Related Party
Transactions of Smile.Media
In
2006, 2007 and 2008, our wholly-owned subsidiary Smile.Media purchased NIS 1,064,000, NIS
126,500 and NIS 95,000 ($24,987), respectively, of advertising time from Radius
Broadcasting Ltd., at market terms and prices. Radius Broadcasting is a subsidiary of
Media Holdings EU Ltd., which is 85% indirectly held by Eurocom Communications (on a
fully-diluted basis).
Smile.Media
also has a cooperation marketing agreement with Radius Broadcasting Ltd. regarding an
internet media project. The amounts of this agreement are immaterial.
In
2007 and 2008, Smile.Media paid Eurocom Digital Communication Ltd. (formerly Eurocom
Marketing), which is indirectly controlled by Eurocom Communications, our controlling
shareholder, approximately NIS 500,000 and NIS 1,925,000 ($506,000) for purchase of
various products for sale on its eCommerce website P1000, as part of it core and current
activities, at market terms and prices.
In
2006, 2007 and 2008, Smile.Media paid Trans-Global PTE Ltd. (formerly Eurocom Digital
Systems Ltd.) approximately NIS 59,000 , NIS 200,000 and NIS 441,000 ($116,000) for the
purchase of various products for sale on its eCommerce website P1000, as part of it core
and current activities, at market terms and prices.
In
2008, D.M. (3000) Engineering Ltd., which is controlled by the Eurocom group, paid
Smile.Media NIS 33,000 ($8,680) for car usage leasing services and NIS 23,000 ($6,049)
for purchased equipment.
Mr.Dani Elovitch, Mr. Yossef Elovitchs son, is employed as head of the
eCommerce division of Smile.Media.
Agreements with 012
Smile.Communications
Intercompany Loans.
We
historically financed the principal acquisitions and investments of 012
Smile.Communications through interest bearing intercompany loans. In connection with 012
Smile.Communications acquisition of 012 Golden Lines, we provided 012
Smile.Communications with additional long-term financing, which amounted to NIS 111
million ($29 million) at December 31, 2008, bearing interest at the Prime rate published
from time to time by the Bank of Israel, which was 4% as of December 31, 2008. We may call
the loan beginning October 1, 2008. 012 Smile.Communications may not repay any of the
loans we provided to it as long as its ratio of net debt (defined as bank debt,
debentures, debt with respect to the ROU, dividend to be announced, net cash, cash
equivalents and short term investments), not including shareholder loans, to EBITDA
(defined as earnings before financial expenses, taxes on income, depreciation and
amortization), is more than two for the last four quarters. In addition, and provided that
the loans we provided will bear any interest, such interest will accumulate and be paid by
012 Smile.Communications only upon any partial repayment of the principal amount of the
loans, and only with respect to the such repaid amount. For more detail, see
Managements Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
Intercompany Agreements.
In
February 2008, 012 Smile.Communications entered into an execution services agreement with
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 012
Smile.Communications with various financial services. Under the agreement, Eurocom Capital
handles the execution of the financial investments of 012 Smile.Communications pursuant to
direct instructions from our chief financial officer, which is based on a policy that was
established by its management and approved by the Board of Directors of 012
Smile.Communications. In consideration for these services, 012 Smile.Communications agreed
to pay Eurocom Capital fees which are customary for such agreements and on market terms.
012 Smile.Communications paid Eurocom Capital an aggregate amount of NIS 261,000 ($69,000)
in fees for its services in 2008.
- 89 -
012
Smile.Communications provides broadband and traditional voice services to companies
affiliated with the Eurocom group at its customary rates and charges. During the years
ended December 31, 2007 and 2008, 012 Smile.Communications revenues from the
Eurocom group, not including our company were NIS 2.5 million and NIS
5.3 million ($1.4 million ), respectively. 012 Smile.Communications
revenues from our company in those two years were NIS 0.4 million and NIS
1.5 million ($0.4 million ), respectively.
During
the years ended December 31, 2006, 2007 and 2008, 012 Smile.Communications paid
Eurocom Digital Communications Ltd. NIS 0.1 million,, NIS 1.3 million and NIS
1.8 million ($473,000), respectively, for the purchase of telephone devices and TV
monitors, including equipment maintenance and repair services, all at market terms and
prices.
During
the years ended December 31, 2007 and 2008, 012 Smile.Communications purchased from
Trans-Global Industries Pte Ltd, a company controlled by the Eurocom group, telephone
devices and other telephone equipment at market terms and prices, in the aggregate amounts
of NIS 0.1 million and NIS 6.9 million ($1.8 million), respectively.
