as of January 2008, the international communication
agreements of UUNET from Internet Golds fully owned subsidiary Internet Gold
International Ltd., or IGI, in consideration of NIS 3,035,000 ($798,000). Under the
agreement with UUNET, IGI agreed to provide communications and IP services to
international branches of Israeli customers.
65
During
the years ended December 31, 2006, 2007 and 2008, we purchased from Eurocom Digital
Communications Ltd., telephone devices, TV monitors, equipment maintenance and repair
services, all at market terms and prices, in an aggregate amount of NIS 0.1 million, NIS
1.3 million and NIS 1.8 million ($473,000), respectively.
During
the years ended December 31, 2007 and 2008, we purchased from Trans-Global Industries
Pte Ltd., which is controlled by the Eurocom group, telephone devices and other telephone
equipment, at market terms and prices, in an aggregate amount of NIS 0.1 million and NIS
6.9 million ($1.8 million), respectively. We did not make any purchases from Trans-Global
Industries Pte Ltd. in 2006.
During
the years ended December 31, 2006, 2007 and 2008, we purchased from Gilat Satcom Ltd.,
which is controlled by Mr. Shaul Elovitch, international call related services, at market
terms and prices, in an aggregate amount of NIS 2.4 million, NIS 8.4 million and NIS 1.2
million ($315,000), respectively.
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
ITEM 8.
|
|
FINANCIAL INFORMATION
|
A.
|
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|
Financial Statements
See
the consolidated financial statements, including the notes thereto, listed in Item 18
Financial Statements and incorporated herein by this reference.
Export Sales
Not
applicable.
Legal Proceedings
We
are involved in legal proceedings and other claims from time to time, including disputes
with customers, commercial disputes with third parties with whom we do business and
disputes with government entities. The disputes with customers include purported class
actions regarding claims.
The
following is a summary of our material litigation.
On
January 27, 2002, 012 Golden Lines (which was subsequently merged into our company) filed
a claim for NIS 53 million ($14 million) and for mandamus orders against Bezeq and Bezeq
International claiming that Bezeq and Bezeq International interfered with its entry into
the international telecommunications market. In April 2002, Bezeq and Bezeq International
filed their statements of defense, together with a third-party notice against the Ministry
of Communications. On January 2009, we filed a motion to amend the claim to increase the
damages sought to NIS 77 million ($20 million).
In
2003, Bezeq requested a collection commission from 012 Golden Lines in the
amount of approximately NIS 6.0 million for completion of international calls made from
card-operated public telephones in the years 1997-2002. On June 2004, Bezeq unilaterally
deducted this amount from amounts accruing to 012 Golden Lines. On January 4, 2007, the
Ministry of Communications determined that Bezeq is not entitled to the collection
commission and that the deduction was unlawful. The Ministry of Communications
ordered Bezeq to refund all of the amounts it deducted (including interest and linkage
increments). Bezeq filed an administrative appeal with the Tel Aviv Jaffa District
Court against the Ministry of Communications determination, which was dismissed on
the grounds of lack of jurisdiction. Bezeq appealed to the Supreme Court and
contemporaneously filed an administrative petition. Bezeqs appeal was denied in
March 2009. Following the Supreme Court ruling, Bezeq approached us to seek a settlement
and we are currently in negotiations with Bezeq.
66
On
January 2, 2005, a claim was submitted against 012 Golden Lines (which was subsequently
merged into our company) and three other companies regarding the alleged infringement of
Israeli Patent No. 76993 of November 10, 1985, or the Patent, claiming unjust enrichment,
breach of statutory duties and conversion, or the 2005 Claim. The plaintiffs demands
include payment of amounts of income generated from exploitation of the Patent, payment of
reasonable royalties for exploitation of the Patent, punitive damages, litigation costs
and attorneys fees, and payment of linkage differentials and interest from the date
of creation of the debt until the date of actual payment. The 2005 Claim states that the
monetary amount cannot be determined at this stage and that it has been assessed for the
purpose of court fees only at NIS 10 million. A statement of defense was filed on July 17,
2005 and a third party notice against the providers of the telecommunications systems
allegedly infringing the patent, or the Third Party Defendants, seeking indemnification
and compensation for any liability that may be imposed in the context of the 2005 Claim,
or the Third Party Proceedings. The plaintiffs have also initiated similar proceedings
against other telecommunication companies in other countries, including the United Kingdom
and the United States. Some telecommunication companies, including one of the initial
defendants named in the 2005 Claim, have settled with the plaintiffs, whereas other
telecommunication companies have refused to settle and are continuing to litigate. On May
23, 2008, the England & Wales High Court of Justice, Chancery Division, Patents Court,
declared that the plaintiffs corresponding English patent is invalid on the grounds
of obviousness and excluded matter. On May 20 2009, the Court of Appeals dismissed the
appeal and affirmed the lower court decision on the grounds of obviousness. The District
Court scheduled a pre-trial hearing for July 12 2009, and the parties have agreed that all
preliminary proceedings (e.g. discovery requests and interrogatories) will be completed no
later than the pre-trial date. One of the Third Party Defendants is Nortel Networks Israel
(Sales and Marketing) Ltd., or Nortel Israel. In a separate proceeding, on January 19,
2009, the District Court of Tel Aviv Jaffa issued an ex parte order according to
which all legal proceedings to which Nortel Israel is a party, including the Third Party
Proceedings, shall be stayed. Such stay of proceeding was extended several times and is
currently in force until August 30, 2009, and a hearing in this matter is scheduled for
such date. The District Court also appointed two trustees, for the purpose of reaching an
arrangement among the creditors. On February 25, 2009, we and another defendant in the
2005 Claim filed a motion with the District Court of Tel Aviv Jaffa requesting that
it allow us and the other applicant to continue the Third Party Proceedings against Nortel
Israel. On March 10, 2009, Nortel Israels trustees submitted their response and on
March 19, 2009, we submitted our reply. On March 22, 2009, the Court ordered the receiver
in the matter to submit its position before any decision is rendered by the Court, which
submission is due on June 17, 2009. To the best of our knowledge, such response
wasnt filed yet. We have included a provision for the 2005 Claim in our consolidated
financial statements which, according to our managements estimation, is sufficient
to cover any possible losses.
In
February 2008, a motion to certify a class action was filed with various District Courts
in Israel against several international telephony companies including, our company, with
respect to prepaid calling card services. The plaintiffs allege that: (i) the defendants
unlawfully charged consumers in excess of the tariffs published by them, (ii) the prepaid
calling cards provide an average of 50% of the units of time indicated to the purchasers
of the cards, (iii) the defendants deduct from the prepaid calling card the time spent
when a user unsuccessfully attempts to make a call utilizing the card, (iv) the defendants
calculate and collect payment not by units of round minutes indicated, (v) the defendants
provide misleading information about the number of units on the card, and (vi)
the defendants formed a cartel that arranged and raised the prices of calling cards. We
believe that we have good defenses against certification of the suit as a class action. In
the event the lawsuit is certified as a class action, the total amount claimed against us
will be NIS 226.4 million ($59.5 million). At this preliminary stage we are unable to
estimate the potential liability or costs, if any, that we may incur in connection with
this matter.
In
April 2008, a motion to certify a class action was filed with various District Courts in
Israel against Netvision 013 Barak and us with respect to our provision of prepaid calling
card services. The action alleges that the defendants improperly calculated the length of
the international calls in whole-minutes units rather than in one-second units. The
lawsuit does not specify an allocation of the claim amount between the defendants. We
believe that we have good defenses against certification of the suit as a class action. In
the event the suit is certified as a class action, the estimated amount claimed from both
defendants will be NIS 200 million ($52.6 million). At this preliminary stage we are
unable to estimate the potential liability or costs, if any, that we may incur in
connection with this matter.
In
November 2008, a motion to certify a class action was filed against us in the Tel Aviv
Jaffa District Court. The plaintiffs allege that we unlawfully raised the monthly
tariffs of our Internet services. The total amount of the claim is NIS 81.5 million ($21.4
million). At this preliminary stage we are unable to estimate the potential liability or
costs, if any, that we may incur in connection with this matter.
Dividend Distribution
Policy
We
have never paid cash dividends to our shareholders and do not currently have a dividend
distribution policy in place. Any future dividend policy will be determined by our Board
of Directors and will be based upon conditions then existing, including our results of
operations, financial condition, current and anticipated cash needs, contractual
restrictions and other conditions as the Board of Directors may deem relevant.
67
According
to the Israeli Companies Law, a company may distribute dividends out of its profits (as
such term is defined in the Israeli Companies Law), provided that there is no reasonable
concern that payment of the dividend will prevent the company from satisfying all its
current and foreseeable obligations, as they become due. Notwithstanding the foregoing,
dividends may be paid with the approval of a court, at the companys request,
provided that there is no reasonable concern that payment of the dividend will prevent the
company from satisfying its current and foreseeable obligations, as they become due. In
the event cash dividends are declared, such dividends will be paid in NIS.
Except
as otherwise disclosed in this annual report, no significant change has occurred since
December 31, 2008.
ITEM 9.
|
|
THE OFFER AND LISTING
|
A.
|
OFFER
AND LISTING DETAILS
|
Annual Stock Information
The
following table sets forth, for each of the years indicated, the high and low market
prices of our ordinary shares on the NASDAQ Global Market (from October, 2007) and the Tel
Aviv Stock Exchange (from November 14, 2007):
|
NASDAQ Global Market
|
Tel Aviv Stock Exchange
|
Year
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
$
|
13.11
|
|
$
|
11.53
|
|
|
NIS 52.64
|
|
|
NIS 46.59
|
|
2008
|
|
|
$
|
12.77
|
|
$
|
3.80
|
|
|
NIS 50.85
|
|
|
NIS 13.97
|
|
Quarterly Stock
Information
The
following table sets forth, for each of the full financial quarters in the two most recent
full financial years and any subsequent period, the high and low market prices of our
ordinary shares on the NASDAQ Global Market (from October, 2007) and the Tel Aviv Stock
Exchange (from November 14, 2007):
|
NASDAQ Global Market
|
Tel Aviv Stock Exchange
|
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
$
|
13.11
|
|
$
|
11.53
|
|
|
NIS 52.64
|
|
|
NIS 46.59
|
|
|
|
|
2008
|
|
|
First Quarter
|
|
|
$
|
12.77
|
|
$
|
9.02
|
|
|
NIS 50.85
|
|
|
NIS 30.39
|
|
Second Quarter
|
|
|
$
|
11.87
|
|
$
|
9.72
|
|
|
NIS 40.91
|
|
|
NIS 33.39
|
|
Third Quarter
|
|
|
$
|
9.95
|
|
$
|
7.29
|
|
|
NIS 35.69
|
|
|
NIS 25.07
|
|
Fourth Quarter
|
|
|
$
|
7.51
|
|
$
|
3.80
|
|
|
NIS 25.06
|
|
|
NIS 13.97
|
|
|
|
|
2009
|
|
|
First Quarter
|
|
|
$
|
6.34
|
|
$
|
4.96
|
|
|
NIS 25.33
|
|
|
NIS 18.78
|
|
Second Quarter (through June 15)
|
|
|
$
|
8.83
|
|
$
|
5.49
|
|
|
NIS 36.82
|
|
|
NIS 22.79
|
|
Monthly Stock Information
The
following table sets forth, for the most recent six months, the high and low market prices
of our ordinary shares on the NASDAQ Global Market and the Tel Aviv Stock Exchange:
|
NASDAQ Global Market
|
Tel Aviv Stock Exchange
|
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2008
|
|
|
$
|
5.61
|
|
$
|
3.80
|
|
|
NIS 23.39
|
|
|
NIS 13.97
|
|
January 2009
|
|
|
$
|
6.14
|
|
$
|
5.00
|
|
|
NIS 23.34
|
|
|
NIS 18.78
|
|
February 2009
|
|
|
$
|
6.34
|
|
$
|
5.14
|
|
|
NIS 24.94
|
|
|
NIS 22.02
|
|
March 2009
|
|
|
$
|
5.85
|
|
$
|
4.96
|
|
|
NIS 25.33
|
|
|
NIS 20.53
|
|
April 2009
|
|
|
$
|
6.68
|
|
$
|
5.70
|
|
|
NIS 27.92
|
|
|
NIS 24.16
|
|
May 2009
|
|
|
$
|
7.30
|
|
$
|
5.49
|
|
|
NIS 30.16
|
|
|
NIS 22.79
|
|
|
|
|
|
|
68
Not
applicable.
Our
ordinary shares were listed on the NASDAQ Global Market in connection with our initial
public offering on October 30, 2007 and have been traded on the Tel Aviv Stock Exchange
since November 14, 2007.
Not
applicable.
Not
applicable.
Not
applicable.
ITEM 10.
|
|
ADDITIONAL INFORMATION
|
Not
applicable.
B.
|
MEMORANDUM
AND ARTICLES OF ASSOCIATION
|
Set
out below is a description of certain provisions of our Articles of Association and of the
Israeli Companies Law related to such provisions. This description is only a summary and
does not purport to be complete and is qualified by reference to the full text of the
Articles of Association, which are incorporated by reference as exhibits to this Annual
Report, and to Israeli law.
Purposes and Objects of
the Company
We
are a public company registered under the Israel Companies Law, 1999-5759, or the Israeli
Companies Law, as 012 Smile.Communications Ltd., registration number 512832742.
Our
objects and purposes, as provided by our Articles of Association, are to carry on any
lawful activity.
The Powers of the
Directors
Under
the provisions of the Israeli Companies Law and our Articles of Association, a director
cannot participate in a meeting nor vote on a proposal, arrangement or contract in which
he or she is materially interested unless such proposal, arrangement or contract is in the
ordinary course of business or the majority of directors are personally interested in such
proposal, arrangement or contract. In the event the majority of the members of the board
of directors have a personal interest in the proposed transaction, approval of our
shareholders at a general meeting is required. In addition, our directors cannot vote
compensation to themselves or any members of their body without the approval of our audit
committee and our shareholders at a general meeting. See Item 6C. Directors, Senior
Management and Employees Board Practices Approval of Related Party
Transactions Under Israeli Law.
The
authority of our directors to enter into borrowing arrangements on our behalf is not
limited, except in the same manner as any other transaction by us.
Under
our Articles of Association, retirement of directors from office is not subject to any age
limitation and our directors are not required to own shares in our company in order to
qualify to serve as directors.
69
Rights Attached to Shares
Our
authorized share capital consists of 50,000,000 ordinary shares of a nominal value of NIS
0.1 each. All of our issued and outstanding ordinary shares are duly authorized, validly
issued, fully paid and non-assessable. Our ordinary shares are not redeemable and do not
have preemptive rights.
Dividend and Liquidation
Rights
The
holders of the ordinary shares will be entitled to their proportionate share of any cash
dividend, share dividend or dividend in kind declared with respect to our ordinary shares.
Our board of directors may declare a dividend to be paid to the holders of ordinary shares
in proportion to the paid up capital attributable to the shares that they hold. Dividends
may only be paid out of our profits and other surplus funds, as defined in the Israeli
Companies Law, as of the end of the most recent fiscal year or as accrued over a period of
two years, whichever is higher, provided that there is no reasonable concern that a
payment of a dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. If we do not meet the profit requirement, we may seek the
approval of the court to distribute a dividend. The court may approve our request if it is
convinced that there is no reasonable risk that a distribution might prevent us from
satisfying our existing and anticipated obligations as they become due.
Under
the Israeli Companies Law, a dividend declaration must be approved by the board of
directors and does not require the approval of the shareholders of a company unless the
companys articles of association provide otherwise. Our articles of association do
not require shareholder approval of a dividend distribution.
In
the event of our liquidation, after satisfaction of liabilities to creditors, our assets
will be distributed to the holders of ordinary shares in proportion to the paid up capital
attributable to the shares that they hold. Dividend and liquidation rights may be affected
by the grant of preferential dividend or distribution rights to the holders of a class of
shares with preferential rights that may be authorized in the future.
Voting
Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Such voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that may be
authorized in the future.
Our
general licenses also require that Israeli residents and citizens have minimum
shareholdings. In that regard, throughout the term of the VoB and DFL License, at least
20% of our means of control must be held by an Israeli citizen and resident or by an
entity controlled by an Israeli resident and citizen, while under the international
telephony license at least 26% of our means of control must be held by Israelis at all
times. Means of control is defined as voting rights, the right to appoint a
director or general manager, the right to receive dividends, or the right to participate
in distributions upon liquidation.
Limitations on the Rights to Own Ordinary Shares in Our Company
None
of our memorandum of association, our articles of association or the laws of the State of
Israel restrict in any way the ownership or voting of ordinary shares by non-residents,
except that shares held by citizens of countries which are in a state of war with Israel
will not confer any rights to their holders unless the Israeli Ministry of Finance
consents otherwise.
Election of Directors
Our
ordinary shares do not have cumulative rights for the election of directors. Rather, under
our articles of association, our directors (other than the outside directors) are elected
by a vote of the holders of a majority of the voting power represented and voting at our
annual general meetings of shareholders, and hold office until the next annual general
meeting of shareholders and until their successors have been elected. See Item 6C.
Directors, Senior Management and Employees Board Practices Election of
Directors. Internet Gold, our controlling shareholder, is able to elect all of our
directors other than our outside directors. For information regarding the election of
outside directors, see Item 6C. Directors, Senior Management and Employees
Board Practices Outside and Independent Directors Outside Directors.
All the members of our Board of Directors (except the outside directors) may be reelected
upon completion of their term of office.
Regulations
promulgated under the Communications Law require that our chief executive officer, any
member of our board of directors holding an executive role, as well as a majority of the
members of the board of directors, be citizens and residents of the State of Israel.
70
Annual and Extraordinary
Meetings
Under
the Israeli Companies Law and our articles of association, our board of directors must
convene an annual meeting of shareholders at least once every calendar year and within 15
months of the last annual meeting. Depending on the matter to be voted upon, and subject
to the Israeli Companies Law and regulations thereunder, notice of at least 14 days or 21
days or 35 days prior to the date of the meeting is required. Our articles of association
provide that notice of a general meeting of shareholders will be delivered to all eligible
shareholders by publication in two daily Hebrew language newspapers in Israel that have a
reasonably-sized readership. Our board of directors may, in its discretion, convene
additional meetings as special general meetings. In addition, the board must
convene a special general meeting upon the demand of: (a) two of the directors or 25%
of the nominated directors, (b) one or more shareholders having at least 5% of the
outstanding share capital and at least 1% of the voting power in the company, or
(c) one or more shareholders having at least 5% of the voting power in the company.
The chairman of the board of directors presides at each of our general meetings. The
chairman of the board of directors is not entitled to a vote at a general meeting in his
capacity as chairman. As a foreign private issuer, we will be exempt from the rules under
the Securities Exchange Act of 1934, as amended, prescribing certain disclosure and
procedural requirements for proxy solicitations. However, we intend to distribute proxy
material to our shareholders for our annual and extraordinary meetings and to provide them
with an opportunity to participate in such meetings.
Quorum
The
quorum required for any general meeting is the presence, in person or by proxy, of
shareholders holding or representing, in the aggregate, at least one third of the voting
rights. No business shall be considered or determined at a general meeting, unless the
requisite quorum is present within half an hour from the time designated for the general
meeting. If within half an hour from the time designated for the general meeting a quorum
is not present, the general meeting shall stand adjourned to the same day in the following
week, at the same time and place, or to such other time as designated in the notice of
such adjourned meeting. If within half an hour from the time designated for the adjourned
meeting a quorum is not present, any number of shareholders present will constitute a
quorum. However, if the general meeting was convened on the demand of shareholders, the
adjourned meeting shall take place only if there are present at least the number of
shareholders required to convene a general meeting under our articles of association (as
discussed above).
An
adjourned meeting that is convened on the demand of shareholders may take place only if
there are present at least the number of shareholders required to convene such a meeting.
A
general meeting in which a quorum is present may resolve to adjourn the meeting, the
discussion or the vote on a matter included in the agenda to such other time and place as
it may determine. Only matters that were on the agenda and in respect of which no
resolution was passed shall be discussed at the adjourned meeting.
Resolutions
An
ordinary resolution requires approval by the holders of a simple majority of the voting
rights represented at the meeting, in person, by proxy or by written ballot, and voting on
the resolution.
Under
the Israeli Companies Law, unless otherwise provided in the articles of association or
applicable law, all resolutions of the shareholders require a simple majority. A
resolution for the voluntary winding up of the company requires approval by holders of 75%
of the voting rights represented at the meeting, in person, by proxy or by written ballot
and voting on the resolution.
Access to Corporate
Records
Under
the Israeli Companies Law, all shareholders generally have the right to review minutes of
our general meetings, our shareholder register, our articles of association and any
document we are required by law to file publicly with the Israeli Companies Registrar. Any
shareholder who specifies the purpose of its request may request to review any document in
our possession that relates to any action or transaction with a related party which
requires shareholder approval under the Israeli Companies Law. We may deny a request to
review a document if we determine that the request was not made in good faith, that the
document contains a commercial secret or a patent or that the documents disclosure
may otherwise harm our interests.