During
the years ended December 31, 2006, 2007 and 2008, 012 Smile.Communications paid Gilat
Satcom Ltd., a company controlled by Mr. Shaul Elovitch, the aggregate amounts of NIS 2.4
million, NIS 8.4 million and NIS 1.2 million ($315,000), respectively, for
international call related services at market terms and prices.
In
June 2008, 012 Smile. Communications acquired the international communication agreements
of UUNET as of January 2008, from our fully owned subsidiary, Internet Gold International
Ltd., or IGI, in consideration of NIS 3,035,000 ($798,000). Under the agreement with
UUNET, IGI provided communications and IP services for international Israeli costumers
that have affiliated branches outside Israel.
We
have agreed with 012 Smile.Communications 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
of 012 Smile.Communications from us. 012 Smile.Communications has also agreed to provide
mutual access to historical records relating to businesses that may be in our possession.
Under
an agreement we entered into with 012 Smile.Communications, it will provide us, at our
request, with those communication services that we may wish to utilize at market prices.
Smile.Media has agreed to provide 012 Smile.Communications, at its 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.
Indemnification Agreement
On
December 31, 2006, 012 Smile.Communications transferred certain media assets, including
P1000.co.il, an Internet eCommerce website, to our wholly-owned subsidiary, Smile.Media,
as part of its internal restructuring for no consideration. In connection with the
transfer, 012 Smile.Communications agreed to hold Smile.Media harmless for any liabilities
relating to such assets which accrued prior to the transfer. In September 2007,
Smile.Media was named as one of a number of defendants in a purported class action suit in
Israel, which alleges that Smile.Media, as the operator of the P1000.co.il eCommerce
website and the owners of the other five leading eCommerce websites in Israel, fabricated
online auction results. The total amount of the claim is unknown at this time. We have
agreed to hold 012 Smile.Communications harmless in the event the class action is
permitted to move forward and any liability is imposed upon 012 Smile.Communications with
respect to any other claims arising out of the transfer of the assets.
Registration Rights
Agreement with 012 Smile.Communications
We
and 012 Smile.Communications have entered into a registration rights agreement under which
012 Smile.Communications has granted us the right to register the ordinary shares of 012
Smile.Communications that we hold under the Securities Act of 1933, as amended. Under the
registration rights agreement, we have demand registration rights that allow
us, at any time after one year following the initial public offering in the United States
of 012 Smile.Communications, to request to register under the Securities Act of 1933, some
or all of the ordinary shares of 012 Smile.Communications that we own. We are entitled to
an aggregate of five demand registrations. 012 Smile.Communications is 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. 012
Smile.Communications is also not required to effect more than one demand registration
during the first 12 months following its initial public offering in the United States or
more than one demand registration during any 12-month period thereafter. 012
Smile.Communications is not obligated to grant a request for a demand registration within
90 days of any other demand registration. We also have piggyback registration
rights that allow us to include the ordinary shares of 012 Smile.Communications that we
own in any public offering of equity securities initiated by 012 Smile.Communications
(other than 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. 012 Smile.Communications has also granted us the right to
request a shelf registration on Form F-3, provided that it 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 the audit committee of 012
Smile.Communications.
- 90 -
Under
the registration rights agreement, 012 Smile.Communications has agreed to indemnify us
against any losses or damages resulting from any untrue statement or omission of material
fact in any registration statement or prospectus pursuant to which we sell ordinary
shares, unless such liability arose in reliance upon and in strict conformity with
information that we furnished in writing. 012 Smile.Communications will pay all expenses
incident to any demand registration, and we will pay our respective portions of all
underwriting discounts, commissions and fees attributable to the sale of our ordinary
shares it owns under the registration rights agreement.
For
as long as we are required to consolidate 012 Smile.Communications results of
operations and financial position or account for our investment in 012
Smile.Communications pursuant to the equity method of accounting, 012 Smile.Communications
has agreed to maintain the same fiscal year end and accounting periods as us, and to the
extent possible conform its financial presentation with ours. 012 Smile.Communications has
agreed to use its best efforts to enable its independent auditors to complete their audit
of its financial statements in a timely manner so to permit timely filing of our financial
statements. It has also agreed to provide to us and our independent auditors all
information required for us to meet our schedule for the filing and distribution of our
financial statements and to make available to us and our independent auditors all
documents necessary for the annual audit of 012 Smile.Communications as well as access to
its responsible company personnel so that we and our independent auditors may conduct our
audits relating to our financial statements. 012 Smile.Communications has also agreed to
adhere to certain specified accounting policies of ours and to notify and consult with us
regarding any changes to its accounting principles and estimates used in the preparation
of its financial statements, and any deficiencies in, or violations of law in connection
with, its internal control over financial reporting.
Chief Executive Officer
Employment Agreement
On
June 15, 2000, we entered into an employment agreement with Mr. Eli Holtzman, our chief
executive officer and a member of our board of directors, which was terminated in July
2002 and replaced by an agreement with a company wholly-owned by Mr. Holtzman. Pursuant to
the agreement, such company will provide us with the services of Mr. Holtzman as our chief
executive officer. The agreement contains certain non-competition and confidentiality
provisions. In the event we terminate the agreement for any reason, Mr. Holtzmans
company will be entitled to an amount equal to four monthly payments under the agreement.
The term of the agreement will continue until such time it is terminated by us, subject to
us providing 90-days prior notice and immediately in the event of termination for cause.
Mr. Holtzmans company may terminate the agreement on 90-days notice.
Financial Services
Agreement with Eurocom Digital
On
January 25 2009, we entered into an agreement with Eurocom Digital, a private company
controlled by Mr. Shaul Elovitch, according to which Mr. Doron Turgeman, our chief
financial officer, will provide Eurocom Digital with financial services. In consideration
for his services, Eurocom Digital will bear a portion of the employment cost of Mr.
Turgeman.
C.
|
INTERESTS
OF EXPERTS AND COUNSEL
|
Not
applicable.
- 91 -
ITEM 8.
|
|
FINANCIAL INFORMATION
|
A.
|
CONSOLIDATED
STATEMENTS AND OTHER FINANCIAL INFORMATION
|
See
the consolidated financial statements, including the notes thereto, beginning of page F-1
and the exhibits listed in Item 19 hereof and incorporated herein by this reference.
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. Two legislative changes, the adoption of the Israeli Class
Actions Law in 2007 and the 2005 amendment to the Consumer Protection Law, include
provisions that expand the causes of action for which a class of litigants may bring suit,
including with regard to damages incurred prior to the effective dates of the law and the
amendment, reducing the minimal requirements for certification of a class action suit and
broadening and loosening the qualifications to be the leading plaintiff in a class action
lawsuit. These laws have increased and may increase further, the number of requests for
certification of class action lawsuits against us and have increased and may increase
further, our legal exposure as a result of such class action lawsuits and our legal costs
in defending against such suits.
The
following is a summary of our and our subsidiaries material litigation.
On
January 27, 2002, 012 Golden Lines (which was subsequently merged into 012
Smile.Communications) 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, 012
Smile.Communications 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 contacted 012 Smile.Communications
to seek a settlement. Such negotiations have not been finalized.
On
January 2, 2005, a claim was submitted against 012 Golden Lines (which was subsequently
merged into 012 Smile.Communications) 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 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 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 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, 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 such date. The District Court also appointed two trustees for
the purpose of reaching an arrangement among the creditors. On February 25, 2009, 012
Smile.Communications and another defendant in the 2005 Claim filed a motion with the
District Court of Tel Aviv Jaffa requesting that it allow 012 Smile.Communications
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, 012 Smile.Communications submitted its reply. On March 22, 2009, the Court ordered
the receiver in the matter to submit its position before any decision on this matter is
rendered by the Court, which submission is due on June 17, 2009 012 Smile.Communications
has included a provision for the 2005 Claim in its consolidated financial statements
which, according to managements estimation, is sufficient to cover any possible
losses.
- 92 -
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
Smile.Communications, 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. 012 Smile.Communications believes that it
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 all of the
defendants is NIS 226.4 million ($59.5 million).
In
April 2008, a motion to certify a class action was filed with various District Courts in
Israel against Netvision 013 Barak and 012 Smile.Communications with respect to their
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. 012 Smile.Communications believes that it 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).
In
November 2008, a motion to certify a class action was filed against 012
Smile.Communications in the Tel Aviv Jaffa District Court. The plaintiffs allege
that 012 Smile.Communications unlawfully raised the monthly tariffs of its Internet
services. The total amount of the claim NIS 81.5 million ($21.4 million). At this stage
012 Smile.Communications is unable to estimate what potential liability or costs, if any,
it may incur in connection with this matter.
On
May 5, 2009 a motion was filed in Tel Aviv Magistrates Court seeking a declaratory
judgment against Start Net and Smile.Media, alleging that the plaintiff has the right to
exercise an option to purchase 8.5% of Start Nets issued shares for $30,000 pursuant
to an option warrant that was allegedly given to him by our company in February 2000. We
have not submitted a response in this action as yet, but believe that we have strong
defenses to the claim.