Transfer of Ordinary
Shares and Notices
Fully
paid ordinary shares are issued in registered form and may be freely transferred under our
articles of association unless the transfer is restricted or prohibited by another
instrument, Israeli law, U.S. securities laws or the rules of a stock exchange on which
the shares are traded.
71
Modification of Class
Rights
Under
the Israeli Companies Law and our articles of association any amendment, conversion,
cancellation, expansion, addition to or other change in the rights, preferences,
privileges, restrictions or provisions attached to any particular class of shares issued
to shareholders of our company, shall require the written consent of holders of all issued
shares of such particular class, or authorization by an ordinary resolution adopted at an
extraordinary meeting of such class.
Limitations on the Rights to Own Ordinary Shares in Our Company
None
of our memorandum of association, our articles of association or the laws of the State of
Israel restrict in any way the ownership or voting of ordinary shares by non-residents,
except that shares held by citizens of countries which are in a state of war with Israel
will not confer any rights to their holders unless the Ministry of Finance consents
otherwise.
Anti-Takeover Provisions;
Mergers and Acquisitions
Full
Tender Offer.
A person wishing to acquire shares, or any class of shares, of a
publicly traded Israeli company and who would as a result hold over 90% of the
companys issued and outstanding share capital, or a class of shares which are
listed, is required by the Israeli Companies Law to make a tender offer to all of the
companys shareholders for the purchase of all of the remaining issued and
outstanding shares of the company, or any class of shares, as the case may be. If the
shareholders who do not respond to the offer hold less than 5% of the issued share capital
of the company, or of the relevant class of shares, all of the shares that the acquirer
offered to purchase will be transferred to the acquirer by operation of law. However, the
shareholders may petition the court within three months after receipt of the offer to
alter the consideration for the acquisition. If the dissenting shareholders hold more than
5% of the issued and outstanding share capital of the company, the acquirer may not
acquire additional shares of the company from shareholders who accepted the tender offer
if following such acquisition the acquirer would then own over 90% of the companys
issued and outstanding share capital.
Special
Tender Offer
. The Israeli Companies Law provides that an acquisition of shares of a
public company be made by means of a special tender offer if as a result of the
acquisition the purchaser would hold 25% or more of the voting rights at the
companys general meeting, unless one of the exemptions described in the Israeli
Companies Law are met. This rule does not apply if there is already another shareholder
who holds 25% or more of the voting rights at the companys general meeting. Our
parent, Internet Gold, currently holds more than 25% of our outstanding ordinary shares as
determined in accordance with the Israeli Companies Law. Similarly, the Israeli Companies
Law 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 hold more than 45% of
the voting rights of the company, if there is no other shareholder of the company who
holds more than 45% of the voting rights in the company. A tender offer is not required in
the following circumstances: (i) the purchase was made in a private placement that
was approved by the shareholders as a private placement and was meant to grant the
purchaser 25% or more of the voting rights of a company in which no other shareholder
holds 25% or more of the voting rights, or to grant the purchaser more than 45% of the
voting rights of a company in which no other shareholder holds more than 45% of the voting
rights, (ii) the purchaser would hold 25% or more of the voting rights after
purchasing shares from a person that held 25% or more of the voting rights, or
(iii) the purchaser would hold more than 45% of the voting rights after purchasing
shares from a person that held more than 45% of the voting rights.
Merger.
The Israeli Companies Law permits merger transactions if approved by each
partys board of directors and, unless certain requirements described
under the Israeli Companies Law are met, the majority of each partys
shares voted on the proposed merger at a shareholders meeting called on
at least 35 days prior notice. Under the Israeli Companies Law, if the
approval of a general meeting of the shareholders is required, merger
transactions may be approved by holders of a simple majority of the shares
present, in person or by proxy, at a general meeting and voting on the
transaction. In determining whether the required majority has approved the
merger, if shares of the company are held by the other party to the merger, or
by any person holding at least 25% of the outstanding voting shares or 25% of
the means of appointing directors of the other party to the merger, then a vote
against the merger by holders of the majority of the shares present and voting,
excluding shares held by the other party or by such person, or anyone acting on
behalf of either of them, is sufficient to reject the merger transaction. If
the transaction would have been approved but for the exclusion of the votes of
certain shareholders as provided above, a court may still approve the merger
upon the request of holders of at least 25% of the voting rights of a company,
if the court holds that the merger is fair and reasonable, taking into account
the value of the parties to the merger and the consideration offered to the
shareholders. Upon the request of a creditor of either party to the proposed
merger, the court may delay or prevent the merger if it concludes that there
exists a reasonable concern that, as a result of the merger, the surviving
company will be unable to satisfy the obligations of any of the parties to the
merger and the court may also provide instructions to assure the rights of
creditors. In addition, a merger may not be completed unless at least 50 days
have passed from the date that a proposal for approval of the merger was filed
with the Israeli Registrar of Companies and 30 days from the date that
shareholder approval of both merging companies was obtained.
72
Notwithstanding
the foregoing, a merger is not subject to shareholders approval if (i) the target
company is a wholly-owned subsidiary of the acquiring company and (ii) the acquiring
company is issuing to the shareholders of the target company up to 20% of its share
capital and no person will become, as a result of the merger, a controlling shareholder,
subject to certain limitation relating to the continuing of the votes, at a meeting of the
shareholders of a company that is a party to the merger, of any entity or person that is
either the other party to the merger or a control person thereof.
We
lease office facilities in Petach Tikva. The lease expires on July 31, 2012, with an
option to extend the lease for an additional five year period. The annual rental fees for
the 6,700 square meter premises is approximately NIS 3.8 million (approximately $1.0
million), linked to the Israeli CPI. We assumed this lease agreement from 012
Golden-Lines.
In
May 2004, 012 Golden-Lines entered into an agreement with a former related party for the
lease of an office building in Rishon LeZion, in which some of the companys
departments are located. The lease expires on January 2009 and with an option to extend
for an additional five year period. The annual rent for the 4,200 square meter premises is
approximately NIS 1.46 million (approximately $ 380,000), linked to the Israeli CPI. We
assumed this lease agreement from 012 Golden-Lines.
In
July 2003, Internet Gold entered into a long-term agreement with 013 Barak, one of
Israels three long distance carriers, to purchase rights of use for 14 international
fiber optic lines (presented in our financial statements as a capital lease) until 2017,
with an option to extend the agreement for an additional five year period. The total
capacity of the lines is 2.2 Gigabits. In November 2005, the agreement was amended to
increase the number of our international fiber optic lines. According to the amendment, we
were required to connect four international fiber optic lines remaining under the original
agreement by December 31, 2007 and are required to connect an additional seven
international fiber optic lines by December 31, 2012. Currently the terms of the amended
agreement are being reviewed and negotiated by the parties in an effort to provide us with
greater operational and financial flexibility. We assumed this agreement from Internet
Gold in connection with its restructuring in 2006.
In
April 2004, Internet Gold entered into a long-term agreement with Bezeq International, one
of Israels three long distance carriers (at that time), to purchase rights of use
for one international fiber optic line for at least 13 years beginning in May 2004. In May
2004, Internet Gold entered into an additional agreement with Bezeq International for an
additional fiber optic line on the same terms. We assumed these agreements from Internet
Gold in connection with its restructuring in 2006.
In
January 2003, 012 Golden-Lines entered into a long-term agreement with Med-Nautilus Ltd.
(Ireland), to purchase rights of use for nine international fiber optic lines (presented
in our financial statements as other assets) until 2017, with an option to extend
the agreement for an additional five year period. The total capacity of these lines is 1.6
Gigabits. This agreement was extended twice in July 2004 with an additional 6 lines
having a capacity of 0.9 Gigabits, and in September 2005 with an additional 25
lines having a capacity of 3.9 Gigabits. We assumed this agreement from 012 Golden-Lines.
Since
our launch of the international telephony service in August 2004 (through Internet Gold),
we have entered into agreements with several international carriers for the purchase of
international long distance voice services to about 240 destinations around the world.
We
have entered into several agreements with networks providers, including local and long
distance telecommunications companies for leased lines, on market terms.
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 such law, and enabled Israeli citizens to
freely invest outside of Israel and freely convert Israeli currency into non-Israeli
currencies.
73
Non-residents
of Israel who purchase our ordinary shares will be able to convert dividends, if any,
thereon, 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, into
freely repatriable dollars, at the exchange rate prevailing at the time of conversion,
provided that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
The
following description is not intended to constitute a complete analysis of all tax
consequences relating to the ownership or disposition of our ordinary shares. You should
consult your own tax advisor concerning the tax consequences of your particular situation,
as well as any tax consequences that may arise under the laws of any state, local, foreign
or other taxing jurisdiction.
Israeli Tax
Considerations
General
The
following discussion summarizes the material Israeli income tax consequences applicable to
the purchase, ownership and disposition of our ordinary shares. This discussion does not
address all of the tax consequences that may be relevant to purchasers of our ordinary
shares in light of their particular circumstances, or certain types of purchasers of our
ordinary shares subject to special tax treatment. Examples of this kind of investor
include residents of Israel and traders in securities who are subject to special tax
regimes not covered in this discussion. Each individual/entity should consult its own tax
or legal advisor as to the Israeli tax consequences of the purchase, ownership and
disposition of our ordinary shares.
To
the extent that part of the discussion is based on new tax legislation, which has not been
subject to judicial or administrative interpretation, we cannot assure that the tax
authorities or the courts will accept the views expressed in this section.
The
following summary describes the current tax structure applicable to companies in Israel,
with special reference to its effect on us. The following also contains a discussion of
the material Israeli tax consequences to holders of our ordinary shares.
Taxation of Companies
General Corporate Tax
Structure
Generally,
Israeli companies were subject to corporate tax at the rate of 27% for the 2008 tax year,
which was reduced to 26% for the 2009 tax year and will be further reduced to 25% for the
2010 tax year and thereafter. In addition, Israeli companies are subject to capital gains
tax at a rate of 25% on capital gains (other than gains derived from the sale of listed
securities that are taxed at the prevailing corporate tax rates) derived after
January 1, 2003.
Ruling Issued by the
Israeli Tax Authority
In
order to effect the transfer of the Communications Business from Internet Gold to us on a
tax free basis, the Israeli Tax Authority, or the ITA, issued a ruling confirming that the
transfer of the Communications Business from Internet Gold to us and the transfer of the
P-1000 website from us to Smile.Media were not taxable at the time of transfer in
accordance with Section 105 and 104B(f) of the Israeli Tax Ordinance. According to
the ruling and the relevant provisions of the Israeli Tax Ordinance, the deferral of taxes
as a result of these transactions was subject to our compliance with the following terms
through the end of 2008:
|
|
We
are required to continue to operate the Communications Business;
|
|
|
We
may not sell more than 50% of the assets that were transferred to us from Internet Gold;
|
|
|
Internet
Gold may not sell ordinary shares constituting more than 10% of its holdings in us; and
|
|
|
We
may not issue shares constituting more than 20% of our outstanding share capital,
provided that we may issue up to 50% of our outstanding share capital as part of public
offerings if Internet Gold continues to hold at least 50% of our ordinary shares.
|
The
ruling and the relevant provisions of the Israeli Tax Ordinance limit our ability to
utilize net operating losses. We can utilize net operating losses accrued prior to March
2006 only over a period of five years and in each year for not more than the lower of:
(i) 20% of such accrued losses; or (ii) 50% of our taxable income in that year.
In addition, we are precluded from deducting any expenses related to the reorganization,
and, until the end of 2008, we could not deduct losses in an amount equal to the fair
market value of the P1000 website.
74
Special Provisions
Relating to Taxation Under Inflationary Conditions
The
Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary
Adjustments Law, represents an attempt to overcome the problems presented to a traditional
tax system by an economy undergoing rapid inflation. On February 26, 2008 the Israeli
parliament amended the Inflationary Adjustments law, and the Inflationary Adjustments law
was terminated as of December 31, 2007. As of the 2008 tax year and onwards, the law is no
longer in force, except for transitional regulations which will help to avoid any
distortions in computing tax liability. Furthermore, as of the 2008 tax year and onwards,
there will not be any inflationary adjustments of a companys revenues for tax
purposes. The amendment also ended the price index linking of the depreciation of fixed
assets and of carryforward losses as of December 31, 2007.
Taxation of our
Shareholders
Taxation of Non-Israeli
Shareholders on Receipt of Dividends
Non-residents
of Israel are generally subject to Israeli income tax on the receipt of dividends paid on
our ordinary shares at the rate of 20% or 15% for dividends or income generated by an
approved enterprise, which tax will be withheld at source, unless a different rate is
provided in a treaty between Israel and the shareholders country of residence.
However,
the tax rate on dividends paid to a substantial shareholder (a shareholder who
alone, or together with another person, holds, directly or indirectly, at least 10% in one
or all of any of the Means of Control in the corporation) is 25%.
Under
the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid
to a holder of our ordinary shares who is a U.S. resident (within the meaning of the
U.S.-Israel Tax Treaty) is 25%. Furthermore, the maximum rate of withholding tax on
dividends that are paid to a U.S. corporation holding 10% or more of our outstanding
voting capital during the part of the tax year that precedes the date of the payment of
the dividend and during the whole of its prior tax year, is 12.5%. This reduced rate will
not apply if more than 25% of the Israeli companys gross income consists of interest
or dividends, other than dividends or interest received from a subsidiary corporation 50%
or more of the outstanding shares of the voting shares of which are owned by the company.
Investors should consult their own tax advisors to determine if they are eligible for
benefits under the U.S. Israel Tax Treaty.
A
non-resident of Israel who receives dividends from which tax was fully paid is generally
exempt from the duty to file returns in Israel in respect of such income, provided such
income was not derived from a business conducted in Israel by the taxpayer, and the
taxpayer has no other taxable sources of income in Israel.
Capital Gains Taxes
Applicable to Non-Israeli Shareholders
Israeli
law imposes a capital gains tax on the sale of capital assets. The law distinguishes
between real gain and inflationary surplus. The inflationary surplus is the portion of the
total capital gain that is equivalent to the increase of the relevant assets
purchase price which is attributable to the increase in the Israeli consumer price index
between the date of purchase and the date of sale. Foreign residents who purchased an
asset in foreign currency may request that the inflationary surplus be computed on the
basis of the devaluation of the shekel against such foreign currency. The real gain is the
excess of the total capital gain over the inflationary surplus. The inflationary surplus
accumulated from and after December 31, 1993, is exempt from any capital gains tax in
Israel while the real gain is taxed at the applicable rate discussed below.
Dealers
in securities in Israel are taxed at regular tax rates applicable to business income.
Under
the convention between the United States and Israel concerning taxes on income, Israeli
capital gains tax will not apply to the sale, exchange or disposition of ordinary shares
by a person:
|
|
who
qualifies as a resident of the United States within the meaning of the U.S.-Israel tax
treaty; and
|
|
|
who
is entitled to claim the benefits available to the person by the U.S.-Israel tax treaty.
|
However,
this exemption does not apply, among other cases, if the gain is attributable to a
permanent establishment of such person in Israel, or if the holder is a resident of the
United States within the meaning of the U.S.-Israeli tax treaty who holds, directly or
indirectly, shares representing 10% or more of our voting power during any part of the
12-month period preceding the sale, exchange or disposition, subject to specified
conditions. Under these circumstances, the sale, exchange or disposition would be subject
to Israeli tax, to the extent applicable. However, under the U.S.-Israel tax treaty, a
U.S. resident generally would be permitted to claim a credit for the Israeli taxes paid
against the U.S. federal income tax imposed on the sale, exchange or disposition, subject
to the limitations under U.S. law applicable to foreign tax credits. The U.S.-Israel tax
treaty does not relate to U.S. state or local taxes.
75
For
residents of countries other than Israel and the United States, the purchaser of shares
may be required to withhold 25% capital gains tax on all amounts received for the sale of
our ordinary shares, for so long as the capital gain from such a sale is not exempt from
Israeli capital gains tax, and unless a different rate is provided in a treaty between
Israel and the sellers country of residence.
Non-residents
of Israel are subject to tax on income accrued or derived from sources in Israel. These
sources of income include passive income such as dividends, royalties and interest, as
well as non-passive income, such as income received for services rendered in Israel. We
are required to withhold income tax at the rate of 25% with respect to passive income,
unless a different rate or an exemption is provided in a tax treaty between Israel and the
shareholders country of residence.
UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES
The
following is a summary of certain material U.S. federal income tax consequences that apply
to U.S. Holders who hold ordinary shares as capital assets. This summary is based on the
United States Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations
promulgated thereunder, judicial and administrative interpretations thereof, and the
U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject
to change either prospectively or retroactively. This summary does not address all tax
considerations that may be relevant with respect to an investment in ordinary shares. This
summary does not account for the specific circumstances of any particular investor, such
as:
|
|
financial
institutions,
|
|
|
certain
insurance companies,
|
|
|
regulated
investment companies,
|
|
|
investors
liable for alternative minimum tax,
|
|
|
tax-exempt
organizations,
|
|
|
non-resident
aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar,
|
|
|
persons
who hold the ordinary shares through partnerships or other pass-through entities,
|
|
|
persons
who acquired their ordinary shares through the exercise or cancellation of employee stock
options or otherwise as compensation for services,
|
|
|
certain
expatriates or former long-term residents of the United States,
|
|
|
investors
that own or have owned, directly, indirectly or by attribution, 10 percent or more of our
voting shares, and
|
|
|
investors
holding ordinary shares as part of a straddle or appreciated financial position or a
hedging or conversion transaction.
|
If
a partnership or an entity treated as a partnership for U.S. federal income tax purposes
owns ordinary shares, the U.S. federal income tax treatment of a partner in such a
partnership will generally depend upon the status of the partner and the activities of the
partnership. A partnership that owns ordinary shares and the partners in such partnership
should consult their tax advisors about the U.S. federal income tax consequences of
holding and disposing of ordinary shares.
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.
You
are urged to consult your tax advisors regarding the foreign and United States federal,
state and local tax considerations of an investment in ordinary shares.
76
For
purposes of this summary, a U.S. Holder is any beneficial owner of ordinary shares that
is:
|
|
an
individual who is a citizen or, for U.S. federal income tax purposes, a resident of the
United States;
|
|
|
a
corporation or other entity created or organized in or under the laws of the United
States or any political subdivision thereof;
|
|
|
an
estate whose income is subject to U.S. federal income tax regardless of its source; or
|
|
|
a
trust that (a) is subject to the primary supervision of a court within the United States
and the control of one or more U.S. persons or (b) has a valid election in
effect under applicable U.S. Treasury regulations to be treated as a U.S.
person.
|
Taxation of Dividends
Subject
to the discussion below under the heading Passive Foreign Investment
Companies
, the gross amount of any distributions received with respect to
ordinary shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends for U.S. federal income tax purposes, to the extent of our current
and accumulated earnings and profits as determined for U.S. federal income tax purposes.
You will be required to include this amount of dividends in gross income as ordinary
income. Distributions in excess of our earnings and profits will be treated as a
non-taxable return of capital to the extent of your tax basis in the ordinary shares, and
any amount in excess of your tax basis will be treated as gain from the sale of ordinary
shares. See Disposition of Ordinary Shares below for the discussion on
the taxation of capital gains. Dividends will not qualify for the dividends-received
deduction generally available to corporations under Section 243 of the Code.
Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be
included in your income in a U.S. dollar amount calculated by reference to the exchange
rate in effect on the day such dividends are received. A U.S. Holder who receives payment
in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in
effect on the day of receipt may have a foreign currency exchange gain or loss that would
be treated as ordinary income or loss. U.S. Holders should consult their own tax advisors
concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.
Subject
to complex limitations, any Israeli withholding tax imposed on such dividends will be a
foreign income tax eligible for credit against a U.S. Holders U.S. federal income
tax liability, subject to certain limitations set out in the Code (or, alternatively, for
deduction against income in determining such tax liability). The limitations set out in
the Code include computational rules under which foreign tax credits allowable with
respect to specific classes of income cannot exceed the U.S. federal income taxes
otherwise payable with respect to each such class of income. Dividends generally will be
treated as foreign-source passive category income or general category income for United
States foreign tax credit purposes. A U.S. Holder will be denied a foreign tax credit with
respect to Israeli income tax withheld from dividends received on the ordinary shares to
the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the
31-day period beginning on the date which is 15 days before the ex-dividend date or to the
extent such U.S. Holder is under an obligation to make related payments with respect to
substantially similar or related property. Any days during which a U.S. Holder has
substantially diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. Further, there are special
rules for computing the foreign tax credit limitation of a taxpayer who receives dividends
subject to a reduced tax rate. The rules relating to the determination of the foreign tax
credit are complex, and you should consult with your personal tax advisors to determine
whether and to what extent you would be entitled to this credit.
Subject
to certain limitations, qualified dividend income received by a non-corporate
U.S. Holder through 2010 will be subject to tax at a reduced maximum tax rate of 15
percent.
The rate reduction does not apply to dividends received from passive foreign
investment companies, see discussion below
. Distributions taxable as dividends paid on
the ordinary shares should qualify for the 15 percent rate provided that either: (i) we
are entitled to benefits under the income tax treaty between the United States and Israel,
or the Treaty, or (ii) the ordinary shares are readily tradable on an established
securities market in the United States and certain other requirements are met. We believe
that we are entitled to benefits under the Treaty and that the ordinary shares currently
are readily tradable on an established securities market in the United States. However, no
assurance can be given that the ordinary shares will remain readily tradable. The rate
reduction does not apply unless certain holding period requirements are satisfied. With
respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61
days during the 121-day period beginning 60 days before the ex-dividend date. The rate
reduction also does not apply in respect of certain hedged positions or in certain other
situations. The legislation enacting the reduced tax rate contains special rules for
computing the foreign tax credit limitation of a taxpayer who receives dividends subject
to the reduced tax rate. U.S. Holders of ordinary shares should consult their own tax
advisors regarding the effect of these rules in their particular circumstances.
77
Disposition of Ordinary
Shares
If
you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S.
federal income tax purposes in an amount equal to the difference between the amounts
realized on the sale or other disposition and the adjusted tax basis in ordinary shares.
Subject to the discussion below under the heading Passive Foreign Investment
Companies
, such gain or loss generally will be capital gain or loss and will be
long-term capital gain or loss if you have held the ordinary shares for more than one year
at the time of the sale or other disposition. In general, any gain that you recognize on
the sale or other disposition of ordinary shares will be U.S.-source for purposes of the
foreign tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the Code.
In
the case of a cash basis U.S. Holder who receives NIS in connection with the sale or
disposition of ordinary shares, the amount realized will be based on the U.S. dollar value
of the NIS received with respect to the ordinary shares as determined on the settlement
date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into
United States dollars at a conversion rate other than the rate in effect on the settlement
date may have a foreign currency exchange gain or loss that would be treated as ordinary
income or loss.
An
accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers
with respect to a sale or disposition of ordinary shares, provided that the election is
applied consistently from year to year. Such election may not be changed without the
consent of the Internal Revenue Service. In the event that an accrual basis U.S. Holder
does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury
regulations applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. federal income tax purposes because of differences
between the U.S. dollar value of the currency received prevailing on the trade date and
the settlement date. Any such currency gain or loss would be treated as ordinary income or
loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on
the sale or disposition of such ordinary shares.
Passive Foreign
Investment Companies
There
is a substantial risk that we may become a passive foreign investment company, or PFIC,
for U.S. federal income tax purposes. Our treatment as a PFIC could result in a reduction
in the after-tax return to the U.S. Holders of our ordinary shares and may cause a
reduction in the value of such shares.
For
U.S. federal income tax purposes, we will be classified as a PFIC for any taxable year in
which either (i) 75% or more of our gross income is passive income, or (ii) 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, cash is considered to be an asset which
produces passive income. Passive income generally includes dividends, interest, royalties,
rents, annuities and the excess of gains over losses from the disposition of assets which
produce passive income. As a result of our relatively substantial cash position at the
time, we believe that we were a PFIC in certain periods in the past under a literal
application of the asset test described above, which looks solely to the market value of
our assets. We do not believe that we were a PFIC in 2008.
If
we are a PFIC, dividends will not qualify for the reduced maximum tax rate, applicable to
qualified dividend income, discussed above, and, unless you timely elect to
mark-to-market your ordinary shares, as described below:
|
|
you
will be required to allocate income recognized upon receiving certain dividends or gain
recognized upon the disposition of ordinary shares ratably over the holding period for
such ordinary 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, in effect for that year and an interest charge
would be imposed with respect to the resulting tax liability allocated to each such year,
|
|
|
the
amount allocated to the current taxable year and any taxable year before we became a PFIC
would be taxable as ordinary income in the current year, and
|
|
|
you
will be required to make an annual return on IRS Form 8621 regarding distributions
received with respect to ordinary shares and any gain realized on your ordinary shares.
|
In
addition, holders of stock in a PFIC may not receive a step-up in basis on
shares acquired from a decedent.
78
The
PFIC provisions discussed above apply to U.S. persons who directly or indirectly hold
stock in a PFIC. Generally, a U.S. person is considered an indirect shareholder of a PFIC
if it is:
|
|
A
direct or indirect owner of a pass-through entity, including a trust or estate, that is a
direct or indirect shareholder of a PFIC,
|
|
|
A
shareholder of a PFIC that is a shareholder of another PFIC, or
|
|
|
A
50%-or-more shareholder of a foreign corporation that is not a PFIC and that directly or
indirectly owns stock of a PFIC.
|
An
indirect shareholder may be taxed on a distribution paid to the direct owner of the PFIC
and on a disposition of the stock indirectly owned. Indirect shareholders are strongly
urged to consult their tax advisors regarding the application of these rules.
If
we become a PFIC and cease to be a PFIC in a future year, a U.S. Holder may avoid the
continued application of the tax treatment described above by electing to be treated as if
it sold its ordinary shares on the last day of the last taxable year in which we were a
PFIC. Any gain would be recognized and subject to tax under the rules described above.
Loss would not be recognized. A U.S. Holders basis in its ordinary shares would be
increased by the amount of gain, if any, recognized on the sale. A U.S. Holder would be
required to treat its holding period for its ordinary shares as beginning on the day
following the last day of the last taxable year in which we were a PFIC.
If
the ordinary shares are considered marketable stock and if you elect to
mark-to-market your ordinary shares, you would not be subject to the rules
described above. Instead, you will generally include in income any excess of the fair
market value of the ordinary shares at the close of each tax year over your adjusted basis
in the ordinary shares. If the fair market value of the ordinary shares had depreciated
below your adjusted basis at the close of the tax year, you may generally deduct the
excess of the adjusted basis of the ordinary shares over its fair market value at that
time. However, such deductions generally would be limited to the net mark-to-market gains,
if any, that you included in income with respect to such ordinary shares in prior years.
Income recognized and deductions allowed under the mark-to-market provisions, as well as
any gain or loss (to the extent of net mark-to-market gains) on the disposition of
ordinary shares with respect to which the mark-to-market election is made, is treated as
ordinary income or loss. Loss on a disposition, to the extent in excess of net
mark-to-market gains, would be treated as capital loss. Gain or loss from the disposition
of ordinary shares (as to which a mark-to-market election was made) in a year
in which we are no longer a PFIC will be capital gain or loss. Loss on a disposition, to
the extent in excess of net mark-to-market gains, would be treated as capital loss. Our
ordinary shares should be considered marketable stock if they traded at least
15 days during each calendar quarter of the relevant calendar year in more than de minimis
quantities.
A
U.S. Holder of ordinary shares will not be able to avoid the tax consequences described
above by electing to treat us as a qualified electing fund, or QEF, because we do not
intend to prepare the information that U.S. Holders would need to make a QEF election.
Backup Withholding and
Information Reporting
Payments
in respect of ordinary shares may be subject to information reporting to the U.S. Internal
Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest
income tax rate applicable to individuals which, under current law, is 28%. Backup
withholding will not apply, however, if you (i) are a corporation or come within certain
exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct
taxpayer identification number and make any other required certification.
Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules
may be credited against a U.S. Holders U.S. tax liability, and a U.S. Holder may
obtain a refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.
Any
U.S. Holder who holds 10% or more in vote or value of our ordinary shares will be subject
to certain additional United States information reporting requirements.
U.S. Gift and Estate Tax
An
individual U.S. Holder of ordinary shares will be subject to U.S. gift and estate taxes
with respect to ordinary shares in the same manner and to the same extent as with respect
to other types of personal property.
79
F.
|
DIVIDEND
AND PAYING AGENTS
|
Not
applicable.
Not
applicable.
We
are subject to certain of the reporting requirements of the Securities and Exchange Act of
1934, as amended, or the Exchange Act, as applicable to foreign private
issuers as defined in Rule 3b-4 under the Exchange Act. As a foreign private issuer,
we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy
solicitations are not subject to the disclosure and procedural requirements of Regulation
14A under the Exchange Act, and transactions in our equity securities by our officers and
directors are exempt from reporting and the short-swing profit recovery
provisions contained in Section 16 of the Exchange Act. In addition, we are not required
under the Exchange Act to file periodic reports and financial statements as frequently or
as promptly as U.S. companies whose securities are registered under the Exchange Act.
However, we file with the Securities and Exchange Commission an annual report on Form 20-F
containing financial statements audited by an independent accounting firm. We also submit
to the Securities and Exchange Commission reports on Form 6-K containing (among other
things) press releases and unaudited financial information. We post our annual report on
Form 20-F on our website (
www.012.net
) promptly following the filing of our annual
report with the Securities and Exchange Commission. The information on our website is not
incorporated by reference into this annual report.
This
annual report and the exhibits thereto and any other document we file pursuant to the
Exchange Act may be inspected without charge and copied at prescribed rates at the
Securities and Exchange Commission public reference room at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the operation of the Securities and
Exchange Commissions public reference room in Washington, D.C. by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act file number for our
Securities and Exchange Commission filings is 001-33773.
The
Securities and Exchange Commission maintains a website at www.sec.gov that contains
reports, proxy and information statements, and other information regarding registrants
that make electronic filings with the Securities and Exchange Commission using its EDGAR
(Electronic Data Gathering, Analysis, and Retrieval) system.
The
documents concerning our company referred to in this annual report may also be inspected
at our offices located at 25 Hasivim Street, Petach Tikva 49170, Israel.
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
ITEM 11.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
|
We
are exposed to a variety of risks, including foreign currency fluctuations and changes in
interest rates. We regularly assess currency and interest rate risks to minimize any
adverse effects on our business as a result of those factors.
Effects of Currency
Fluctuations
As
the NIS is the primary currency of the economic environment in which we and our
subsidiaries operate, the NIS is our functional currency, and, accordingly, monetary
accounts maintained in currencies other than the NIS are remeasured using the foreign
exchange rate at the balance sheet date. Operational accounts and non-monetary balance
sheet accounts are measured and recorded at the rate in effect at the date of the
transaction. The effects of foreign currency remeasurement are reported in current
operations. Since June 2002, we are required by law to state our prices in NIS to our
residential and SoHo customers. Most of our communications and advertising costs are
quoted in dollars.
We
have dollar denominated liabilities, including those relating to the ROU of international
fiber optic cables. Given that we report our financial statements in NIS, we are subject
to risks caused by fluctuations in the exchange rate between the dollar and NIS. From time
to time we use derivative financial instruments, such as forward currency contracts to
hedge certain of our risks associated with foreign currency fluctuations. As of December
31, 2008, the total amount of such contracts was $71.8 million.
80
Effects of Changes in
Interest Rates and the Israeli CPI
We
pay interest on our short-term credit lines and on our shareholders loan based on the
Israeli Prime Rate. As of December 31, 2008, our outstanding short-term debt consists of a
loan from our parent company Internet Gold in the amount of NIS 111.3 million ($29.3
million), bearing an average interest rate of 5.18%. As a result, changes in the general
level of interest rates directly affect the amount of interest payable by us under these
facilities. Each increase or decrease of one percent in the Israeli Prime Rate will
increase or decrease our yearly interest expense by NIS 1.1 million ($0.3).
In
addition, our NIS 440.9 million ($ 116.0 million) of Series A Debentures (including
current maturities) are linked to the Israeli CPI. Each increase or decrease of one
percent in the Israeli CPI will result in an increase or decrease in our yearly financial
expense by NIS 4.4 million ($1.2 million).
ITEM 12.
|
|
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
|
Not
applicable.
PART II
ITEM 13.
|
|
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
|
None.
ITEM 14.
|
|
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
|
Not
applicable.
Use of Proceeds
We
sold 6,990,000 of our ordinary shares in our initial public offering on October 30, 2007.
The aggregate offering price of the shares sold was $83.9 million. The total expenses of
the offering were approximately $8.0 million. None of such expenses were paid directly or
indirectly to directors, officers, persons owning 10% or more of any class of equity
securities of our company or to our affiliates. The net public offering proceeds to us,
after deducting the total expenses were approximately $77.7 million. Such proceeds have
been used to repay $24.3 million of short-term debt and the payment of $262,000 to a
former minority shareholder as contingent purchase price consideration. As
of December 31, 2008, we had NIS 289 million ($76 million) in cash, cash equivalents,
short-term and long-term investments.
ITEM 15.
|
|
CONTROLS AND PROCEDURES
|
Disclosure Controls and
Procedures
We
maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms, and that such information is accumulated and
communicated to our chief executive officer and chief financial officer to allow timely
decisions regarding required disclosure. Our management, including our chief executive
officer and chief financial officer, conducted an evaluation of our disclosure controls
and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period
covered by this annual report on Form 20-F. Based upon that evaluation, our chief
executive officer and chief financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective.
81
Management Annual Report
on Internal Control Over Financial Reporting
Our
management, including our chief executive officer and chief financial officer, is
responsible for establishing and maintaining adequate internal control over financial
reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our 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 accounting principles generally
accepted in the United States. Internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of our
assets, (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made only in
accordance with appropriate authorizations; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of our assets that could have a material effect on the financial statements.
Our
management assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In conducting its assessment of internal control over financial
reporting, management based its evaluation on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations, or
the COSO, of the Treadway Commission. Based on that assessment, our management has
concluded that our internal control over financial reporting was effective as of December
31, 2008.
This
annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial report. Managements report
was not subject to attestation by our independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that permit us to
provide only managements report in this annual report.
Changes in Internal
Control over Financial Reporting
There
was no change in our internal controls over financial reporting that occurred during the
period covered by this annual report that has materially affected, or is reasonably likely
to materially affect, our internal controls over financial reporting.
ITEM 16A.
|
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our
board of directors has determined that Ms. Anat Winner, an independent director, meets the
definition of an audit committee financial expert, as defined by rules of the Securities
and Exchange Commission. For a brief listing of Ms. Winners relevant experience, see
Item 6.A. Directors, Senior Management and Employees Directors and Senior
Management.
We
have adopted a code of ethics that applies to our chief executive officer and all senior
financial officers of our company, including the chief financial officer, chief accounting
officer or controller, or persons performing similar functions. Our code of ethics is
available for viewing on our website www.012.net. Written copies are available upon
request. If we make any substantive amendment to the code of ethics or grant any waivers,
including any implicit waiver, from a provision of the codes of ethics, we will disclose
the nature of such amendment or waiver on our website.
ITEM 16C.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Fees Billed by
Independent Public Accountants
The
following table sets forth, for the years ended December 31, 2007 and 2008, the fees
billed to us by our principal independent registered public accounting firm. All of such
fees were pre-approved in advance by our Audit Committee.
|
Year Ended December 31,
|
Services Rendered
|
2007
|
2008
|
|
(NIS in thousands)
|
|
|
|
|
|
|
Audit (1)
|
|
|
|
3,125
|
|
|
924
|
|
Tax (2)
|
|
|
|
22
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
|
|
3,147
|
|
|
924
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Audit
fees are for audit services for each of the years shown in the table,
including fees associated with the annual audit and audit services
provided in connection with other statutory and regulatory filings.
|
|
(2)
|
Tax
fees for the 2007 fiscal year are for services related to tax compliance and
tax advice.
|
82
Pre-Approval Policies
and Procedures
Our
audit committee has adopted a policy and procedures for the pre-approval of audit and
non-audit services rendered by our independent registered public accountants, Somekh
Chaikin, a member firm of KPMG International. Pre-approval of an audit or non-audit
service may be given as a general pre-approval, as part of the audit committees
approval of the scope of the engagement of our independent auditor, or on an individual
basis. Any proposed services exceeding general pre-approved levels also require specific
pre-approval by our audit committee. The policy prohibits retention of the independent
public accountants to perform the prohibited non-audit functions defined in Section 201 of
the Sarbanes-Oxley Act or the rules of the Securities and Exchange Committee, and also
requires the audit committee to consider whether proposed services are compatible with the
independence of the public accountants.
ITEM 16D.
|
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
|
Not
applicable.
ITEM 16E.
|
|
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Issuer Purchase of
Equity Securities
In
December 2008, our Board of Directors authorized the repurchase of up to NIS 38 million or
$10 million of our ordinary shares in the open market from time to time at prevailing
market prices. We did not repurchase any of our ordinary shares in 2008. From January 1,
2009 and until May 31, 2009, we repurchased 19,230 ordinary shares under the program at a
total purchase price of approximately $116,000, or an average price of $6.00 per share.
In
December 2008, Eurocom Communications, our controlling shareholder, purchased an
additional 410,000 of our ordinary shares from a third party in a coordinated transaction
on the TASE, increasing its beneficial ownership interest in our company from 72.45% to
74.07%. The purchase by Eurocom Communications was not made pursuant to a publicly
announced plan or program.
The following table sets forth, for each of the months
indicated in 2008, the total number of shares purchased by Eurocom Communications, the
average price paid per share and the number of shares purchased. Eurocom did not purchase
such shares in concert with our company, nor has it notified us of the maximum number of
shares that it may purchase.
Period in 2008
|
Total Number of
Shares Purchased
|
Average Price Paid
per Share
|
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
|
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
|
|
|
|
410,000
|
|
|
NIS 21.4
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
$ (5.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 16F.
|
|
CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
|
Not
applicable.
83
ITEM 16G.
|
|
CORPORATE GOVERNANCE
|
NASDAQ Exemptions for a
Controlled Company
We
are a controlled company within the meaning of NASDAQ Marketplace Rule 4350(c)(5), or Rule
4350(c)(5), since Internet Gold holds more than 50% of our voting power. Under Rule
4350(c)(5), a controlled company is exempt from the following requirements of Rule 4350(c)
of the NASDAQ Marketplace Rules:
|
|
The
requirement that the majority of the companys board of directors qualify as
independent directors, as defined under NASDAQ Marketplace Rules. Instead, we follow
Israeli law and practice which requires that we appoint at least two outside directors,
within the meaning of the Israeli Companies Law, to our board of directors. In addition,
we have the mandated three independent directors, within the meaning of the rules of the
Securities and Exchange Commission and NASDAQ, on our audit committee. See Item 6C. Directors,
Senior Management and Employees Board Practices Outside and Independent
Directors.
|
|
|
The
requirement that the compensation of the chief executive officer and all other executive
officers be determined, or recommended to the board of directors for determination,
either by (i) a majority of the independent directors or (ii) a compensation committee
comprised solely of independent directors. Under the Israeli Companies Law, arrangements
as to compensation of office holders who are not directors require approval by the board
of directors, provided that they are not deemed extraordinary transactions, unless
otherwise provided in the articles of association. Our articles of association do not
provide otherwise. Any compensation arrangement with an office holder who is not a
director that is deemed an extraordinary transaction, the exemption of such office holder
from liability, the insurance of such office holder and the indemnification of such
office holder, or an undertaking to indemnify such office holder, require both audit
committee and board of directors approval. The compensation, exemption, indemnification
and insurance of office holders who are directors must be approved by our audit
committee, board of directors and shareholders. If the office holder is a controlling
shareholder or a relative of a controlling shareholder, any extraordinary transaction,
compensation, exemption, indemnification and insurance of the office holder must be
approved by our audit committee, board of directors and shareholders, supported by the
vote of at least one-third of the shares of the shareholders that have no personal
interest in the transaction voting on the matter, or provided that the total number of
shares held by shareholders that have no personal interest in the transaction that voted
against the proposal did not exceed one percent of all of the voting rights in the
company.
|
|
|
The
requirement that director nominees either be selected or recommended for the board of
directors selection, either by (a) a majority of independent directors or (b) a
nominations committee comprised solely of independent directors. Instead, we follow
Israeli law and practice, in accordance with which directors may be recommended by our
board of directors for election by our shareholders;
|
If
the controlled company exemptions would cease to be available to us under
NASDAQ Marketplace Rules, we may instead elect to follow Israeli law instead of the
foregoing NASDAQ requirements, as described below.
NASDAQ Marketplace Rules
and Home Country Practice
Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our company,
are permitted to follow certain home country corporate governance practices instead of
certain provisions of Rule 4350. As a foreign private issuer listed on the NASDAQ Global
Market, we may follow home country practice with regard to, among other things, the
composition of the board of directors, compensation of officers, director nomination
process and quorum at shareholders meetings. In addition, we may follow home country
practice instead of the NASDAQ requirement to obtain shareholder approval for certain
dilutive events (such as for the establishment or amendment of certain equity-based
compensation plans, an issuance that will result in a change of control of the company,
certain transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of another
company). A foreign private issuer that elects to follow a home country practice instead
of NASDAQ requirements must submit to NASDAQ in advance a written statement from an
independent counsel in such issuers home country certifying that the issuers
practices are not prohibited by the home countrys laws. In addition, a foreign
private issuer must disclose in its annual reports filed with the Securities and Exchange
Commission each such requirement that it does not follow and describe the home country
practice followed by the issuer instead of any such requirement. Accordingly, our
shareholders may not be afforded the same protection as provided under NASDAQs
corporate governance rules.