On
September 2, 2007, a motion to certify a class action was filed with the Tel Aviv
Jaffa District Court, against several corporations operating eCommerce sites, including
Smile.Medias P1000 website, as well as against several suppliers. The petitioners
claim that these sites have deceived and defrauded participants in online auctions, by
unrightfully preventing them from wining products that the sites determined as
under-priced. The petition also claims that this practice was carried out
through the use of fictitious bidders during the auction process. In addition, the
petitioners asked for a temporary injunction to prevent the websites from amending,
erasing, or disposing of any auction or sales data that is in their possession, in order
to enable the petitioners to discover the extent of the alleged fraud and related damages.
On October 15, 2007, the Court granted the petitioners such temporary injunction. On
January 13, 2008, we filed our response to these petitions. The parties are conducting,
several preliminary proceedings, regarding among other things, the possible severance of
the proceedings. At this preliminary stage it is impossible to estimate what potential
liability or costs, if any, may be incurred in connection with this matter.
- 93 -
On
October 12, 2008, 14 former freelancers and a former employee filed a monetary claim in
Tel Aviv Employment Tribunal against Smile.Media, Mr. Eli Holtzman, Microsoft Israel and
Mr. Dani Yamin, in the amount of approximately NIS 1.1 million ($301,923). The former
freelancers seek to be acknowledged as employees of the defendants, and receive the social
rights derived from such relationship and the termination of such relationship with the
defendants. On January 6, 2009, two additional former freelancers joined the claim, and
the plaintiffs requested to amend their claim so that among other things, that Microsoft
Corporation be substituted for Microsoft Israel Ltd. as a defendant. The amount of the
amended claim is approximately NIS 1 million ($263,000 ). On February 19, 2009, the
Tribunal granted its consent to the requested amendments. In addition, on February 5,
2009, an additional former freelancer filed a monetary claim against all the defendants
mentioned above in the amount of NIS 72,115 ($18,937), and sought to join his claim with
the other former freelancers. On May 4, 2009, the Tribunal granted its consent to the
requested motion. Simultaneously, two of the plaintiffs (one former freelancer and one
former employee) who were pregnant, requested a temporary injunction for their
reinstatment. A hearing took place on October 17, 2008, and in light of the
Tribunals recommendation, the plaintiffs withdrew their claim, and the Tribunal
rejected the request for the temporary injunction. On November 11, 2008 those two
plaintiffs requested an extension to the time which they can file an appeal with respect
to the decision of the Commissioner for Employment of Women Law. Both the Commissioner and
Smile.Media filed responses to the request. On December 31, 2008, the Tribunal accepted
the request to extend the period in which to file an appeal. On April 4, 2009, at the
plaintiffs initiative, the appeal was dismissed. On April 21, 2009, Smile.Media and
Mr. Eli Holtzman moved to dismiss the action against them. No answer has been submitted by
the plaintiffs. The time to file a statement of defense has not passed. At this
preliminary stage it is impossible to estimate what potential liability or costs, if any,
may be incurred in connection with this matter.
From
time to time, claims arising in the ordinary course of our business are brought against
us. In the opinion of our management, no currently existing claims which are not reserved
in our financial statements will have a material adverse effect on our financial position,
liquidity or results of operations.
Dividend Distribution
Policy
We
have never declared or paid any cash dividends to our shareholders. 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. In addition, our
articles of association provide that the declaration of a dividend requires approval by an
ordinary resolution of our shareholders, which may decrease but not increase the amount
proposed by the Board of Directors.
According
to the Israeli Companies Law, a company may distribute dividends out of its profits
provided that there is no reasonable concern that such dividend distribution will prevent
the company from paying all its current and foreseeable obligations, as they become due.
Notwithstanding the foregoing, dividends may be paid with the approval of a court,
provided that there is no reasonable concern that such dividend distribution will prevent
the company from satisfying its current and foreseeable obligations, as they become due.
Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings
or earnings accumulated during the preceding two years, after deducting previous
distributions that were not deducted from the surpluses. 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.