84
PART III
ITEM 17.
|
|
FINANCIAL STATEMENTS
|
We
have elected to furnish financial statements and related information specified in Item 18.
ITEM 18.
|
|
FINANCIAL STATEMENTS
|
Consolidated Financial Statements
of 012 Smile.Communications Ltd.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index to Consolidated Financial Statements
|
F-1
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
Consolidated Balance Sheets
|
F-3
|
|
|
|
Combined and Consolidated Statements of Operations
|
F- 5
|
|
|
|
Combined and Consolidated Statements of Changes in Shareholders' Equity
|
F- 6
|
|
|
|
Combined and Consolidated Statements of Cash Flows
|
F- 7
|
|
|
|
Notes to the Combined and Consolidated Financial Statements
|
F- 9
|
|
|
|
1.1
|
|
Memorandum
of Association of the Registrant. (1)
|
1.2
|
|
Articles
of Association of the Registrant. (1)
|
2.1
|
|
Specimen
of Ordinary Share Certificate. (1)
|
4.1
|
|
Trust
Deed between the Registrant and Shiff Hezenfortz Trustees (2004) Ltd. dated March 8,
2007. (1)
|
4.2
|
|
Form
of Smile.Communications Series A Debenture Certificate for Notes issued in March and May
2007 (1)
|
4.3
|
|
Form
of Registration Rights Agreement among the Registrant, Internet Gold-Golden Lines Ltd.
and Eurocom Communications Ltd. (1)
|
4.4
|
|
Agreement
dated July 25, 2006 among Internet Gold-Golden Lines Ltd., Fishman Family
Properties Management (1988) Ltd., Monitin Media Ltd. and 012 Golden
Lines Ltd. for the acquisition by Internet Gold of a 60% interest in 012 Golden Lines
Ltd. (1)
|
4.5
|
|
Amendment
dated August 1, 2006 to the Agreement dated July 25, 2006 among Internet Gold-Golden
Lines Ltd., Fishman Family Properties Management (1988) Ltd., Monitin
Media Ltd. and 012 Golden Lines Ltd. for the acquisition by Internet
Gold of 60% interest in 012 Golden Lines Ltd. (1)
|
4.6
|
|
Amendment
dated December 20, 2006 to the Agreement dated July 25, 2006 among Internet Gold-Golden
Lines Ltd., Fishman Family Properties Management (1988) Ltd., Monitin
Media Ltd., Globescom Communication (1997) Ltd. and 012 Golden Lines
Ltd. for the acquisition by Internet Gold of a 100% interest in 012
Golden Lines Ltd. (1)
|
85
4.7
|
|
Form
of Agreement among the Registrant, Smile.Media Ltd. and Internet Gold-Golden Lines Ltd.
(1)
|
4.8
|
|
Agreement
dated December 29, 2006 between the Registrant and Smile.Media Ltd. (1)
|
4.9
|
|
Capacity
Right of Use Agreement dated as of January 1, 2003 by and between Mediterranean Nautilus
Limited and 012 Golden Lines Ltd. (1)
|
4.10
|
|
Offer
to 012 Golden Lines Ltd. to Purchase Additional Capacity over the Med Nautilus Network
dated September 5, 2005. (1)
|
4.11
|
|
Capacity
Rights of Use Agreement, dated July 31, 2003, between Barak I.T.C. (1995)-The
International Telecommunications Services Corp. Ltd. and Internet Gold
- Golden Lines Ltd. (1)
|
4.12
|
|
Amendment
of Agreement, dated November 10, 2005, between Barak I.T.C. (1995)-The International
Telecommunications Services Corp. Ltd. and Internet Gold - Golden Lines
Ltd. (1)
|
4.13
|
|
2007
Equity Incentive Plan. (1)
|
8.1
|
|
List
of Subsidiaries of the Registrant
|
12.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as amended.
|
12.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act
1934, as amended.
|
13.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
|
13.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
|
15.1
|
|
Consent
of Somekh Chaikin, a member firm of KPMG International, Independent Registered Public
Accounting Firm
|
15.2
|
|
Consent
of BDO Ziv Haft Consulting and Management Ltd.
|
|
(1)
|
Filed
as an exhibit to the Registrants Registration Statement on Form F-1,
Registration Number 333-146645, filed with the Securities and Exchange
Commission, and incorporated herein by reference.
|
86
012 Smile.Communications Ltd.
|
|
Combined and Consolidated Financial Statements
|
|
|
Contents
F - 1
Report
of Independent Registered Public Accounting Firm
The Board of Directors
and Shareholders of
012 Smile.Communications
Ltd.:
We have audited the accompanying
consolidated balance sheets of 012 Smile.Communications Ltd. and subsidiary (hereinafter
the Company) as of December 31, 2007 and 2008, and the related combined
and consolidated statements of operations, changes in shareholders equity and cash
flows, for each of the years in the three-year period ended December 31, 2008. These
combined and consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these combined
and consolidated financial statements based on our audits.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2007 and 2008 and the results of
their operations and their cash flows for each of the years in the three-year period ended
December 31, 2008, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated
financial statements as of and for the year ended December 31, 2008 have been translated
into United States dollars solely for the convenience of the reader. We have audited the
translation and, in our opinion, the consolidated financial statements expressed in NIS
have been translated into dollars on the basis set forth in Note 2 of the notes to the
combined and consolidated financial statements.
As discussed in Note 2 to the
combined and consolidated financial statements, the Company adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, as of
January 1, 2007.
/s/ Somekh Chaikin
Somekh Chaikin
Certified Public
Accountants (Isr.)
Member Firm of KPMG
International
Tel Aviv, Israel
June 24, 2009
F - 2
012 Smile.Communications Ltd.
|
|
Consolidated Balance Sheets (in thousands)
|
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
December 31
|
December 31
2008
|
|
2007
|
2008
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
229,895
|
|
|
60,652
|
|
|
15,953
|
|
Marketable securities
|
|
|
|
-
|
|
|
76,742
|
|
|
20,185
|
|
Trade receivables, net of allowance for doubtful accounts of
|
|
|
NIS 12,294 and NIS 12,730 at December 31, 2007 and 2008
|
|
|
|
194,964
|
|
|
203,009
|
|
|
53,395
|
|
Parent company receivable
|
|
|
|
6,553
|
|
|
-
|
|
|
-
|
|
Related parties receivables
|
|
|
|
2,161
|
|
|
-
|
|
|
-
|
|
Prepaid expenses and other current assets
|
|
|
|
19,804
|
|
|
23,038
|
|
|
6,059
|
|
Deferred tax assets
|
|
|
|
9,396
|
|
|
17,838
|
|
|
4,692
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
462,773
|
|
|
381,279
|
|
|
100,284
|
|
|
|
|
Long-term trade receivables
|
|
|
|
3,460
|
|
|
6,350
|
|
|
1,670
|
|
Marketable securities
|
|
|
|
-
|
|
|
152,020
|
|
|
39,984
|
|
Assets held for employee severance benefits
|
|
|
|
18,453
|
|
|
16,499
|
|
|
4,340
|
|
Property and equipment, net
|
|
|
|
160,211
|
|
|
169,406
|
|
|
44,557
|
|
Other assets, net
|
|
|
|
295,592
|
|
|
291,607
|
|
|
76,698
|
|
Other intangible assets, net
|
|
|
|
202,376
|
|
|
174,640
|
|
|
45,934
|
|
Goodwill
|
|
|
|
411,171
|
|
|
411,171
|
|
|
108,146
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
1,554,036
|
|
|
1,602,972
|
|
|
421,613
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Stella Handler
|
|
/s/ Doron Ilan
|
|
|
|
|
|
Stella Handler
|
|
Doron Ilan
|
|
Chief Executive Officer
|
|
Chief Financial Officer
|
|
Date of signature: June
24, 2009
The accompanying notes are an
integral part of the combined consolidated financial statements.
F - 3
012 Smile.Communications Ltd.
|
|
Consolidated Balance Sheets (in thousands except share data)
|
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
December 31
|
December 31
2008
|
|
2007
|
2008
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Short-term bank credit
|
|
|
|
2,407
|
|
|
-
|
|
|
-
|
|
Current maturities of long-term obligations
|
|
|
|
3,558
|
|
|
99,295
|
|
|
26,116
|
|
Accounts payable
|
|
|
|
164,535
|
|
|
141,055
|
|
|
37,100
|
|
Loan from the parent company
|
|
|
|
105,733
|
|
|
111,344
|
|
|
29,286
|
|
Other payables and accrued expenses
|
|
|
|
100,558
|
|
|
115,339
|
|
|
30,337
|
|
Parent company payable
|
|
|
|
1,103
|
|
|
1,410
|
|
|
371
|
|
Related parties payables
|
|
|
|
-
|
|
|
2,228
|
|
|
586
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
377,894
|
|
|
470,671
|
|
|
123,796
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
Debentures
|
|
|
|
437,460
|
|
|
385,919
|
|
|
101,504
|
|
Long-term obligations and other payables
|
|
|
|
23,294
|
|
|
143
|
|
|
38
|
|
Deferred tax liabilities
|
|
|
|
29,027
|
|
|
25,535
|
|
|
6,716
|
|
Liability for employee severance benefits
|
|
|
|
32,318
|
|
|
32,430
|
|
|
8,530
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
|
522,099
|
|
|
444,027
|
|
|
116,788
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 19)
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
Ordinary shares NIS 0.1 par value -
|
|
|
50,000,000 shares authorized at December 31, 2007 and 2008;
|
|
|
18,370,000 and 25,360,000 shares issued and outstanding at
|
|
|
December 31, 2007 and 2008, respectively
|
|
|
|
2,536
|
|
|
2,536
|
|
|
667
|
|
|
|
|
Additional paid-in capital
|
|
|
|
611,615
|
|
|
612,009
|
|
|
160,970
|
|
Accumulated other comprehensive loss
|
|
|
|
-
|
|
|
(14,645
|
)
|
|
(3,852
|
)
|
Retained earnings
|
|
|
|
39,892
|
|
|
88,374
|
|
|
23,244
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
654,043
|
|
|
688,274
|
|
|
181,029
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
|
|
1,554,036
|
|
|
1,602,972
|
|
|
421,613
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the combined and consolidated financial statements.
F - 4
012 Smile.Communications Ltd.
|
|
Combined and Consolidated Statements of Operations
|
|
|
(in thousands except share and per share data)
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
Year ended December 31
|
Year ended
December 31
2008
|
|
2006
|
2007
|
2008
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
Revenue*
|
|
|
|
343,086
|
|
|
1,102,888
|
|
|
1,106,203
|
|
|
290,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and operating expenses:
|
|
|
Cost of revenue**
|
|
|
|
224,565
|
|
|
762,205
|
|
|
753,416
|
|
|
198,163
|
|
Selling and marketing
|
|
|
|
59,864
|
|
|
157,304
|
|
|
162,274
|
|
|
42,683
|
|
General and administrative
|
|
|
|
22,921
|
|
|
57,984
|
|
|
55,913
|
|
|
14,706
|
|
Impairment and other charges
|
|
|
|
10,187
|
|
|
10,433
|
|
|
6,705
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
317,537
|
|
|
987,926
|
|
|
978,308
|
|
|
257,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
25,549
|
|
|
114,962
|
|
|
127,895
|
|
|
33,637
|
|
Financial income
|
|
|
|
1,829
|
|
|
4,694
|
|
|
7,640
|
|
|
2,010
|
|
Financial expenses
|
|
|
|
19,095
|
|
|
56,737
|
|
|
64,879
|
|
|
17,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
8,283
|
|
|
62,919
|
|
|
70,656
|
|
|
18,583
|
|
Income tax expense
|
|
|
|
10,315
|
|
|
23,027
|
|
|
22,174
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
(2,032
|
)
|
|
39,892
|
|
|
48,482
|
|
|
12,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
Basic and diluted earnings (loss) per share
|
|
|
|
(0.11
|
)
|
|
2.05
|
|
|
1.91
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary
|
|
|
shares used in calculation of basic and
|
|
|
diluted earnings per share
|
|
|
|
18,370,000
|
|
|
19,493,329
|
|
|
25,360,000
|
|
|
25,360,000
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes
revenues from related parties of NIS 2,496, NIS 2,864 and NIS 6,848 for the years ended
December 31, 2006, 2007 and 2008, respectively.
|
**
|
Includes
cost of revenue from related parties of NIS 62, NIS 1,258 and NIS 10,350 for the years
ended December 31, 2006, 2007 and 2008, respectively.
|
The accompanying notes are an
integral part of the combined and consolidated financial statements.
F - 5
012 Smile.Communications Ltd.
|
|
Combined and Consolidated Statements of Changes in Shareholders' Equity (in thousands except share data)
|
|
|
|
Share capital
|
Parent
company
investment
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
|
Total
comprehensive
income
(loss)
|
Total
|
Convenience
translation
into
US dollars
(Note 2)
|
|
Number of
shares
|
Amount
|
|
NIS 0.1 par
value
|
|
|
|
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2006
|
|
|
|
18,370,000
|
|
|
1,837
|
|
|
134,700
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
136,537
|
|
|
|
|
|
|
|
Changes during 2006:
|
|
|
Contribution from parent
company
|
|
|
|
-
|
|
|
-
|
|
|
8,012
|
|
|
-
|
|
|
-
|
|
|
2,032
|
|
|
|
|
|
10,044
|
|
|
|
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,032
|
)
|
|
(2,032
|
)
|
|
(2,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,032
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
|
|
18,370,000
|
|
|
1,837
|
|
|
142,712
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
144,549
|
|
|
|
|
|
|
|
Changes during 2007:
|
|
|
Contribution from parent
company
|
|
|
|
-
|
|
|
-
|
|
|
170,238
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
170,238
|
|
|
|
|
Paid-in capital from parent
company
|
|
|
|
-
|
|
|
-
|
|
|
(312,950
|
)
|
|
312,950
|
|
|
-
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Issuance of shares, net
|
|
|
|
6,990,000
|
|
|
699
|
|
|
-
|
|
|
298,665
|
|
|
-
|
|
|
-
|
|
|
|
|
|
299,364
|
|
|
|
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
39,892
|
|
|
39,892
|
|
|
39,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,892
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2007
|
|
|
|
25,360,000
|
|
|
2,536
|
|
|
-
|
|
|
611,615
|
|
|
-
|
|
|
39,892
|
|
|
|
|
|
654,043
|
|
|
172,026
|
|
|
|
|
Changes during 2008:
|
|
|
Share-based compensation
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,429
|
|
|
-
|
|
|
-
|
|
|
|
|
|
3,429
|
|
|
902
|
|
Capital contribution from
controlling shareholder
|
|
|
(Note 18D)
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,035
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(3,035
|
)
|
|
(798
|
)
|
Comprehensive loss, net of tax -
|
|
|
Unrealized losses on available-
for-sale marketable
|
|
|
securities, net of deferred tax
benefit of NIS 4,882
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(14,645
|
)
|
|
-
|
|
|
(14,645
|
)
|
|
(14,645
|
)
|
|
(3,852
|
)
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,482
|
|
|
48,482
|
|
|
48,482
|
|
|
12,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2008
|
|
|
|
25,360,000
|
|
|
2,536
|
|
|
-
|
|
|
612,009
|
|
|
(14,645
|
)
|
|
88,374
|
|
|
|
|
|
688,274
|
|
|
181,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the combined and consolidated financial statements.
F - 6
012 Smile.Communications Ltd.
|
|
Combined and Consolidated Statements of Cash Flows (in thousands)
|
|
|
|
|
|
|
Convenience
translation
into US dollars
(Note 2)
|
|
Year ended December 31
|
Year ended
December 31
2008
|
|
2006
|
2007
|
2008
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
|
(2,032
|
)
|
|
39,892
|
|
|
48,482
|
|
|
12,751
|
|
|
|
|
Adjustments to reconcile net income to
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
21,433
|
|
|
110,981
|
|
|
111,723
|
|
|
29,386
|
|
Stock-based compensation
|
|
|
|
-
|
|
|
-
|
|
|
3,429
|
|
|
902
|
|
Deferred tax benefit
|
|
|
|
(94
|
)
|
|
(11,129
|
)
|
|
(7,052
|
)
|
|
(1,855
|
)
|
Accrued interest on debentures
|
|
|
|
-
|
|
|
20,458
|
|
|
21,061
|
|
|
5,539
|
|
Increase in allowance for doubtful accounts, net
|
|
|
|
1,102
|
|
|
5,931
|
|
|
436
|
|
|
115
|
|
Increase (decrease) in employee severance
|
|
|
benefits, net
|
|
|
|
(135
|
)
|
|
(34
|
)
|
|
2,066
|
|
|
543
|
|
Impairment and other charges
|
|
|
|
8,202
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Linkage and interest differences on long-term
|
|
|
obligations, exchange rate difference and other
|
|
|
|
(1,361
|
)
|
|
24,592
|
|
|
47,865
|
|
|
12,589
|
|
Gain from redemption of debentures
|
|
|
|
-
|
|
|
-
|
|
|
(3,052
|
)
|
|
(803
|
)
|
Realized and unrealized (income) expenses on
|
|
|
marketable securities, net
|
|
|
|
(79
|
)
|
|
883
|
|
|
9,518
|
|
|
2,503
|
|
Changes in assets and liabilities,
|
|
|
net of effects of acquisition:
|
|
|
Trade receivables including non current portion
|
|
|
|
(8,489
|
)
|
|
(7,552
|
)
|
|
(11,371
|
)
|
|
(2,990
|
)
|
Prepaid expenses and other current assets
|
|
|
|
(364
|
)
|
|
2,116
|
|
|
(1,931
|
)
|
|
(508
|
)
|
Other assets, net
|
|
|
|
1,234
|
|
|
(52
|
)
|
|
483
|
|
|
127
|
|
Accounts payable
|
|
|
|
18,947
|
|
|
7,102
|
|
|
(35,766
|
)
|
|
(9,407
|
)
|
Receivables (payables) from parent company and
|
|
|
related parties, net
|
|
|
|
(918
|
)
|
|
(5,274
|
)
|
|
8,214
|
|
|
2,160
|
|
Other payables and accrued expenses
|
|
|
|
659
|
|
|
34,236
|
|
|
14,781
|
|
|
3,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
38,105
|
|
|
222,150
|
|
|
208,886
|
|
|
54,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property and equipment and
|
|
|
other assets
|
|
|
|
(11,175
|
)
|
|
(50,808
|
)
|
|
(56,135
|
)
|
|
(14,765
|
)
|
Investment in trading marketable securities
|
|
|
|
-
|
|
|
-
|
|
|
(186,678
|
)
|
|
(49,100
|
)
|
Proceeds from sale of trading marketable securities
|
|
|
|
-
|
|
|
-
|
|
|
100,417
|
|
|
26,412
|
|
Investment in available-for-sale marketable
|
|
|
securities
|
|
|
|
-
|
|
|
-
|
|
|
(171,546
|
)
|
|
(45,120
|
)
|
Purchase of a subsidiary company, net of cash
|
|
|
acquired
|
|
|
|
(5,118
|
)
|
|
(585,636
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
(16,293
|
)
|
|
(636,444
|
)
|
|
(313,942
|
)
|
|
(82,573
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an
integral part of the combined and consolidated financial statements.