- 94 -
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 range of high bid and low
ask prices of our ordinary shares on the NASDAQ Global Market (since February 4, 2005) or
the NASDAQ Capital Market (prior to February 4, 2005) and the TASE (since March 1, 2005):
|
NASDAQ
|
TASE
|
Year
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
$
|
6.85
|
|
$
|
3.43
|
|
|
-
|
|
|
-
|
|
2005
|
|
|
$
|
8.15
|
|
$
|
4.60
|
|
|
NIS 35.89
|
|
|
NIS 21.36
|
|
2006
|
|
|
$
|
12.93
|
|
$
|
4.20
|
|
|
NIS 51.80
|
|
|
NIS 18.45
|
|
2007
|
|
|
$
|
17.32
|
|
$
|
9.68
|
|
|
NIS 68.20
|
|
|
NIS 36.01
|
|
2008
|
|
|
$
|
12.20
|
|
$
|
2.20
|
|
|
NIS 46.28
|
|
|
NIS 8.67
|
|
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 range of high ask and low bid prices
of our ordinary shares on the NASDAQ Global Market and the TASE:
|
NASDAQ
|
TASE
|
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
$
|
15.63
|
|
$
|
11.11
|
|
|
NIS 63.48
|
|
|
NIS 48.12
|
|
Second Quarter
|
|
|
$
|
17.32
|
|
$
|
11.80
|
|
|
NIS 68.20
|
|
|
NIS 46.40
|
|
Third Quarter
|
|
|
$
|
15.19
|
|
$
|
9.68
|
|
|
NIS 63.30
|
|
|
NIS 36.01
|
|
Fourth Quarter
|
|
|
$
|
13.94
|
|
$
|
10.33
|
|
|
NIS 54.99
|
|
|
NIS 40.05
|
|
|
|
|
2008
|
|
|
First Quarter
|
|
|
$
|
12.20
|
|
$
|
6.77
|
|
|
NIS 46.28
|
|
|
NIS 22.91
|
|
Second Quarter
|
|
|
$
|
12.07
|
|
$
|
7.21
|
|
|
NIS 39.50
|
|
|
NIS 26.50
|
|
Third Quarter
|
|
|
$
|
8.99
|
|
$
|
2.82
|
|
|
NIS 29.62
|
|
|
NIS 19.50
|
|
Fourth Quarter
|
|
|
$
|
6.15
|
|
$
|
2.20
|
|
|
NIS 22.30
|
|
|
NIS 8.67
|
|
|
|
|
2009
|
|
|
First Quarter
|
|
|
$
|
5.33
|
|
$
|
2.70
|
|
|
NIS 21.89
|
|
|
NIS 8.86
|
|
Second Quarter (through June 22,)
|
|
|
$
|
7.40
|
|
$
|
3.80
|
|
|
NIS 29.54
|
|
|
NIS 18.04
|
|
Monthly Stock Information
The
following table sets forth, for the most recent six months, the range of high bid and low
ask prices of our ordinary shares on the NASDAQ Global Market and the TASE:
|
NASDAQ
|
TASE
|
|
High
|
Low
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 2008
|
|
|
$
|
4.21
|
|
$
|
2.2
|
|
|
NIS 16.53
|
|
|
NIS 8.67
|
|
January 2009
|
|
|
$
|
4.29
|
|
$
|
2.7
|
|
|
NIS 17.50
|
|
|
NIS 8.86
|
|
February 2009
|
|
|
$
|
5.33
|
|
$
|
4.0
|
|
|
NIS 21.89
|
|
|
NIS 15.80
|
|
March 2009
|
|
|
$
|
5.19
|
|
$
|
4.31
|
|
|
NIS 21.48
|
|
|
NIS 18.27
|
|
April 2009
|
|
|
$
|
5.07
|
|
$
|
3.8
|
|
|
NIS 21.46
|
|
|
NIS 18.04
|
|
May 2009
|
|
|
$
|
7.00
|
|
$
|
4.34
|
|
|
NIS 24.79
|
|
|
NIS 19.05
|
|
June 2009 (through June 22,)
|
|
|
$
|
7.40
|
|
$
|
5.70
|
|
|
NIS 29.54
|
|
|
NIS 22.50
|
|
- 95 -
Not
applicable.
Our
ordinary shares were listed on the NASDAQ Global Market (symbol: IGLD) from our initial
public offering in August, 1999 until July 21, 2001, at which date the listing of our
ordinary shares was transferred to the NASDAQ Capital Market. Since February 4, 2005, our
shares once again have been listed on the NASDAQ Global Market. Since March 1, 2005, our
ordinary shares have also been traded on the TASE.
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 memorandum of association and
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 memorandum of association and 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 as Internet Gold
Golden Lines Ltd., registration number 52-004426-4. Pursuant to our memorandum of
association, we were formed for the purpose of providing various services in the
telecommunication industry and performing various corporate activities permissible under
Israeli law.
On
February 1, 2000, the Israeli Companies Law, 1999, or the Israeli Companies Law, came into
effect and superseded most of the provisions of the Israeli Companies Ordinance (New
Version), 5743-1983, except for certain provisions which relate to bankruptcy, dissolution
and liquidation of companies. Under the Israeli Companies Law, various provisions, some of
which are detailed below, overrule the current provisions of our articles of association.
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 personally 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 6.A. Directors, Senior
Management and Employees Approval of Related Party Transactions Under Israeli
Law.
- 96 -
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.
Our
articles of association do not impose any mandatory retirement or age-limit requirements
on our directors and our directors are not required to own shares in our company in order
to qualify to serve as directors.