F - 7
012 Smile.Communications Ltd.
|
|
Combined and Consolidated Statements of Cash Flows (in thousands) (cont'd)
|
|
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
Year ended December 31
|
Year ended
December 31
2008
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in short-term bank credit, net
|
|
|
|
41,552
|
|
|
(329,232
|
)
|
|
(2,407
|
)
|
|
(633
|
)
|
Loan from parent company
|
|
|
|
-
|
|
|
100,640
|
|
|
-
|
|
|
-
|
|
Payments in respect of long-term finance
|
|
|
arrangement
|
|
|
|
(35,421
|
)
|
|
(50,247
|
)
|
|
(25,835
|
)
|
|
(6,795
|
)
|
Issuance of debentures, net of issuance expense
|
|
|
|
-
|
|
|
423,779
|
|
|
-
|
|
|
-
|
|
Redemption of debentures
|
|
|
|
-
|
|
|
-
|
|
|
(15,913
|
)
|
|
(4,186
|
)
|
Contribution from parent company
|
|
|
|
10,044
|
|
|
170,238
|
|
|
-
|
|
|
-
|
|
Proceeds from issuance of shares, net
|
|
|
|
-
|
|
|
299,364
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
|
|
|
activities
|
|
|
|
16,175
|
|
|
614,542
|
|
|
(44,155
|
)
|
|
(11,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in cash and cash equivalents
|
|
|
|
37,987
|
|
|
200,248
|
|
|
(149,211
|
)
|
|
(39,245
|
)
|
Effect of exchange rate changes
|
|
|
|
-
|
|
|
(8,340
|
)
|
|
(20,032
|
)
|
|
(5,269
|
)
|
Cash and cash equivalents at
|
|
|
beginning of the year
|
|
|
|
-
|
|
|
37,987
|
|
|
229,895
|
|
|
60,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
|
37,987
|
|
|
229,895
|
|
|
60,652
|
|
|
15,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
Interest paid
|
|
|
|
382
|
|
|
11,463
|
|
|
649
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
|
-
|
|
|
8,000
|
|
|
21,515
|
|
|
5,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of
|
|
|
non-cash investing activities:
|
|
|
|
|
|
Net change in unrealized losses on available-
|
|
|
for-sale marketable securities
|
|
|
|
-
|
|
|
-
|
|
|
14,645
|
|
|
3,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
and other assets on credit
|
|
|
|
7,545
|
|
|
13,063
|
|
|
12,286
|
|
|
3,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
012 acquisition
|
|
|
|
584,621
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 1, on December
31, 2006, the Company completed the acquisition of 012 Golden Lines Ltd. for a total
consideration of NIS 599.4 million. The majority of the consideration for the acquisition
was paid in January 2007 and March 2007.
The accompanying notes are an
integral part of the combined and consolidated financial statements.
F - 8
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 1 General
|
012
Smile.Communications Ltd. (hereinafter the Company) is a majority owned
subsidiary of Internet Gold Golden Lines Ltd. (IGLD or the Parent
Company), a publicly traded corporation currently traded on the NASDAQ Global Market
and on the Tel-Aviv Stock Exchange (TASE). The Company commenced operations in 2000.
|
|
On
October 31, 2007, the Company consummated an initial public offering (the IPO)
of its ordinary shares on the NASDAQ Global Market, see Note 15. Following the IPO the
Company also listed its shares for trading on the TASE.
|
|
The
Company is a communication services provider in Israel, focused on offering broadband and
traditional voice services to residential and business customers, as well as to domestic
and international communication services providers, or carriers.
|
|
On
December 31, 2006, the Company acquired the entire outstanding share capital of 012 Golden
Lines Ltd. (hereinafter 012) for a total consideration of approximately NIS
599.4 million. The consideration for the acquisition was paid subsequent to the balance
sheet date in two installments, in January 2007 and March 2007.
|
|
In
addition, subsequent to the acquisition, all of the assets and liabilities of 012 were
merged into the Company and 012 ceased to exist as a separate legal entity. The statutory
merger was approved by an Israeli court in February 2007.
|
|
On
December 31, 2006, the Company and IGLD signed an agreement for the transfer of the
assets, liabilities and operations related to the communication business of IGLD (the
Communication Business) to the Company. On May 9, 2007, the transfer was
authorized as a tax free transfer by the Israeli Tax Authorities.
|
|
Prior
to the IPO, the combined financial statements include the Company and its subsidiary as
well as certain assets, liabilities and related operations not owned by the Company during
the reported periods which were transferred to the Company (the Contribution)
by IGLD. The combined statements of operations include the historical results of the
Communication Business within IGLD that were transferred to the Company. Because no direct
ownership relationship existed among all the various units comprising the Communication
Business and the Company, IGLDs net investment in the Company is shown in lieu of
shareholders equity in the combined financial statements.
|
|
Subsequent
to the transfer of the Communication Business, IGLD and the Company entered into a series
of supply and services agreements, pursuant to which IGLD and the Company provide a
variety of services to each other. These services include distribution of certain of
IGLDs products, facilities, administrative and accounting services. Charges for
these services are calculated based on the nature of the service involved (see Note 18).
|
|
Following
the IPO, the Parent Company investment account was reclassified as additional paid-in
capital and the combined financial statements were presented on a consolidated basis.
|
F - 9
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies
|
The
combined and consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States of America (US GAAP).
|
|
The
combined financial statements through the date of the IPO have been derived from the
financial statements and accounting records of IGLD using the historical results of
operations and historical basis of the assets and liabilities of the Communication
Business. Management believes the assumptions underlying the combined financial statements
are reasonable. However, the combined financial statements included herein may not
necessarily reflect the Companys future results of operations, financial position
and cash flows, or what its results of operations, financial position and cash flows would
have been had the Company been a stand-alone company during the periods presented. The
combined financial statements include allocations of certain of IGLDs corporate
headquarters assets, liabilities and expenses directly relating to the Communication
Business that were transferred to the Company from IGLD. In addition, general corporate
overhead has been allocated to the Company either based on the ratio of the Communication
Business costs and expenses to IGLDs total costs and expenses or based on the
Communication Business revenue as a percentage of IGLDs total revenue.
|
|
General
corporate overhead primarily includes cash management, legal, accounting, insurance,
public relations, advertising and data services and amounted to NIS 3,452, for the
year ended December 31, 2006. The costs of these services charged to the Company are not
necessarily indicative of the costs that would have been incurred if the Company had
performed these functions as a stand-alone company.
|
|
IGLD
used a centralized approach to cash management and the financing of its operations. Cash
deposits from the Communication Business were transferred to IGLD on a regular basis and
were netted against the Parent Company investment account. As a result, none of
IGLDs cash, cash equivalents or debt at the corporate level has been allocated to
the Company in the combined financial statements. Cash and cash equivalents in the
combined financial statements represents amounts held by the Company. Changes in the
Parent Company investment represent IGLDs contribution of its net investment after
giving effect to the net income of the Company plus net cash transferred to or from IGLD.
|
|
The
Company began accumulating its retained earnings starting from January 1, 2007.
|
|
The
Companys income taxes in the combined financial statements were calculated on a
separate tax return basis. Certain payments for income taxes of the Communication Business
historically have been offset against IGLDs tax losses and do not necessarily
reflect what the Communication Business would have paid had it been stand-alone entity.
The tax expense amounts shown in the combined statements of income have been calculated
based on managements estimate of what the Communication Business may have incurred
had it been a separate entity.
|
F - 10
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
The
functional currency of the Company is the local currency, the New Israeli Shekel
(NIS). The Company prepares and presents its financial statements in NIS.
|
|
Transactions
and balances denominated in NIS are presented at their original amounts.
|
|
Transactions
and balances, not denominated in NIS, have been remeasured into NIS in accordance with the
principles set forth in Statement of Financial Accounting Standards (SFAS) No.
52, Foreign Currency Translation of the Financial Accounting Standards Board
(FASB).
|
|
All
exchange gains and losses from remeasurement of monetary balance sheet items denominated
in non-NIS currencies are reflected in the combined and consolidated statement of
operations when they arise.
|
|
Effect
of changes in foreign currency exchange rates:
|
|
|
December 31
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange rate of US$ in NIS
|
|
|
|
4.225
|
|
|
3.846
|
|
|
3.802
|
|
|
Change of exchange rate of US$ in %
|
|
|
|
(8.2
|
)%
|
|
(9.0
|
)%
|
|
(1.1
|
)%
|
|
The
preparation of financial statements in conformity with US GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant
estimates and assumptions made by management involve the assessment of collectibility of
accounts receivable and the determination of the allowance for doubtful accounts, the
allocation of corporate overhead, the computation of the Companys effective tax rate
and deferred tax assets and liabilities, the valuation of derivatives and share-based
compensation, valuation of investments in marketable securities, income tax uncertainties
and other contingencies and the valuation and useful life of its long-lived assets. Actual
results may differ from those estimates. The current economic environment has increased
the degree of uncertainty inherent in those estimates and assumptions.
|
|
For
the convenience of the reader, the reported NIS figures as of December 31, 2008 and for
year ended December 31, 2008 have been presented in thousands of U.S. Dollars translated
at the representative rate of exchange as of December 31, 2008 (NIS 3.802 = U.S. Dollar
1.00). The U.S. Dollar (hereinafter $) amounts presented in these financial
statements should not be construed as representing amounts receivable or payable in U.S.
Dollars or convertible into U.S. Dollars, unless otherwise indicated.
|
F - 11
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Principles
of combination and consolidation
|
|
The
combined and consolidated financial statements include the activities of the Communication
Business together with majority-owned or otherwise controlled subsidiaries of IGLD. All
material intercompany transactions and balances between and among the Communication
Business and the Company have been eliminated. Transactions between the Communication
Business and other members of the IGLD group are included in these financial statements.
The results of operations of 012 were included starting from the date of acquisition by
the Company.
|
|
Cash
and cash equivalents
|
|
The
Company considers as cash equivalents all highly-liquid investments, including short-term
bank deposits with an original maturity of three months or less, which are not encumbered
by a lien.
|
|
Allowance
for doubtful accounts
|
|
The
financial statements include an allowance for doubtful accounts which properly reflects,
in managements estimation, the potential loss from non-collection of accounts. The
Company provides for doubtful accounts on the basis of its experience in collecting past
debts, as well as on the basis of information available to the management of the Company
about specific customers.
|
|
The
activity in the allowance for doubtful accounts for the years ended December 31, 2006,
2007 and 2008 is as follows:
|
|
|
|
|
|
Convenience
translation
into
US Dollars
(Note 2)
|
|
|
December 31
|
Year ended
December 31
2008
|
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
Allowance for doubtful accounts is
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprised as follows:
|
|
|
|
Balance at beginning of year
|
|
|
|
5,261
|
|
|
6,363
|
|
|
12,294
|
|
|
3,234
|
|
|
Provision
|
|
|
|
1,373
|
|
|
9,668
|
|
|
5,714
|
|
|
1,503
|
|
|
Write-offs
|
|
|
|
(271
|
)
|
|
(3,737
|
)
|
|
(5,278
|
)
|
|
(1,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
6,363
|
|
|
12,294
|
|
|
12,730
|
|
|
3,348
|
|
|
|
|
|
|
|
|
|
|
|
F - 12
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Investments in marketable securities
|
|
Investment
securities at December 31, 2008 consist of corporate debt and equity securities. The
Company classifies its debt securities in one of two categories: trading or
available-for-sale and its equity securities that have readily determinable fair values
into available-for-sale. Trading securities are bought and held principally for the
purpose of selling them in the near term. All securities not included in trading are
classified as available-for-sale.
|
|
Trading
and available-for-sale securities are recorded at fair value. Unrealized holding gains and
losses on trading securities are included in earnings. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale securities are excluded from
earnings and are reported as a separate component of accumulated other comprehensive
income (loss) until realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific-identification basis.
|
|
A
decline in the market value of any available-for-sale below cost that is deemed to be
other-than-temporary results in an impairment to reduce the carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the security is
established. To determine whether an impairment is other-than-temporary, the Company
considers whether it has the ability and intent to hold the investment until a market
price recovery and considers whether evidence indicating the cost of the investment is
recoverable outweighs the evidence to the contrary. Evidence considered in this assessment
includes the reasons for the impairment, the severity and duration of the impairment and
changes in value subsequent to year-end.
|
|
Premiums
and discounts are amortized or accreted over the life of the related available-for-sale
security as an adjustment to yield using the effective-interest method. Such amortization
and accretion is included in the Financial income or Financial
expenses line items in the combined and consolidated statements of operations.
Dividend and interest income are recognized when earned.
|
|
Property
and equipment, net
|
|
Property
and equipment, net are stated at cost, including direct costs necessary to prepare the
asset for its intended use. Maintenance and repair costs are charged to expense as
incurred. The cost of significant renewals and improvements is capitalized to the carrying
amount of the respective fixed asset.
|
|
The
Company capitalized certain costs incurred in connection with developing or obtaining
internal use software in accordance with Statement of Position 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use of the
American Institute of Certified Public Accountants. Capitalized costs include direct
development costs associated with internal use software, including internal direct labor
costs and external costs of materials and services. These capitalized software costs are
included in Property and equipment, net in the combined balance sheets. Costs
incurred during the preliminary project stage, as well as maintenance and training costs
are expensed as incurred. On December 31, 2006, as result of the 012 acquisition, the
Company determined that the majority of its NIS 8.2 million of capitalized software
development cost for internal use that was under development at that time was impaired and
wrote-off that amount.
|
F - 13
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Property
and equipment, net (contd)
|
|
Annual
depreciation rates are as follows:
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network equipment, capitalized software costs and computers
|
|
|
|
15-33
|
|
|
Furniture and office equipment
|
|
|
|
7-15
|
|
|
Motor vehicles
|
|
|
|
15
|
|
|
Leasehold improvements
|
|
|
|
Shorter of the lease term or the useful life of the asset (mainly 10 years)
|
|
|
Other
assets, net consist of licenses, rights of use (ROU) of international fiber optic cables
and costs to acquire new subscribers. Licenses are stated at cost and are amortized over
their estimated useful lives by the straight-line method starting at the time such
licenses were put into service and will continue until the expiry date of the licenses
which is 20 years.
|
|
ROU
of international fiber optic cables are amortized by the straight-line method over the
relevant term of the service agreement which range from 15-20 years.
|
|
Payments
in advance for operating leases of fiber optic cables are presented at cost and are
charged to operations on a straight-line basis over the term of the operating lease (five
years).
|
|
Deferred
expenses in respect of commissions regarding the acquisition of new subscribers are
recognized as assets, if the cost can be measured reliably, incremental to the contract
and directly attributable to obtaining a specific subscriber. Deferred expenses are
amortized over their contractual lives by the straight line method (12-36 months). If the
cost does not meet the aforementioned criteria, they are recognized immediately as
expenses.
|
|
Intangible assets and long-lived assets other than goodwill
|
|
Intangible
assets other than goodwill and customer relationships are carried at cost less accumulated
amortization. Intangible assets other than customer relationships are generally amortized
on a straight-line basis over the useful lives of the respective assets, generally eight
to twenty years. Customer relationships are amortized over eight to ten years according to
the economic benefit expected from those customers each period, which results in
accelerated amortization during the early years of the relationship. Long-lived assets and
certain identifiable amortizable intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount
of such assets may not be recoverable. Determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of any impairment loss for long-lived assets and certain
identifiable intangible assets that management expects to hold and use is based on the
amount the carrying value exceeds the fair value of the asset. No impairment charges were
recorded during 2006, 2007 and 2008.
|
F - 14
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Goodwill
and indefinite lived intangible assets
|
|
Goodwill
represents the excess of cost over fair value of net tangible and intangible assets
acquired. Goodwill and brand names acquired in a business combination and determined to
have an indefinite useful life are not amortized but instead tested for impairment at
least annually at the reporting unit level (operating segment or one level below an
operating segment) and between annual tests in certain circumstances in accordance with
the provisions of FASB SFAS No. 142 Goodwill and Other Intangible Assets. The
performance of the test involves a two-step process. The first step of the impairment test
involves comparing the fair value of the Companys reporting units with the reporting
units carrying amount, including goodwill. The Company generally determines the fair
value of its reporting units using the expected present value of future cash flows. If the
carrying amount of a reporting unit exceeds the reporting units fair value, the
Company performs the second step of the goodwill impairment test to determine the amount
of impairment loss. The second step of the goodwill impairment test involves comparing the
implied fair value of the reporting units goodwill with the carrying amount of that
goodwill.
|
|
The
Company has established December 31 as its annual impairment testing date. No impairment
charges were recorded in any of the reporting periods for goodwill and indefinite-lived
intangible assets.
|
|
Revenue
derived from usage of the Companys networks, including business, residential and
carrier long distance traffic, data and Internet traffic services revenues is recognized
when the price is fixed or determinable, persuasive evidence of an arrangement exists, the
service is performed or product delivered and collectibility of the resulting receivable
is reasonably assured.
|
|
For
traditional voice services, revenue is earned based on the number of minutes of a call and
is recorded upon completion of a call. Revenue for a period is calculated based on
information received through the Companys network switches. Revenue on prepaid
calling cards is recognized as service is provided until expiration when all unused
minutes, which are no longer available to customers, are recognized as revenue.
|
|
For
broadband and data services, revenue is earned on a fixed monthly fee basis for the
provision of services. Broadband and data services include monthly fees collected for the
provision of dedicated and dial-up access at various speeds and bandwidths, and also web
and server hosting. These fees are recognized as services are provided. The Company
records payments received in advance for services and services to be provided under
contractual agreements, such as Internet broadband, as deferred revenue until such related
services are provided.
|
|
The
Company also offers value-added services including web faxing services, anti-spam and
anti-virus protection. Generally, these enhanced features and data applications generate
additional service revenues through monthly subscription fees or increased usage through
utilization of the features and applications. Revenues from enhanced features and optional
services are recognized when earned.
|
F - 15
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Revenue
recognition (contd)
|
|
Revenues
from sales of equipment such as routers, that are not contingent upon the delivery of
additional products or services are recognized when products are delivered to and accepted
by customers. Pursuant to Emerging Issues Task Force (EITF) No. 00-21,
Revenue Arrangements with Multiple Deliverables, the Company determined that
the sale of equipment with accompanying services constitutes a revenue arrangement with
multiple deliverables. Accordingly, consideration received for equipment, that is not
contingent upon the delivery of additional items (such as the services), is recognized as
equipment revenue, based on their relative fair value, upon the delivery of the equipment
to the subscriber and when all other revenue recognition criteria are met. Consideration
for services is recognized as services revenue when earned.
|
|
The
Company reports any taxes assessed by a governmental authority that is directly imposed on
a revenue-producing transaction between the Company and a customer on a net basis
(excluded from revenues).
|
|
Advertising
costs included in sales and marketing expenses, which include the costs associated with
the Companys online and offline advertising campaigns, are expensed as incurred and
amounted to NIS 29 million, NIS 56.8 million and NIS 39.9 million for the years ended
December 31, 2006, 2007 and 2008, respectively.
|
|
The
Company accounts for income taxes under the provisions of SFAS No. 109, Accounting
for Income Taxes, which requires the use of the asset and liability method. Deferred
income taxes are recorded for temporary differences between financial statement carrying
amounts and the tax bases of assets and liabilities. Deferred tax assets and liabilities
reflect the tax rates expected to be in effect for the years in which the temporary
differences are expected to reverse. A valuation allowance is provided if it is more
likely than not that some or the entire deferred tax asset will not be realized. The
Company records interest related to unrecognized tax benefits in interest expense and
penalties in general and administrative expenses in the statement of operations.
|
|
Basic
income (loss) per share (Basic EPS) is computed by dividing net income (loss)
available to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period. Diluted earnings per share (Diluted EPS) gives
effect to all potential dilutive ordinary shares outstanding during the period. The
computation of Diluted EPS does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings. The dilutive effect of
outstanding stock options is computed using the treasury stock method. During the years
ended December 31, 2006 and 2007 there were no potential dilutive ordinary
shares outstanding. The total weighted average number of ordinary shares related to
the outstanding options excluded from the calculations of Diluted EPS in 2008, since they
would have an anti-dilutive effect was 1,150,000 ordinary shares.
|
F - 16
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
On
January 1, 2008, the Company adopted the provisions FASB Statement No. 157, Fair
Value Measurements, for fair value measurements of financial assets and financial
liabilities and for fair value measurements of nonfinancial items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. Statement 157
defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the
measurement date. Statement 157 also establishes a framework for measuring fair value and
expands disclosures about fair value measurements (Note 16). FASB Staff Position FAS
157-2, Effective Date of FASB Statement No. 157, delays the effective date of
Statement 157 until fiscal years beginning after November 15, 2008 for all nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a nonrecurring basis.
|
|
The
provisions of Statement 157 were not applied to fair value measurements of the
Companys reporting units (Step 1 of goodwill impairment tests performed under
Statement 142) and nonfinancial assets and nonfinancial liabilities measured at fair value
to determine the amount of goodwill impairment (Step 2 of goodwill impairment tests
performed under Statement 142).
|
|
On
January 1, 2009, the Company will be required to apply the provisions of Statement 157 to
fair value measurements of nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a nonrecurring basis.