Rights Attached to Shares
Our
authorized share capital consists of 501,000,000 ordinary shares of a nominal value of NIS
0.01 each. All outstanding ordinary shares are validly issued, fully paid and
non-assessable. The rights attached to the ordinary shares are as follows:
Dividend
rights.
Holders of our ordinary shares are entitled to the full amount
of any cash or share dividend subsequently declared. The board of directors may declare
interim dividends and propose the final dividend with respect to any fiscal year only out
of the retained earnings, in accordance with the provisions of the Israeli Companies Law.
Our articles of association provide that the declaration of a dividend requires approval
by an ordinary resolution of the shareholders, which may decrease but not increase the
amount proposed by the board of directors or affect the amount already distributed as an
interim dividend. See Item 8.A. Financial Information Consolidated and Other
Financial Information Dividend Distribution Policy. The board of directors is
entitled to invest or otherwise make use of all unclaimed dividends or other moneys
payable in respect of a share, for our benefit until claimed. We are not obligated to pay
interest or linkage differentials on an unclaimed dividend.
Voting
rights.
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.
An
ordinary resolution, such as a resolution for the declaration of dividends or amendment to
our articles of association, requires approval by the holders of a majority of the voting
rights represented at the meeting, in person, by proxy or by written ballot and voting
thereon. Under our articles of association, a special resolution, such as amending our
memorandum of association (when permitted), approving any change in capitalization,
winding-up, authorization of a class of shares with special rights, or other changes as
specified in our articles of association, requires approval of a special majority,
representing the holders of no less than 75% of the voting rights represented at the
meeting in person, by proxy or by written ballot, and voting thereon. Under the Israeli
Companies Law, we may change our articles of association by the aforementioned majority,
in order to cancel the special majority requirement in most of the events.
Pursuant
to our articles of association, our board of directors is divided into three classes
(other than outside directors). Generally, at each annual meeting of shareholders one of
such classes of directors is elected for a term of three years by a vote of the holders of
a majority of the voting power represented and voting at such meeting. For information
regarding the election of our outside directors, see Item 6C. Directors, Senior
Management and Employees Board Practices Election of Directors.
Eurocom Holdings, which is our controlling shareholder, is able to elect all our
directors, except our outside directors, whose election requires the affirmative vote of
at least one third of the shareholders who are non-controlling shareholders, or no more
than 1% of such shareholders opposing the election of the outside directors. For
information regarding the election of our outside directors, see Item 6C. Directors,
Senior Management and Employees Board Practices Election of Directors.
Rights
to share in the companys profits.
Our shareholders have the right to share in
our profits distributed as a dividend and any other permitted distribution. See this Item
10B. Additional Information Memorandum and Articles of Association
Rights Attached to Shares Dividend Rights.
Rights
to share in surplus in the event of liquidation.
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 nominal value of their holdings. This
right 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.
- 97 -
Liability
to capital calls by the company.
Under our memorandum of association, the liability of
our shareholders to provide us funds is limited to the par value of the shares held by
them.
Limitations
on any existing or prospective major shareholder.
See Item 6C. Directors and
Senior Management Board Practices Approval of Related Party Transactions
Under Israeli Law.
Changing Rights Attached
to Shares
According
to our articles of association, in order to change the rights attached to any class of
shares, unless otherwise provided by the terms of the class, such change must be adopted
by a general meeting of the shareholders and by a separate general meeting of the holders
of the affected class with a majority of 75% of the voting power participating in such
meeting.
Annual and Extraordinary
Meetings
The
board of directors must convene an annual meeting of shareholders at least once every
calendar year and within fifteen months of the last annual meeting. At our 2007 annual
general meeting of shareholders, our shareholders approved the amendment of Article 25 of
our articles of association, pursuant to which we are no longer required to deliver notice
of our annual and special general meetings to our shareholders. 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 two of the directors, 25% of the nominated directors, 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 one or more shareholders having at least 5% of the voting power in the
company.
The
quorum required for an ordinary meeting of shareholders consists of at least two
shareholders present in person or represented by proxy who hold or represent, in the
aggregate, more than one third of the voting rights of the issued share capital. A meeting
adjourned for lack of a quorum generally is adjourned to the same day in the following
week at the same time and place or any time and place as the chairman of the board of
directors determines with the consent of the holders of a majority of the shares present
in person or represented by proxy and voting on the matter of adjournment. At the
reconvened meeting, the required quorum consists of any two members present in person or
by proxy.
Limitations on the
Rights to Own Securities in Our Company
Neither
our memorandum of association or our articles of association nor the laws of the State of
Israel restrict in any way the ownership or voting of shares by non-residents, except with
respect to subjects of countries which are in a state of war with Israel.