The Company is in the process of evaluating the impact, if any, of applying these
provisions on its financial position and results of operations.
|
|
In
October 2008, the FASB issued FASB Staff Position FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active, which was
effective immediately. FSP FAS 157-3 clarifies the application of Statement 157 in cases
where the market for a financial instrument is not active and provides an example to
illustrate key considerations in determining fair value in those circumstances. The
guidance provided by FSP FAS 157-3 in its determination of estimated fair values during
2008, had no impact on the Companys financial position and results of operations.
|
|
Derivative
financial instruments
|
|
The
Company uses derivative financial instruments such as forward currency contracts to hedge
certain of its risks associated with foreign currency fluctuations. These derivative
financial instruments are carried at fair value. As the derivative financial instruments
used by the Company do not qualify for hedge accounting according to SFAS No. 133
Accounting for Derivative Instruments and Certain Hedging Activities, any
changes in the fair value arising from such derivatives are recognized in the statements
of operations in the period of change.
|
F - 17
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
FASB
Statement No. 123(R) requires that all share-based compensation be recognized as an
expense in the financial statements and that such cost be measured at the fair value of
the award. The Company recognizes compensation expense based on estimated grant date fair
value using the Black-Scholes option-pricing model.
|
|
Concentration
of credit risk
|
|
Financial
instruments that potentially subject the Company to a concentration of credit risk consist
principally of cash equivalents, marketable securities and trade receivables. Cash
equivalents are maintained at financial institutions in Israel. Management believes that
the financial institutions that hold the Companys cash equivalents are financially
sound and accordingly, minimal credit risk exists with respect to these investments. The
Companys marketable securities consist of Israeli corporate debt and equity
securities. The Companys investment policy, approved by the Investment Committee,
that was established by the Companys Board of Directors, limits the amount the
Company may invest in any one type of investment or issuer, thereby reducing credit risk
concentrations.
|
|
As
a result of the recent turmoil in capital markets, the Company has tightened its control
and monitoring over its marketable securities portfolio in order to minimize potential
risks stemming from current capital markets environment. Such measures included among
others: reducing credit exposure to financial sector securities and increasing the overall
credit quality of the portfolio.
|
|
The
Company performs ongoing credit evaluations of its customers financial condition.
The Company does not generally require collateral from its customers and substantially all
of its trade receivables are unsecured. For all reported periods, no single customer
accounted for more than 10% of the Companys revenues or accounts receivable.
|
|
Recently
Issued Accounting Standards
|
|
In
December 2007, the FASB issued FASB Statement No. 141(R), Business
Combinations, and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment to ARB No. 51. Statements 141(R) and
160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill
acquired in a business combination to be recorded at full fair value and
require noncontrolling interests (previously referred to as minority interests) to be
reported as a component of equity, which changes the accounting for transactions with
noncontrolling interest holders. Both Statements are effective for periods beginning on or
after December 15, 2008, and earlier adoption is prohibited. Statement 141(R) will be
applied to business combinations occurring after the effective date. Statement 160 will be
applied prospectively to all noncontrolling interests, including any that arose before the
effective date. All of the Companys subsidiaries are wholly owned, so the adoption
of Statement 160 is not expected to impact its financial position and results of
operations. The adoption of Statement 141(R) will be applied prospectively to new
acquisitions.
|
F - 18
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
In
March 2008, the FASB issued FASB Statement No. 161, Disclosures about Derivative
Instruments and Hedging Activitiesan amendment of FASB Statement No.
133". Statement 161 requires entities that utilize derivative instruments
to provide qualitative disclosures about their objectives and strategies for using such
instruments, as well as any details of credit-risk-related contingent features contained
within derivatives. Statement 161 also requires entities to disclose additional
information about the amounts and location of derivatives located within the financial
statements, how the provisions of Statement 133 have been applied, and the impact that
hedges have on an entitys financial position, financial performance, and cash
flows. Statement 161 is effective for fiscal years and interim periods
beginning after November 15, 2008. The Company is currently evaluating the
impact of Statement 161 on the disclosures about its hedging activities and use of
derivatives.
|
|
In
April 2008, the FASB issued FASB Staff Position FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under Statement 142. FSP FAS 142-3 is effective
for fiscal years beginning after December 15, 2008. The adoption of FSP FAS 142-3
will be applied prospectively to new acquisitions of intangible assets. The Company is
currently evaluating the impact of FSP FAS 142-3 on its disclosure for intangible assets
recognized as of the effective date.
|
|
In
April 2009, the (FASB) issued three final Staff Positions (FSPs) intended to provide
additional application guidance and enhance disclosures regarding fair value measurements
and impairments of securities. The FSPs are effective for interim and annual periods
ending after June 15, 2009. FSP 157-4,
Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability Have Significantly
Decreased and
Identifying Transactions That are Not Orderly
(FSP 157-4), provides guidelines for
making fair value measurements more consistent with the principles presented in FASB
Statement No. 157,
Fair Value
Measurements
, and related to determining fair
values when there is no active market or where the price inputs being used represent
distressed sales. FSP 115-2 and 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments (FSP 115-2 and 124-2),
provide additional guidance
on presenting impairment losses on securities to bring consistency to the timing of
impairment recognition, provide clarity to investors about the credit and noncredit
components of impairment recognition, and provide clarity to investors about the credit
and noncredit components of impaired debt securities that are not expected to be sold. The
FSPs also require increased and more timely disclosures sought by investors regarding
expected cash flows, credit losses, and an aging of securities with unrealized losses. We
are still evaluating the impact of FSP 157-4, FSP 115-2 and 124-2, if any, but do not
expect them to have a material impact on our financial position or results of operations.
|
F - 19
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 3 Acquisition
|
On
December 31, 2006, the Company acquired 100% of the outstanding share capital of 012
Golden Lines Ltd. for a total cash consideration of approximately NIS 599.4 million
(including NIS 1.1 million of direct acquisition cost). The majority of the consideration
for the acquisition was paid subsequent to the balance sheet date in two installments in
January 2007 and March 2007 including interest of 6.5% since the dates the agreements were
signed.
|
|
On
July 25, 2006, the Company signed an agreement for the acquisition of 60% of the issued
share capital of 012; subject to, among other things, the regulatory approval of the
Israeli Anti Trust Commission. On December 20, 2006, the parties entered into an amendment
to the aforementioned agreement for the acquisition by the Company of an additional 37.72%
of the issued share capital of 012.
|
|
In
addition, in December 2006, a share purchase agreement was signed between the Company and
a minority shareholder in 012 for the purchase of the remaining 2.28% of the issued share
capital of 012. The minority shareholder received additional consideration of NIS 1.0
million following the completion of the Companys initial public offering.
|
|
The
acquisition date was determined to be the closing date, December 31, 2006, when all
required approvals for the acquisition including from the antitrust commission and all
debtors and others were obtained.
|
|
The
application of purchase accounting under SFAS 141 required that the total purchase price
be allocated to the fair value of assets acquired and liabilities assumed at the
acquisition date, with amounts exceeding the fair values being recorded as goodwill.
|
|
The
assets and liabilities of 012 have been appraised by BDO Ziv Haft Consulting and
Management Ltd. for inclusion in the balance sheet based on their fair value as of the
date of the acquisition. Long-lived assets such as property and equipment were recorded
using the estimated replacement cost fair market value which takes into account changes in
technology, usage, and relative obsolescence and depreciation of the assets. In addition,
assets and liabilities that would not normally be recorded in ordinary operations were
recorded at their acquisition values (i.e., customer relationships that were developed by
the acquired company). Debt instruments and investments were valued in relation to current
market conditions and other assets and liabilities were valued based on the acquiring
companys estimates. After all values have been assigned to assets and liabilities,
the remainder of the purchase price was recorded as goodwill.
|
|
The
allocation process required an analysis of acquired property and equipment, contracts,
customer lists and relationships, contractual commitments, legal contingencies and brand
value to identify and record the fair value of all assets acquired and liabilities
assumed. In valuing acquired assets and assumed liabilities, fair values were based on,
but not limited to: future expected discounted cash flows for customer relationships;
current replacement cost for similar capacity and obsolescence for certain property and
equipment; comparable market rates for contractual obligations and certain investments and
liabilities; expected settlement amounts for litigation and contingencies; and appropriate
discount rates and growth rates.
|
F - 20
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 3
Acquisition (contd)
|
The
following table summarizes the estimated fair values of the 012 assets acquired and
liabilities assumed and related deferred income taxes as of the acquisition date.
|
|
|
012
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
|
|
|
|
Current assets
|
|
|
|
159,027
|
|
|
Deferred tax assets
|
|
|
|
1,168
|
|
|
Other long-term assets
|
|
|
|
2,951
|
|
|
Assets held for employee severance benefits
|
|
|
|
9,616
|
|
|
Property and equipment
|
|
|
|
131,096
|
|
|
ROU of international fiber optic cables
|
|
|
|
173,219
|
|
|
Intangible assets subject to amortization:
|
|
|
|
Customer relationship
|
|
|
|
144,557
|
|
|
Licenses
|
|
|
|
2,332
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
Brand names
|
|
|
|
90,213
|
|
|
Goodwill
|
|
|
|
411,171
|
|
|
|
|
|
|
Total assets acquired
|
|
|
|
1,125,350
|
|
|
|
|
|
|
Liabilities assumed
|
|
|
|
Current liabilities
|
|
|
|
456,150
|
|
|
Long-term liabilities
|
|
|
|
1,365
|
|
|
Deferred tax liabilities
|
|
|
|
51,512
|
|
|
Provision for employee severance benefits
|
|
|
|
16,886
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
|
525,913
|
|
|
|
|
|
|
Net assets acquired
|
|
|
|
599,437
|
|
|
|
|
|
F - 21
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 3
Acquisition (contd)
|
Customer
relationships will be amortized over eight to ten years according to the economic benefit
expected from those customers each period. Licenses acquired will be amortized over the
contractual term of the license (20 years).
|
|
The
following unaudited pro forma consolidated results of operations assume that the
acquisition of 012 was completed as of January 1, 2006:
|
|
|
Year ended
December 31
2006
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
1,038,450
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
|
(21,617
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted in NIS
|
|
|
|
(0.92
|
)
|
|
|
|
|
|
The
unaudited pro forma information presents the combined operating results of the Company and
012, with the results prior to the acquisition date adjusted to include the pro forma
impact of: the adjustment of amortization of intangible assets and depreciation of
property and equipment based on the purchase price allocation; and the adjustment of
interest expense reflecting the interest incurred to finance the acquisition of 012.
|
|
The
unaudited pro forma basic and diluted earnings per share for 2006 are based on the basic
and diluted weighted average shares of the Company.
|
|
Cash
paid for the 012 acquisition, net of cash acquired during the years ended December 31,
2006 and 2007, was as follows:
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital acquired except
|
|
|
|
|
|
|
for cash and cash equivalents
|
|
|
|
(305,806
|
)
|
|
Property and equipment
|
|
|
|
131,096
|
|
|
ROU of international fiber optic cables
|
|
|
|
173,219
|
|
|
Other intangible assets
|
|
|
|
237,102
|
|
|
Goodwill
|
|
|
|
411,171
|
|
|
Other long-term assets
|
|
|
|
2,951
|
|
|
Deferred tax liabilities, net
|
|
|
|
(50,344
|
)
|
|
Long term liabilities, net
|
|
|
|
(8,635
|
)
|
|
|
|
|
|
|
|
|
|
Cash paid for the 012 acquisition, net of cash acquired
|
|
|
|
590,754
|
|
|
|
|
|
F - 22
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 4 Marketable
Securities
|
The
carrying amount, gross unrealized holding gains, gross unrealized holding losses,
and fair value of investments in available-for-sale debt and equity
securities of Israeli corporations by major security type and class of security
at December 31, 2008 were as follows:
|
|
|
Carrying
amount
|
Gross
unrealized
holding
gains
|
Gross
unrealized
holding
(losses)
|
Fair value
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
Corporate debt securities
|
|
|
|
128,194
|
|
|
-
|
|
|
(22,364
|
)
|
|
105,830
|
|
|
Equity securities
|
|
|
|
43,353
|
|
|
2,837
|
|
|
-
|
|
|
46,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171,547
|
|
|
2,837
|
|
|
(22,364
|
)
|
|
152,020
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturities
of debt securities classified as available-for-sale were as follows at December 31, 2008:
|
|
|
Carrying
amount
|
Fair value
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
Due in one through five years
|
|
|
|
86,101
|
|
|
71,080
|
|
|
Due after five years through ten years
|
|
|
|
42,093
|
|
|
34,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,194
|
|
|
105,830
|
|
|
|
|
|
|
|
|
The
Company also maintains a portfolio of investment securities classified as trading of NIS
76,742 as of December 31, 2008. These investments are subject to price volatility
associated with any interest-bearing instrument. Net realized losses on trading securities
during the years ended December 31, 2008 were NIS 7 and are included in financial
expense. Net unrealized losses on trading securities held at year end and included in
financial expense for 2008 were NIS 9,510.
|
|
The
Company evaluates whether unrealized losses on available-for-sale investment securities
indicate an other-than-temporary impairment. Based on this evaluation, the Company
recognized an other-than-temporary impairment loss of NIS 1,281 on an investment in a
certain corporate debt security in 2008. The unrealized loss on this corporate debt
security was caused by an increased credit spread and decrease in the credit of the
corporate debt security during 2008. Because the Company does not have the intent to hold
this investment to recovery, it is considered to be other-than-temporarily impaired.
Other-than-temporary impairment losses are included in financial expenses on the
consolidated statement of operations.
|
F - 23
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 4 Marketable
Securities (contd)
|
Gross
unrealized losses on investment securities for which other-than-temporary impairments have
not been recognized and the fair values of those securities, aggregated by investment
category and length of time that individual securities have been in a continuous
unrealized loss position, at December 31, 2008 were as follows:
|
|
|
Less than 12 months
|
12 months or more
|
Total
|
|
|
Unrealized
losses
|
Fair value
|
Unrealized
losses
|
Fair value
|
Unrealized
losses
|
Fair value
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
22,364
|
|
|
105,830
|
|
|
-
|
|
|
-
|
|
|
22,364
|
|
|
105,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,364
|
|
|
105,830
|
|
|
-
|
|
|
-
|
|
|
22,364
|
|
|
105,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
debt securities: The investments in corporate debt securities with unrealized losses
included in the table above are comprised of investments in a variety of bonds of major
Israeli corporations with maturities in 2009-2018. The unrealized losses on corporate debt
securities were caused by interest rate increases. The contractual terms of the bonds do
not allow the issuer of the bonds to settle the securities at a price less than the face
value of the bonds, which is greater than the amortized cost of the bonds. The credit
ratings of the Israeli corporations which issued the bonds have not decreased during the
period the bonds have been outstanding. Because the decline in fair value is attributable
to changes in interest rates and not credit quality, and because the Company has the
intent and ability to hold these investments to maturity, these investments are not
considered other-than-temporarily impaired.
|
Note 5 Property
and Equipment, Net
|
Property
and equipment consists of:
|
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Network equipment, capitalized software costs
|
|
|
|
|
|
|
|
|
|
|
|
|
and computers
|
|
|
|
239,951
|
|
|
298,728
|
|
|
78,571
|
|
|
Furniture and office equipment
|
|
|
|
33,273
|
|
|
34,287
|
|
|
9,018
|
|
|
Motor vehicles
|
|
|
|
848
|
|
|
848
|
|
|
223
|
|
|
Leasehold improvements
|
|
|
|
39,518
|
|
|
44,332
|
|
|
11,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,590
|
|
|
378,195
|
|
|
99,472
|
|
|
Less - accumulated depreciation and amortization
|
|
|
|
153,379
|
|
|
208,789
|
|
|
54,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,211
|
|
|
169,406
|
|
|
44,557
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 31, 2006, 2007 and 2008, the Company recorded NIS 12,192,
NIS 53,012 and NIS 55,410 of depreciation and amortization expense on property and
equipment, respectively.
|
F - 24
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 6 Other
Intangible Assets, Net
|
|
|
|
Convenience
translation
into
US Dollars
(Note 2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Customer relationships
|
|
|
|
144,859
|
|
|
144,859
|
|
|
38,101
|
|
|
Brand names (*)
|
|
|
|
90,213
|
|
|
90,213
|
|
|
23,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,072
|
|
|
235,072
|
|
|
61,829
|
|
|
Less accumulated amortization
|
|
|
|
32,696
|
|
|
60,432
|
|
|
15,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,376
|
|
|
174,640
|
|
|
45,934
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 2006, 2007 and 2008, the Company recorded NIS 100,
NIS 32,495 and NIS 27,736 of amortization expenses on intangible assets,
respectively.
|
|
The
expected intangible asset amortization expense for the customer relationship will be based
on the expected economic benefit from those customers.
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
23,337
|
|
|
2010
|
|
|
|
18,952
|
|
|
2011
|
|
|
|
15,201
|
|
|
2012
|
|
|
|
11,486
|
|
|
2013
|
|
|
|
7,798
|
|
|
(*) Indefinite life intangible asset
|
|
|
Note 7 Goodwill
|
Changes
in goodwill for the years ended December 31, 2007 and 2008 is as follows:
|
|
|
Year ended December 31
|
Convenience
translation into
US dollars(Note
2)
|
|
|
2007
|
2008
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, beginning of year
|
|
|
|
410,156
|
|
|
411,171
|
|
|
108,146
|
|
|
Acquisition of 012
|
|
|
|
*1,015
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, end of year
|
|
|
|
411,171
|
|
|
411,171
|
|
|
108,146
|
|
|
|
|
|
|
|
|
|
|
*
|
Additional
payment to minority shareholder, see Note 3.
|
F - 25
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 8 Other
Assets, Net
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
ROU of international fiber optic cables
|
|
|
|
340,030
|
|
|
362,591
|
|
|
95,368
|
|
|
Licenses for telecommunication services
|
|
|
|
4,031
|
|
|
4,031
|
|
|
1,060
|
|
|
Other
|
|
|
|
3,532
|
|
|
5,563
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,593
|
|
|
372,185
|
|
|
97,891
|
|
|
Less - accumulated amortization
|
|
|
|
52,001
|
|
|
80,578
|
|
|
21,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,592
|
|
|
291,607
|
|
|
76,698
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 2006, 2007 and 2008, the Company recorded NIS 9,141, NIS 25,522
and NIS 28,577 of amortization expenses on other assets, respectively.
|
|
The
expected other assets amortization expense will be approximately NIS 29,000 for each of
the next five years.
|
Note 9 Short-Term
Bank Credit
|
As
of December 31, 2007 and 2008, the Company had authorized revolving lines of credit of NIS
68.5 million and NIS 78 million, respectively, that bear interest at a weighted average
rate of 5.3% and 5.2%, respectively. As of December 31, 2008, the entire amount of the
lines of credit were available (as of December 31, 2007, NIS 66.1 million was available).
|
|
The
Company committed to the banks from which it received the above line of credit not to
record a pledge or lien on any of its assets without the consent of the banks (negative
pledge).
|
Note 10 Debentures
|
A.
|
Issuance
of debentures
|
|
During
the period of March 2007 to May 2007, the Company issued a total of NIS 425 million
par value Series A debentures to institutional investors at par value. The debentures,
together with the accrued interest, are payable in eight equal payments on March 15 of
each year starting from March 15, 2009 and are linked to the Israeli Consumer Price Index
(CPI). The debentures bear annual interest at the rate of 4.75%.
|
F - 26
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 10
Debentures (contd)
|
The
debentures have the following terms:
|
|
|
The
Company is entitled to increase the series of the debentures and to issue additional
series at the same terms, providing that this does not cause the credit rating of the
outstanding debentures to decrease below the rating prior to the issuance.
|
|
|
The
Company is prohibited from creating any liens on its assets of the Company without the
prior approval of the general meeting of the debentures holders.
|
|
|
The
Company will not repay all or any portion of its shareholders loans for as long as
the ratio of net debt (without the shareholders loans) to EBITDA (defined as
operating income before financial expenses, taxes on income, depreciation and
amortization) is more than two for the last four quarters.
|
|
|
The
Company is entitled to make an early redemption of the debentures, in whole or in part,
in the last two weeks of each quarter. The amount payable will be the higher of: the
principal plus accrued interest and linkage differences as at that date; or the present
value of future cash flows as at that date based on a yield of Israeli Government Bonds +
0.3%.
|
|
|
The
debentures holders are entitled to demand the immediate redemption of the debentures or
are obligated to do so if a resolution is passed in a legal general meeting of the
debenture holders in the following events:
|
|
a.
|
The
winding-up, dissolution or liquidation of the Company.
|
|
b.
|
Non-payment
by the Company of the amounts required according to the terms of the
debentures.
|
|
c.
|
A
foreclosure is imposed on the Companys principal assets.
|
|
d.
|
Breach
of a material provision of the debentures.
|
|
As
of the date of these financial statements the Company was in compliance with the financial
covenants of the debentures.
|
|
B.
|
Debentures
buyback program
|
|
On
November 25, 2008, the Companys Board of Directors announced that it had authorized
the repurchase of up to NIS 100 million of the Companys Series A debentures. As of
December 31, 2008, the Company repurchased approximately NIS 16 million (US$4.2 million)
of these debentures. These transactions generated a gain of approximately NIS 3.1 million
(US$ 0.8 million), which has been recorded in financial income.
|
|
C.