Provisions Restricting
Change in Control of Our Company
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, 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
the 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 to determine that the consideration for the acquired shares is less than the
shares fair value and that the acquiring party should pay the shares fair
value. If the dissenting shareholders hold more than 5% of the issued and outstanding
share capital of the company, or of the relevant class of shares, as the case may be, the
acquirer may not acquire additional shares of the company from shareholders who accepted
the tender offer if following such acquisition the acquirer would own over 90% of the
companys issued and outstanding share capital, or of the relevant class of shares.
- 98 -
The
Israeli Companies Law provides that an acquisition of shares of a public company be made
by means of a tender offer if as a result of the acquisition the purchaser would become
the holder of a control block. Under the Israeli Companies Law shares
conferring 25% or more of the voting rights in the company constitute a control
block. The requirement for a tender offer does not apply if there is already another
holder of a control block. 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 acquirer would hold more than 45% of the voting rights in
the company, unless there is another person holding more than 45% of the voting rights in
the company. These requirements do not apply if:
|
|
the
acquisition was made in a private placement the object of which was to confer to the
acquiring party a control block where there is no holder of a control
block, or to confer to the acquiring party 45% of the voting rights in the company
where there is no holder of 45% of the voting rights in the company, and the private
placement received the general meetings approval; or
|
|
|
the
acquisition was from the holder of a ``control block'' and resulted in a person becoming
the holder of a ``control block;'' or
|
|
|
the
acquisition was from a shareholder holding more than 45% of the voting rights in the
company and resulted in a person becoming a holder of more than 45% of the voting rights
in the company.
|
Merger
.
The Israeli Companies Law permits merger transactions if approved by each
partys board of directors and, except under certain circumstances
specified below, by the majority of each partys shares voted on the
proposed merger at a shareholders meeting convened upon prior notice of at least
35 days (which may be shortened to 14 days in certain circumstances). A merger
is defined as the transfer of all assets and liabilities, including conditional,
future, known and unknown debts of the target company to the surviving company,
as a result of which the target company is liquidated, and stricken out of the
Companies Register.
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 and voting, in person or by proxy or by written ballot, at the general
meeting convened to approve the transaction. If one of the merging companies, or a
shareholder that holds 25% or more of the means of control of one of the merging
companies, or a 25% shareholder, holds shares of the other merging company, then a
dissenting vote of holders of the majority of the shares of the other merging company
present and voting, excluding shares held by the merging company or a 25% shareholder
thereof, or by anyone acting on behalf of either of them, their relatives and corporations
controlled thereby, is sufficient to reject the merger transaction. Means of control are
defined as any of the following: (i) the right to vote at a general meeting of a company;
and (ii) the right to appoint a director of a company. If the transaction would have been
approved but for the exclusion of the votes as previously indicated, a court may still
approve the merger upon the request of holders of at least 25% of the voting rights of the
company. The court will not approve a merger unless it is convinced that the merger is
fair and reasonable, taking into account the values of the merging companies 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 the merged company. 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.
Notwithstanding
the foregoing, a merger is not subject to the approval of the shareholders of the target
company if the target company is a wholly-owned subsidiary of the surviving company. A
merger is not subject to the approval of the shareholders of the surviving company if:
|
|
the
merger does not require the alteration of the memorandum or articles of association of
the surviving company;
|
|
|
the
acquiring company would not issue more than 20% of the voting rights thereof to the
shareholders of the target company in the course of the merger and no person will become,
as a result of the merger, a controlling shareholder of the surviving company, on a fully
diluted basis;
|
|
|
neither
the target company, nor any shareholder that holds 25% of the means of control of the
target company is a shareholder of the surviving company; and
|
|
|
there
is no person that holds 25% or more of the means of control in both companies.
|
- 99 -
Changes in Our Capital
Changes
in our capital are subject to the approval of the shareholders at a general meeting by a
special majority of 75% of the votes of shareholders participating and voting in the
general meeting.
On
December 31, 2006, Smile.Communications acquired the entire outstanding share capital of
012 Golden Lines Ltd. for a total consideration of approximately NIS 598.4 million. The
consideration for the acquisition was paid subsequent to the balance sheet date in two
installments in January 2007 and April 2007. The statutory merger was approved by the
Israeli court in June 2007. Effective as of December 31, 2006, all of the assets and
liabilities of 012 Golden Lines Ltd. were merged into Smile.Communications, and 012 Golden
Lines Ltd. ceased to exist as a separate legal entity.
On
December 31, 2006, we signed an agreement for the transfer of the assets, liabilities and
operations related to our communication business to 012 Smile.Communications, and we also
signed an agreement for the transfer of the assets, liabilities and operations related to
our media business to Smile.Media. Both transfers were contingent on the transfers being
authorized as a tax free transfer by the Israeli Tax Authorities. Such authorization was
received on May 9, 2007.