|
Aggregate
maturities are as follows:
|
|
|
December 31
2008
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
54,979
|
|
|
2010
|
|
|
|
54,979
|
|
|
2011
|
|
|
|
54,979
|
|
|
2012
|
|
|
|
54,979
|
|
|
2013 and thereafter
|
|
|
|
219,914
|
|
F - 27
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 11 Loan from
Parent Company
|
In
2007, the Company received a loan from IGLD. The loan bears annual interest at the prime
rate as published by the Bank of Israel (4.0% at December 31, 2008). IGLD and the Company
agreed that the due date would not be prior to October 1, 2008. As of December 31, 2008,
the loan is payable upon IGLDs demand. In addition, under the terms of the
debentures the repayment of this loan is subject to the Company meeting certain financial
covenants, see Note 10.
|
|
Balance
outstanding as of December 31, 2007 and 2008 is as follows:
|
|
|
2007
|
2008
|
Convenience
translation
into US Dollars
(Note 2)
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Parent Company
|
|
|
|
105,733
|
|
|
111,344
|
|
|
29,286
|
|
|
|
|
|
|
|
|
|
Note 12 Accrued
Severance Liability
|
Pursuant
to Israeli severance pay laws, the amount of Companys liability to its Israeli
employees is calculated based on the most recent salary of the employees multiplied by the
number of years of employment as of the balance sheet date. After completing one full year
of employment, the Companys Israeli employees are entitled to one months
salary for each year of employment or a portion thereof. Most of the Companys
liability is provided by monthly deposits with severance pay funds, insurance policies and
by an accrual.
|
|
The
assets held for employee severance include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements. Severance pay expenses for the
years ended December 31, 2006, 2007 and 2008 were approximately NIS 2,705, NIS 4,153 and
NIS 7,172, respectively.
|
Note 13 Long-Term
Obligations and Other Payables
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Long-term finance arrangement
|
|
|
|
|
|
|
|
|
|
|
|
|
(US$ denominated) see Note 19B3
|
|
|
|
6,394
|
|
|
2,940
|
|
|
773
|
|
|
Accrued interest
|
|
|
|
20,458
|
|
|
-
|
|
|
-
|
|
|
Less: current maturities
|
|
|
|
(3,558
|
)
|
|
(2,797
|
)
|
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,294
|
|
|
143
|
|
|
38
|
|
|
|
|
|
|
|
|
|
F - 28
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 13 Long-Term Obligations
(contd)
|
Aggregate
maturities as of December 31, 2008 are as follows:
|
|
|
|
Convenience
translation into
US dollars
(Note 2)
|
|
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
2,797
|
|
|
735
|
|
|
2010
|
|
|
|
143
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
2,940
|
|
|
773
|
|
|
|
|
|
|
|
Note 14 Other
Payables and Accrued Expenses
|
|
|
|
Convenience
translation
into
US Dollars
(Note 2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Provision and accrued expenses
|
|
|
|
36,386
|
|
|
47,130
|
|
|
12,396
|
|
|
Employee and payroll accruals
|
|
|
|
20,046
|
|
|
17,580
|
|
|
4,624
|
|
|
Government authorities
|
|
|
|
4,394
|
|
|
3,826
|
|
|
1,006
|
|
|
Income tax payable
|
|
|
|
38,037
|
|
|
45,748
|
|
|
12,033
|
|
|
Derivatives financial instruments
|
|
|
|
828
|
|
|
1,055
|
|
|
278
|
|
|
Others
|
|
|
|
867
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,558
|
|
|
115,339
|
|
|
30,337
|
|
|
|
|
|
|
|
|
|
Note 15 Share
Capital
|
All
ordinary share and per share data included in these financial statements have been
retroactively adjusted to reflect the increase in the authorized share capital, stock
split and allotments of shares discussed below.
|
|
In
September 2007 and on October 10, 2007, the Companys shareholders approved the
following:
|
|
1)
|
Reorganizing
the share capital so that each ordinary share of NIS 1 par value would be split
into 10 ordinary shares of NIS 0.1 par value.
|
|
2)
|
Increasing
the authorized share capital from 13,800,000 ordinary shares of NIS 0.1 par
value to 50,000,000 ordinary shares of NIS 0.1 par value.
|
F - 29
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 15 Share
Capital (contd)
|
3)
|
Issuing
17,815,860 fully paid shares of NIS 0.1 par value to the Parent Company in
respect of the contribution of the assets and liabilities of the Communication
Business which were not previously owned by the Company.
|
|
4)
|
Allotting
554,140 fully paid dividend shares of NIS 0.1 par value to the Parent Company.
|
|
Following
the consummation of the above transactions, the Company had 18,370,000 ordinary shares of
NIS 0.1 par value issued and fully paid.
|
|
During
November 2007, the Company consummated an initial public offering in which it sold
6,675,000 ordinary shares at a price of $12 per share. In December 2007, the underwriters
exercised their over allotment option for the purchase of an additional 315,000 ordinary
shares. Net proceeds to the Company from the IPO, including sale of the additional shares
to the underwriters, net of commissions and expenses was $77,838.
|
|
On
December 30, 2008, the Companys Board of Directors announced a share buyback program
under which management is authorized to re-purchase up to $10 million of the
Companys ordinary shares.
As of December 31, 2008, no shares had been purchased.
|
|
2007
Equity Incentive Plan
|
|
In
February 2008, the Companys Board of Directors approved a share based incentive plan
for its employees, directors and service providers. Under its equity incentive plan, the
Company may grant its directors, officers and employees restricted shares, restricted
share units and options to purchase its ordinary shares. The total number of ordinary
shares available for grant under the plan is 2,250,000, which will be reduced by two
shares for each restricted share unit or restricted share that the Company grants under
the plan with a per share or unit purchase price lower than 100% of fair market value of
its ordinary shares on the date of grant and by one share for each option that the Company
grants under the plan.
|
|
Restricted
shares, restricted share units and options granted under the equity incentive plan will
generally vest over four years from the grant date. Any option not exercised within seven
years of the grant date will expire. If the Company terminates the employment of an
employee for cause, all of his or her vested and unvested options expire immediately and
all unvested restricted shares and unvested restricted share units expire immediately. If
the Company terminates the employment of an employee for any other reason, the employee
may exercise his or her vested options within 60 days of the date of termination and shall
be entitled to any rights upon vested restricted shares and vested restricted share units
to be delivered to the employee to the extent that they were vested prior to the date his
or her employment terminates.
|
F - 30
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 15 Share
Capital (contd)
|
At
December 31, 2008, there were 1,150,000 ordinary shares available for future grants.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model that used the weighted average assumptions in the
following table. Since the Companys shares did not have enough trading history at
grant date, expected volatility was computed based on the average historical volatility of
similar entities with publicly traded shares. The risk-free rate for the expected term of
the option is based on the Israeli treasury yield curve in effect at the time of
grant.
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation assumptions:
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
|
0
|
%
|
|
Expected volatility
|
|
|
|
52
|
%
|
|
Expected term (years)
|
|
|
|
5
|
|
|
Risk-free interest rate
|
|
|
|
5.2
|
%
|
|
Stock
option activity during the periods indicated is as follows (in thousands except share and
per share data):
|
|
|
Number of
of shares
|
Weighted
average
exercise
price
|
Weighted
average
remaining
contractual
term
|
Aggregate
intrinsic
value
|
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,100,000
|
|
|
36.34
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
1,100,000
|
|
|
36.34
|
|
|
6.25
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average grant date fair value of options granted during the year 2008 was NIS
19,831.
|
|
At
December 31, 2008, there was NIS 16,402 of total unrecognized compensation cost
related to nonvested share-based compensation arrangements granted under the Plan. That
cost is expected to be recognized over a weighted average period of 3.3 years. As of
December 31, 2008, all options were expected to vest.
|
F - 31
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 16 Fair
Value Measurements
|
A.
|
Fair
Value of financial instruments
|
|
The
fair values of the financial instruments as of December 31, 2007 and 2008, represent
managements best estimates of the amounts that would be received to sell those
assets or that would be paid to transfer those liabilities in an orderly transaction
between market participants at that date. Those fair value measurements maximize the use
of observable inputs. However, in situations where there is little, if any, market
activity for the asset or liability at the measurement date, the fair value measurement
reflects the Companys own judgments about the assumptions that market participants
would use in pricing the asset or liability. Those judgments are developed by the Company
based on the best information available under the circumstances.
|
|
The
following methods and assumptions were used to estimate the fair value of each class of
financial instruments:
|
|
Cash
and cash equivalents, trade receivables, parent company receivable, related parties
receivables, other current assets, short-term bank credit, accounts payable, loan from
parent company, other current liabilities: The carrying amounts, at face value or cost
plus accrued interest, approximate fair value because of the short maturity of these
instruments.
|
|
Long-term
receivables: The fair value is determined as the present value of future contractual cash
flows discounted at an interest rate that reflects the risks inherent in those cash flows.
The discount rates range from 2.4% to 3.0% and approximate rates currently offered by
local lending institutions for loans of similar terms to companies with comparable credit
risk. The difference between the carrying amounts and fair value is not material.
|
|
Marketable
securities: Equity securities classified as available for sale are measured using quoted
market prices at the reporting date multiplied by the quantity held. Debt securities
classified as trading and available-for-sale are measured using quoted market prices
multiplied by the quantity held.
|
|
Foreign
currency forward contracts: The fair value of foreign currency forward contracts are based
on quoted prices and market observable data of similar instruments.
|
|
Debentures:
The Companys debentures are listed for trade on the TASE. The fair value of the
Companys debentures is measured using quoted market prices of the debentures.
|
|
The
estimated fair values of debentures with a carrying value materially different from their
fair value, based on quoted market prices, and the related carrying amounts are as
follows:
|
|
|
December 31, 2007
|
December 31, 2008
|
|
|
Book value
|
Fair value
|
Book value
|
Fair value
|
|
|
NIS millions
|
NIS millions
|
NIS millions
|
NIS millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
|
|
|
455,954
|
|
|
452,540
|
|
|
480,786
|
|
|
434,606
|
|
F - 32
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 16 Fair
Value Measurements (contd)
|
The
Company adopted FASB Statement 157 on January 1, 2008 for fair value measurements of
financial assets and financial liabilities and for fair value measurements of nonfinancial
items that are recognized or disclosed at fair value in the financial statements on a
recurring basis. Statement 157 establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities
(Level 1 measurements) and the lowest priority to measurements involving significant
unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are as follows:
|
|
|
Level
1 inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.
|
|
|
Level
2 inputs are inputs other than quoted prices included within Level 1 that are observable
for the asset or liability, either directly or indirectly.
|
|
|
Level
3 inputs are unobservable inputs for the asset or liability.
|
|
The
level in the fair value hierarchy within which a fair measurement in its entirety falls is
based on the lowest level input that is significant to the fair value measurement in its
entirety.
|
|
All
investments in trading and available-for-sale marketable securities in the amount of NIS
228,762 are measured at fair value on a recurring basis using Level 1 inputs. Derivative
financial instruments, in the amount of NIS 1,055 were measured using Level 2 inputs.
|
|
The
financial statements as of and for the year ended December 31, 2008 do not include any
nonrecurring fair value measurements relating to assets or liabilities for which the
Company has adopted the provisions of Statement 157. All nonrecurring fair value
measurements for 2008 involved nonfinancial assets and the Company will not adopt the
provisions of Statement 157 for nonrecurring fair value measurements involving
nonfinancial assets and nonfinancial liabilities until January 1, 2009.
|
F - 33
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 17 Income
Taxes
|
A.
|
Adjustments
for inflation
|
|
Results
of operations of the Company for tax purposes are computed in accordance with the Income
Tax Law (Inflationary Adjustments), 1985 (the Inflationary Adjustments Law),
in real terms, in order to calculate taxation on inflationary earnings after taking into
account the changes in the Israeli CPI. The Inflationary Adjustments Law was effective
beginning in the 1985 tax year. The various adjustments required by the aforesaid Law are
designed to achieve taxation of income on a real basis. However, adjustment of the
historical income pursuant to the provisions of the Inflationary Adjustments Law is not in
accordance with U.S. GAAP. As a result, differences arise between the reported income
appearing in the financial statements and the inflation adjusted income reported for tax
purposes.
|
|
On
February 26, 2008, the Israeli Income Tax Law (Inflationary Adjustments) (Amendment No.
20) (Restriction of Period of Application) 2008 (the Amendment) was
passed by the Knesset. According to the Amendment, the Inflationary Adjustments Law is no
longer be applicable subsequent to the 2007 tax year, except for certain transitional
provisions.
|
|
Furthermore,
according to the Amendment, commencing with the 2008 tax year, the adjustment of income
for the effects of inflation for tax purposes will no longer be calculated. Additionally,
depreciation on fixed assets and tax loss carryforwards will no longer be linked to the
Israeli CPI subsequent to the 2007 tax year, and the balances that have been linked to the
Israeli CPI through the end of 2007 tax year will be used going forward.
|
|
B
|
Amendments
to the Income Tax Ordinance and the Land Appreciation Tax Law
|
|
On
July 25, 2005, the Knesset passed the Law for the Amendment of the Income Tax
Ordinance (No. 147 and Temporary Order) 2005 (2005 Amendment).
The 2005 Amendment provides for a gradual reduction in the company tax rate in the
following manner: in 2006, 2007 and 2008 the tax rate was 31%, 29% and 27%, respectively,
in 2009 the tax rate will be 26% and from 2010 onward the tax rate will be 25%.
Furthermore, as from 2010, upon reduction of the company tax rate to 25%, real capital
gains will be subject to tax at 25%. The current taxes and the deferred tax balances as of
December 31, 2007 and 2008 are calculated in accordance with the tax rates that were in
effect after the 2005 Amendment.
|
F - 34
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 17 Income
Taxes (contd)
|
C.
|
The
income tax expense presented in the statements of operations are as follow:
|
|
|
|
|
|
Convenience
translation
into
US Dollars
(Note 2)
|
|
|
Year ended December 31
|
Year ended
December 31
2008
|
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
Current taxes
|
|
|
|
10,399
|
|
|
34,156
|
|
|
29,226
|
|
|
7,687
|
|
|
Deferred taxes
|
|
|
|
(84
|
)
|
|
(11,129
|
)
|
|
(7,052
|
)
|
|
(1,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
10,315
|
|
|
23,027
|
|
|
22,174
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
A
reconciliation of the theoretical income tax expense computed on the income
before income taxes at the statutory tax rate to the actual income tax expense
is as follows:
|
|
|
|
|
|
Convenience
translation
into
US Dollars
(Note 2)
|
|
|
Year ended December 31
|
Year ended
December 31
2008
|
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reported in the statement of
|
|
|
|
operations
|
|
|
|
8,283
|
|
|
62,919
|
|
|
70,656
|
|
|
18,583
|
|
|
Statutory tax rate
|
|
|
|
31
|
%
|
|
29
|
%
|
|
27
|
%
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical income tax expense
|
|
|
|
2,568
|
|
|
18,247
|
|
|
19,077
|
|
|
5,017
|
|
|
|
|
|
|
Increase (decrease) in income tax
|
|
|
|
expense resulting from:
|
|
|
|
Permanent differences in respect of
|
|
|
|
losses on hedge transactions
|
|
|
|
5,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Non-deductible expenses
|
|
|
|
278
|
|
|
956
|
|
|
316
|
|
|
83
|
|
|
Effect of change in tax rate
|
|
|
|
139
|
|
|
643
|
|
|
610
|
|
|
160
|
|
|
Change in valuation allowance
|
|
|
|
2,600
|
|
|
1,150
|
|
|
1,550
|
|
|
408
|
|
|
Inflationary adjustments and other
|
|
|
|
differences
|
|
|
|
(270
|
)
|
|
2,031
|
|
|
(766
|
)
|
|
(201
|
)
|
|
Share-based compensation
|
|
|
|
-
|
|
|
-
|
|
|
926
|
|
|
244
|
|
|
Prior year income tax expenses
|
|
|
|
-
|
|
|
-
|
|
|
461
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
10,315
|
|
|
23,027
|
|
|
22,174
|
|
|
5,832
|
|
|
|
|
|
|
|
|
|
|
|
F - 35
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 17 Income
Taxes (contd)
|
E.
|
The
tax effects of significant items comprising the Companys deferred tax
assets and liabilities are as follows:
|
|
|
|
|
Convenience
translation
into
US Dollars
(Note2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for employee benefits, net
|
|
|
|
5,781
|
|
|
5,525
|
|
|
1,453
|
|
|
Allowance for doubtful debts
|
|
|
|
5,028
|
|
|
4,955
|
|
|
1,303
|
|
|
Tax loss carryforwards
|
|
|
|
19,398
|
|
|
19,724
|
|
|
5,188
|
|
|
Property and equipment and other assets, net
|
|
|
|
4,245
|
|
|
3,389
|
|
|
892
|
|
|
Unrealized losses on marketable securities
|
|
|
|
-
|
|
|
7,260
|
|
|
1,909
|
|
|
Other
|
|
|
|
2,052
|
|
|
1,976
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
|
36,504
|
|
|
42,829
|
|
|
11,265
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
(4,750
|
)
|
|
(6,300
|
)
|
|
(1,657
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
|
31,754
|
|
|
36,529
|
|
|
9,608
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
|
|
|
51,385
|
|
|
44,226
|
|
|
11,632
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
|
51,385
|
|
|
44,226
|
|
|
11,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
|
|
(19,631
|
)
|
|
(7,697
|
)
|
|
(2,024
|
)
|
|
|
|
|
|
|
|
|
|
All
income before income taxes and related income tax expense are from Israeli sources.
|
|
As
of December 2008, the Company has historical operating loss carryforwards for tax purposes
of approximately NIS 52,620 and the Companys subsidiary has operating loss
carryforwards for tax purposes of approximately NIS 25,200. These operating loss
carryforwards have no expiration date.
|
|
The
Companys management has assessed its deferred tax asset and the need for a valuation
allowance. Such an assessment considers whether it is more likely than not that some
portion or all of the deferred tax assets may not be realized. The assessment requires
considerable judgment on the part of management with respect to the consideration of
positive and negative factors including benefits that could be realized from available tax
strategies and future taxable income. The ultimate realization of deferred tax assets is
dependent upon the Companys ability to generate the appropriate character of future
taxable income sufficient to utilize loss carryforwards.
|
|
In
assessing the need for a valuation allowance, the Company has evaluated all positive and
negative evidence, including the work plans of management and the analysis of scenarios
for achieving the work plans. The underlying assumptions utilized in forecasting its
future taxable income require judgment and may be subject to revision based on future
business developments. As a result of this assessment, the Company has recorded a
valuation allowance to fully offset the deferred tax assets of its subsidiary which
incurred losses in the years ended December 31, 2008 and 2007.
|
F - 36
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 17 Income
Taxes (contd)
|
F.
|
Accounting
for Uncertainty in Income Taxes
|
|
The
Company adopted the provisions of FIN 48 on January 1, 2007 and there was no material
effect on the consolidated financial statements. As a result, the Company did not record
any cumulative-effect adjustment related to adopting FIN 48.
|
|
A
reconciliation of the beginning and ending amount of total unrecognized tax benefits is
as follows:
|
|
|
2007
|
2008
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1,
|
|
|
|
7,600
|
|
|
-
|
|
|
-
|
|
|
Settlement
|
|
|
|
(5,000
|
)
|
|
Reductions for prior year tax position
|
|
|
|
(2,600
|
)
|
|
-
|
|
|
-
|
|
|
Increase related to prior year tax position
|
|
|
|
-
|
|
|
19,184
|
|
|
5,046
|
|
|
Increase related to current year tax position
|
|
|
|
-
|
|
|
17,861
|
|
|
4,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
|
|
|
-
|
|
|
37,045
|
|
|
9,744
|
|
|
|
|
|
|
|
|
|
|
The
entire balance of the unrecognized tax benefits, if recognized, would not affect the
effective tax rate as this amount would be offset by compensating adjustments in the
Companys deferred tax liabilities.
|
|
The
Company is unable to provide an estimate of the range of the total amount of unrecognized
tax benefits that is reasonably possible to change significantly within the next twelve
months.
|
|
Interest
and penalties related to unrecognized tax benefits amounted to NIS 0 and NIS 1,427 in
2007 and 2008, respectively.
|
|
The
Company and its subsidiary file income tax returns in Israel only. The Israeli tax returns
of the Company and its subsidiary are open to examination by the Israeli tax authorities
for the tax years beginning in 2004.
|
F - 37
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 18 Related
Parties
|
A.
|
Related
party transactions and balances
|
|
The
Companys related parties include the Parent Company and its principal shareholders
(holders of 10% and above of the Parent Companys share capital), their subsidiaries
and affiliates as well as affiliates of the Company.
|
|
The
Company and the Parent Company and its subsidiaries are engaged in arms-length
transactions with each other in the ordinary course of their respective businesses at
regular commercial terms.
|
|
All
related parties balances appear within the Due (to) from related parties balances and the
Parent Company receivables and payables.
|
|
The
Company conducts arms-length transactions with additional related parties other than the
Parent Company and its subsidiaries, as detailed below.
|
|
(a)
|
Sale
of communication services to related parties.
|
|
(b)
|
Purchase
of office equipment for both self use and promotion and purchase cellular
mobile phones from related parties.
|
|
(c)
|
Advertising
through related parties.
|
|
(d)
|
Fees
with respect of investment services.
|
|
B.
|
Balances
due to related parties in the balance sheets as follows:
|
|
|
|
|
Convenience
translation
into
US Dollars
(Note2)
|
|
|
December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent Company receivables
|
|
|
|
6,553
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Related parties receivables
|
|
|
|
2,161
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
Loan from parent company
|
|
|
|
105,733
|
|
|
111,344
|
|
|
29,286
|
|
|
|
|
|
|
|
|
|
|
Parent company payable
|
|
|
|
1,103
|
|
|
1,410
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
Related parties payables
|
|
|
|
-
|
|
|
2,228
|
|
|
586
|
|
|
|
|
|
|
|
|
|
F - 38
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 18 Related
Parties (contd)
|
C.
|
Related
party transactions were reflected in the statements of operations as follows:
|
|
|
|
|
|
Convenience
translation
into
US Dollars
(Note 2)
|
|
|
Year ended December 31
|
Year ended
December 31
2008
|
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
Selling and marketing expense
|
|
|
|
3,721
|
|
|
1,164
|
|
|
248
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing expense
|
|
|
|
-
|
|
|
5,093
|
|
|
5,610
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
D.
|
In
June 2008, the Company acquired the international communication agreements of
UUNET from IGLD for the consideration of NIS 3,035. The acquisition was
approved by the Companys Board of Directors. The transaction was
accounted under the guidance of Staff Accounting Bulletin 5G, Transfers
of Nonmonetary Assets by Promoters or Shareholders. Assets acquired were
recorded at IGLDs historical cost basis determined under U.S. GAAP, which
was zero. The consideration paid by the Company was recorded against additional
paid-in capital as a capital contribution from a controlling shareholder.
|
F - 39
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 19
Commitments and Contingencies
|
A.
|
Contingent
liabilities
|
|
1.
|
On
January 2, 2005, a claim was submitted against 012 Ltd. and three other
companies regarding infringement of Israeli Patent No. 76993 of November 10,
1985, unjust enrichment, breach of statutory duties and conversion (the
2005 Claim). The plaintiffs demands include payment of
amounts of income generated from exploitation of the Patent, payment of
reasonable royalties for exploitation of the Patent, punitive damages,
litigation costs and attorneys fees, and payment of linkage differentials
and interest from the date of creation of the debt until the date of actual
payment. The 2005 Claim states that the monetary amount cannot be determined at
this stage and that it has been assessed for the purpose of court fees only at
NIS 10 million. A statement of defense was filed on July 17, 2005 and a
third party notice against the providers of the telecommunications systems
allegedly infringing the patent (the Third Party Defendants),
seeking indemnification and compensation for any liability that may be imposed
in the context of the 2005 Claim (the Third Party Proceedings). The
plaintiffs have also initiated similar proceedings against other
telecommunication companies in other countries, including the United Kingdom
and the United States. Some telecommunication companies, including one of the
initial defendants named in this 2005 Claim, have settled with the plaintiffs,
whereas other telecommunication companies have refused to settle and are
continuing to litigate. On May 23, 2008, the England & Wales High Court
of Justice, Chancery Division, Patents Court, declared that the plaintiffscorresponding
English patent is invalid on the grounds of obviousness and excluded matter. On May 20
2009, the Court of Appeals dismissed the appeal of the decision in the Chancery Division,
Patents Court and affirmed the lower court decision based on obviousness. The District
Court scheduled a pre-trial hearing for July 12 2009, and the parties have agreed that
all preliminary proceedings (e.g. discovery requests and interrogatories) will be
completed no later than the pre-trial date. One of the Third Party Defendants in the
Third Party Proceedings is Nortel Networks Israel (Sales and Marketing) Ltd. (Nortel
Israel). In a separate proceeding, on January 19, 2009, the District Court of Tel
Aviv issued an
ex parte
order according to which all legal proceedings to which
Nortel Israel is a party, including the abovementioned Third Party Proceedings, are
stayed. Such stay of proceeding was extended several times and is currently in force
until August 30, 2009 and a hearing in this matter is scheduled for that date. On
February 25, 2009, the Company and another defendant in the 2005 Claim, filed a motion
with the Court requesting that it allow the Company and the other applicant to continue
the Third Party Proceedings against Nortel Israel. On March 10, 2009, Nortel Israels
trustees submitted their response. On March 19, 2009, the Company submitted its reply. On
March 22, 2009, the Court ordered the receiver in this matter to submit its position to
the Court before any decision on this matter is rendered. Such response is due on June
17, 2009. The Company included in its consolidated financial statements a provision for
the 2005 Claim which, according to managements estimation, is sufficient to cover
any possible losses from the 2005 Claim.
|
|
2.
|
During
2002, the Israeli Ministry of Communications (the Ministry of
Communications) requested from 012 payment of royalties on its income from
telephone calling cards for the years 1997 2000 in the amount of
approximately NIS 4.5 million. The Company rejected the request. During 2006,
the Ministry of Communications forwarded to 012 a request for payment of the
royalties, as stated, in the amount of approximately NIS 7.5 million (including
interest and linkage increments) as of the date of the request. In November
2006, 012 forwarded to the Ministry of Communications a legal opinion (the
Opinion) rejecting the request and arguing that 012 is entitled to
the repayment of excess royalties paid in the same period. On April 17, 2008,
the Company sent a letter to the Ministry of Communications demanding that it
state its position regarding the findings included in the Opinion. On April 27,
2008 the Ministry of Communications responded to the letter and informed the
Company that its demand regarding the alleged debt remains. In its response the
Ministry of Communications stated that it has conducted several discussions on
the subject and it will inform the Company as to its position shortly.
|
F - 40
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 19
Commitments and Contingencies (contd)
|
A.
|
Contingent
liabilities (contd)
|
|
Representatives
of the Ministry of Communications and the Company met during July 2008 in order to
discuss this dispute. Following this meeting the representatives of the Company were
asked to draft suggestions for the settlement of this dispute and these were sent to the
Ministry of Communications in September 2008. Since then, the Ministry of Communications
has not responded to the Companys suggestions. The Company provided a provision for
this request in its consolidated financial statements. According to managements
estimation, the provision is sufficient to cover any losses that may arise from the
request.
|
|
3.
|
In
2003, Bezeq, The Israel Telecommunications Co. Ltd (Bezeq),
requested a collection commissions from the Company at the rate of 5.72% of its
gross income from card-operated public telephones the card-operated
telephones, for the years 1997-2002 in the amount of approximately NIS 6
million (including interest and linkage increments). In June 2004, Bezeq
unilaterally set off this amount from the amounts accruing to the Company.
|
|
On
January 4, 2006 the Minister of Communication determined that Bezeq is not entitled to
the collection commission and is required to return to the Company the amounts set off in
respect of this commission, with the addition of interest and linkage increments.
|
|
On
September 6, 2006 the District Court dismissed Bezeqs appeal on the grounds of lack
of jurisdiction. On September 26, 2007, Bezeq submitted an administrative petition to the
Israeli Supreme Court regarding the Ministry of Communications determination. In
addition, in an alternative proceeding, Bezeq appealed on October 25, 2006 to the Supreme
Court against the District Courts decision dismissing Bezeqs appeal against
the Ministry of Communications determination. At 012 Golden Lines request,
the hearings regarding the administrative petition and the appeal were scheduled for July
28, 2008 before the same panel.
|
|
On
July 28, 2008 the Supreme Court conducted a hearing on Bezeqs appeal stating that a
hearing on Bezeqs administrative petition should only take place after the Supreme
Court issues a decision on the appeal. On March 16, 2009 the Supreme Court published its
decision denying Bezeqs appeal and awarding expenses to the Company.
|
|
Following
the Supreme Court ruling, the Company was approached by Bezeq seeking a settlement which
might result in a gain in the future. In compliance with FASB Statement 5, Accounting
for Contingencies, no gain was recognized as a settlement was not reached during
the year ended December 31, 2008.
|
F - 41
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 19
Commitments and Contingencies (contd)
|
A.
|
Contingent
liabilities (contd)
|
|
4.
|
In
February 2008, a motion to certify a class action was filed with various
District Courts in Israel against several international telephony companies
including, 012, with respect to prepaid calling card services. The plaintiffs
allege that: (i) the defendants unlawfully charged consumers in excess of the
tariffs published by them, (ii) the prepaid calling cards provide an average of
50% of the units of time indicated to the purchasers of the cards, (iii) the
defendants deduct from the prepaid calling card the time spent when a user
unsuccessfully attempts to make a call utilizing the card, (iv) the defendants
calculate and collect payment not by units of round minutes indicated, (v) the
defendants provide misleading information about the number of units on
the card, and (vi) the defendants formed a cartel that arranged and raised the
prices of calling cards. Management believes that 012 has good defenses against
certification of the suit as a class action. In the event the lawsuit is
certified as a class action, the total amount claimed against 012 is NIS 226.4
million ($59.5 million). At this preliminary stage 012 is unable to estimate
what potential liability or costs, if any, may be incurred in connection with
this matter.
|
|
In
April 2008, a motion to certify a class action was filed with various District Courts in
Israel against NetVision 013 Barak and 012 with respect to its provision of prepaid
calling card services. The action alleges that the defendants improperly calculated the
length of the international calls in whole-minutes units rather than in one-second units.
The lawsuit does not specify an allocation of the claim amount between the defendants.
Management believes that 012 has good defenses against certification of the suit as a
class action. In the event the suit is certified as a class action, the estimated amount
claimed from both defendants is NIS 200 million ($52.6 million). At this preliminary
stage 012 is unable to estimate what potential liability or costs, if any, may be
incurred in connection with this matter.
|
|
In
November 2008, a motion to certify a class action was filed against the Company. The
action alleges that the Company unlawfully raised the monthly tariffs of its Internet
services. The total amount of the claim is NIS 81 million. At this stage the Company is
unable to estimate what potential liability or costs, if any, may be incurred in
connection with this petition.
|
|
5.
|
From
time to time, claims arising from the normal course of business are brought
against the Company. In the opinion of management, based on the advice of legal
counsel, the ultimate disposition of these matters will not have a material
adverse effect on the financial position, liquidity or results of operations of
the Company.
|
F - 42
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 19
Commitments and Contingencies (contd)
|
The
Company has been granted various licenses from the Ministry of Communications for the
provision of international telecommunication services for 20 years until December 2025.
At the end of each of the license period, the Minister of Communications may extend the
period of the license for one or more successive periods of five to ten years.
|
|
In
December 2005, the Company was granted a license for the provision of stationary domestic
telecommunication services. The license was granted for a period of 20 years. At the end
of the license period, the Minister of Communications may extend the license for one or
more successive periods of ten years. During 2006, 012 commenced providing domestic
telecommunication services under the terms of the license, which on January 31, 2007, was
amended to also include provision of domestic telecommunication services using voice over
broadband (VoB) technology.
|
|
According
to the license terms, the Company is obligated to pay royalties to the State of Israel at
the rate of 2% of the royalty-bearing income. The rate of these royalties has decreased
in recent years, from 4.5% in 2002, to 4% in 2003, to 3.5% in 2004 and 2005. In August
2006, the royalty rate was reduced to 3%, retroactively from January 1, 2006 and it will
continue to be reduced by 0.5% per year, until reaching a rate of 1% in 2010.
|
|
The
Company provided the State of Israel with an unconditional bank guarantee of NIS 28.2
million to ensure compliance with the provisions of the licenses. The guarantee will be
in effect for a period ending two years after the end of the licenses period, or until
the date on which the Company fulfills all of its obligations under the licenses.
|
|
2.
|
Under
the terms of the licenses the Company must maintain minimum shareholders equity
equal to or in excess of NIS 20-25 million ($ 4.7-5.9 million).
|
|
3.
|
Rights
of Use (ROU) and lease agreements
|
|
a.
|
The
Company has signed long-term agreements with two other Israeli long distance
carriers, to purchase indefeasible Rights of Use (ROU) for international fiber
optic lines until the year 2017, with an option to extend the agreements for an
additional five year period. The Company is obligated to pay ROU charges for
each new international line ordered in respect of each circuit in 36 monthly
installments. As of the balance sheet date, the Company has a commitment to
purchase additional ROUs in the framework of the above agreements in the total
amount of approximately NIS 48.8 million during 2009-2015. As of December 31,
2007 and 2008, the balance of the long-term arrangements amounted to NIS 6,394
and NIS 2,940, respectively.
|
|
012
also entered into agreements with a service provider for the purchase of indefeasible
ROUs for international fiber optic lines until the year 2017 including an extension
option of five years. The purchase price for each ROU is payable in 29 to 36 monthly
payments commencing with the utilization of each cable.
|
F - 43
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 19
Commitments and Contingencies (contd)
|
3.
|
Rights
of Use (ROU) and lease agreements (contd)
|
|
The
anticipated annual payments for the active ROU as of December 31, 2008 are:
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
44,402
|
|
|
11,679
|
|
|
2010
|
|
|
|
40,968
|
|
|
10,775
|
|
|
2011
|
|
|
|
32,029
|
|
|
8,424
|
|
|
2012
|
|
|
|
26,723
|
|
|
7,029
|
|
|
2013 and thereafter
|
|
|
|
14,922
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159,044
|
|
|
41,832
|
|
|
|
|
|
|
|
|
In
addition, under the terms of the ROU agreements the Company is committed to pay annual
maintenance fees during the usage period of a total of approximately NIS 24.5 million per
year. All payments under the ROU agreements are linked to the US dollar.
|
|
b.
|
The
Company has entered into various noncancellable operating lease agreements for
premises. The Company provided a bank guarantee of NIS 2.1 million in respect
of certain lease agreements.
|
|
The
anticipated annual lease payments under non-cancelable operating leases for motor
vehicles and premises, as of December 31, 2008 are as follows:
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
15,733
|
|
|
4,138
|
|
|
2010
|
|
|
|
14,777
|
|
|
3,887
|
|
|
2011
|
|
|
|
12,490
|
|
|
3,285
|
|
|
2012
|
|
|
|
5,963
|
|
|
1,569
|
|
|
2013 and thereafter
|
|
|
|
12,183
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,146
|
|
|
16,083
|
|
|
|
|
|
|
|
F - 44
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 19
Commitments and Contingencies (contd)
|
4.
|
Effect
of new legislation and standards
|
|
Bezeq
pays the Company interconnect fees with respect to calls being made from Bezeq
fixed-lines to the Companys VoB lines. Bezeq has raised the claim that it should
not be paying interconnect fees because the Company uses its infrastructure. Although the
Ministry of Communications has determined that Bezeq should continue to pay interconnect
fees to the Company for calls originated from Bezeq fixed-lines to the Companys
lines at the same tariff that the Company pays Bezeq, this determination will be reviewed
by the Ministry of Communications and there is no certainty that the Ministry of
Communications will affirm its determination that Bezeq should continue to pay the
Company interconnect fees at the current rates, or at all.
|
|
As
a result of an amendment to the Communications Law in March 2005, all telephone operators
were required to implement number portability by September 1, 2006. Number
portability would permit VoB subscribers to change to another network operator without
having to change their telephone numbers. Despite efforts to introduce the requisite
technology and coordinate the transition to number portability by September 1, 2006,
currently none of the cellular or landline operators implemented number portability by
that date. A petition was filed with the Israeli High Court of Justice for the issuance
of an order to the Government of Israel and the Ministry of Communications to show cause
for their failure to act immediately in order to initiate an amendment to the
Communications Law postponing the deadline for the implementation of number portability.
If adequate relief is not granted, the Company may be exposed to sanctions and legal
claims, including class action lawsuits by subscribers. On May 24, 2007, the Company was
notified by the Ministry of Communications that its failure to implement the number
portability program constituted a continued violation of its license, which may require
the Company to pay a fine of NIS 2,033 and additional daily fines of NIS 6.4 beginning
May 25, 2007 until its implementation of the program. The Company submitted its response
to the notification on July 5, 2007 and implemented number portability in December 2007.
At this stage, management can not estimate the financial outcome of this violation, if
any, therefore, no provision was recorded.
|
|
a.
|
The
Board of Directors resolved to indemnify the directors and officers of the
Company for damages that they may incur in connection with the Company
being a public company, to the extent that these damages are not covered
by the directors and officers liability insurance.
|
|
b.
|
As
at December 31, 2008, the Company has commitments of NIS 3,915 primarily
covering purchases and maintenance of network equipment.
|
|
Bank
guarantees provided in respect of licenses and lease of office facilities, see B above.
In addition, the Company provided bank guarantees to other parties in the aggregate
amount of NIS 1,159 as of December 31, 2008.
|
F - 45
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 20 Segment
Reporting
|
SFAS
No. 131, Disclosures about Segments of an Enterprise and Related Information
(SFAS No. 131), establishes standards for reporting information about operating segments.
The following information is provided in accordance with the requirements of SFAS No. 131
and is consistent with how business results are reported internally to management. The
Company operates within two segments: broadband and traditional voice services.
|
|
Broadband
services include broadband Internet access with a suite of value-added services,
specialized data services, local telephony via VoB, server hosting and a WIFI network of
hotspots across Israel.
|
|
Traditional
voice services include outgoing and incoming international telephony, hubbing services for
international carriers, roaming and signaling services for cellular operators and calling
card services.
|
|
The
majority of the Companys property and equipment is utilized by both segments and
therefore is not allocated between these segments.
|
|
Management
evaluates each segments performance based upon revenue and gross profit. Management
believes such discussions are the most informative representation of how management
evaluates performance. Business segment revenue and gross profit are presented below.
|
|
Year
ended December 31, 2008
|
|
|
Broadband
|
Traditional
Voice
|
Total
|
|
|
NIS
|
NIS
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
548,979
|
|
|
557,224
|
|
|
1,106,203
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
240,355
|
|
|
112,432
|
|
|
352,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
162,274
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
55,913
|
|
|
Impairment and other charges
|
|
|
|
|
|
|
|
|
|
6,705
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
127,895
|
|
|
|
|
|
|
Financial income
|
|
|
|
|
|
|
|
|
|
7,640
|
|
|
Financial expenses
|
|
|
|
|
|
|
|
|
|
64,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,239
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
70,656
|
|
|
|
|
|
|
|
|
Goodwill attributed to the segment
|
|
|
|
297,040
|
|
|
114,131
|
|
|
411,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
73,482
|
|
|
38,241
|
|
|
111,723
|
|
|
|
|
|
|
|
|
|
F - 46
012 Smile.Communications Ltd.
|
|
Notes to the Combined and Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 20 Segment
Reporting (contd)
|
Year
ended December 31, 2007
|
|
|
Broadband
|
Traditional
Voice
|
Total
|
|
|
NIS
|
NIS
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
478,703
|
|
|
624,185
|
|
|
1,102,888
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
212,384
|
|
|
128,299
|
|
|
340,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
157,304
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
57,984
|
|
|
Impairment and other charges
|
|
|
|
|
|
|
|
|
|
10,433
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
114,962
|
|
|
|
|
|
|
Financial income
|
|
|
|
|
|
|
|
|
|
4,694
|
|
|
Financial expenses
|
|
|
|
|
|
|
|
|
|
56,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,043
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
62,919
|
|
|
|
|
|
|
|
|
Goodwill attributed to the segment
|
|
|
|
297,040
|
|
|
114,131
|
|
|
411,171
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
77,266
|
|
|
33,715
|
|
|
110,981
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006
|
|
|
Broadband
|
Traditional
Voice
|
Total
|
|
|
NIS
|
NIS
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
|
183,096
|
|
|
159,990
|
|
|
343,086
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
90,577
|
|
|
27,944
|
|
|
118,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
59,864
|
|
|
General and administrative
|
|
|
|
|
|
|
|
|
|
22,921
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
10,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,549
|
|
|
Financial income
|
|
|
|
|
|
|
|
|
|
1,829
|
|
|
Financial expenses
|
|
|
|
|
|
|
|
|
|
19,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,266
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
8,283
|
|
|
|
|
|
|
|
|
Goodwill attributed to the segment
|
|
|
|
296,307
|
|
|
113,849
|
|
|
410,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
17,894
|
|
|
3,539
|
|
|
21,433
|
|
|
|
|
|
|
|
|
|
F - 47
S I G N A T U R E S
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.
|
|
012 SMILE.COMMUNICATIONS LTD.
By: /s/ Stella Handler
Stella Handler
Chief Executive Officer
|
|
|
By: /s/ Doron Ilan
Doron Ilan
Chief Financial Officer
|
Dated: June 24, 2009
87
012 Smile.Communications Ltd. (MM) (NASDAQ:SMLC)
Graphique Historique de l'Action
De Avr 2024 à Mai 2024
012 Smile.Communications Ltd. (MM) (NASDAQ:SMLC)
Graphique Historique de l'Action
De Mai 2023 à Mai 2024