In
March 1999, we entered into a ten-year lease ending in September 2009 for an office
building in Petach Tikva, that is subject to a ten-year renewal option. The annual rent
for the 4,470 square meter premises is approximately NIS 2.2 million (approximately
$578,000).
012.Smile
Communications leases office facilities in Petach Tikva under a lease that 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 million), linked to the Israeli CPI.
In
May 2004, 012.Smile Communications
entered into an agreement with a former related
party for the lease of an office building in Rishon Lezion, in which some of its
departments are located. The lease expired in January 2009 with an option to extend for an
additional five year period. The annual rent for the 4,200 square meter premises is
approximately NIS 1.5 million (approximately $384,000), linked to the Israeli CPI.
In
July 2003, we 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. In November 2005, we
amended such agreement to increase the number of our international fiber optic lines.
According to the amendment, we were obliged to connect the four remaining international
lines by December 31, 2007 and are required to connect an additional seven international
lines by December 31, 2012. Currently the terms of this amended agreement, which was
assigned to 012 Smile.Communications, are being reviewed and negotiated by the companies
in an effort to provide us with greater flexibility.
In
April 2004, we 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,
we entered into an additional agreement with Bezeq International for an additional fiber
optic line on the same terms. This agreement was assigned subsequently to 012
Smile.Communciations.
In
January 2003, 012 Golden Lines
entered into a long-term agreement with Med Nautilus
Ltd., 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 six additional lines
having a capacity of 0.9 Gigabits, and in September 2005 with an additional 25
lines having a capacity of 3.9 Gigabits.
- 100 -
012
Smile.Communications has agreements with several international carriers for the purchase
of international long distance voice services to about 240 destinations around the world.
012
Smile.Communications has entered into several agreements with networks providers,
including local and long distance telecommunications companies for leased lines, on market
terms.
Israeli
laws 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.
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 is a discussion of Israeli and United States tax consequences material to our
shareholders. To the extent that the discussion is based on tax legislation which has not
been subject to judicial or administrative interpretation, the views expressed in the
discussion might not be accepted by the tax authorities in question or by court. The
discussion is not intended, and should not be construed, as legal or professional tax
advice and does not exhaust all possible tax considerations.
Holders
of our ordinary shares should consult their own tax advisors as to the United States,
Israeli or other tax consequences of the purchase, ownership and disposition of ordinary
shares, including, in particular, the effect of any foreign, state or local taxes.
ISRAELI TAX
CONSIDERATIONS
General Tax Structure
General
Corporate Tax Structure.
On July 25, 2005 the Knesset passed the Law for the Amendment
of the Income Tax Ordinance (No. 147 and Temporary Order) 2005. The Amendment provides for
a gradual reduction in the company tax rate in the following manner: in 2008 the tax rate
was 27%, in 2009 the tax rate is 26% and from 2010 onward the tax rate will be 25%.
Dividends
received from another Israeli company are exempt (except for dividends derived from income
earned outside of Israel). Furthermore, in Israel, individuals must pay income tax at
graduated marginal rates from 10% to 48%. Nevertheless, a company or individual, i.e., a
non-resident of Israel, may benefit from exemptions or reductions in respect of all or a
portion of such Israeli taxes, under the provisions of an international tax treaty, such
as the Convention between the Government of the United States of America and the
Government of Israel with Respect to Taxes on Income.
Taxation Under
Inflationary Conditions
The
Income Tax Law (Inflationary Adjustments) (1985), or the Inflationary Adjustments Law,
affects the taxation of earnings of Israeli companies and individuals, under certain
circumstances. This statute attempts to overcome some of the problems presented to a
traditional tax system by an economy undergoing rapid inflation, which was the case in
Israel at the time the law was enacted. Israels inflation rate has been materially
reduced in recent years. It should be noted that on February 26, 2008 the Israeli
parliament amended the Inflationary Adjustments law. According to the aforementioned
amendment, the incidence of the Inflationary Adjustments law will be terminated as of
December 31, 2007. As of the tax year 2008 and onwards, the law will no longer be in
force, except for transitional regulations which will help to avoid any distortions in
computing tax liability. Furthermore, as of the tax year 2008 and onwards, there will not
be any inflationary adjustments of the firms revenues for tax purposes. In addition
to the aforesaid, the price index linking of the depreciation of fixed assets and of
carryforward losses will last until December 31, 2007. Accordingly, as of the tax year
2008 and onwards, price index linking will not be implemented for computing the amounts of
depreciation of fixed assets and of carryforward losses.
- 101 -
The
Inflationary Adjustments Law is characterized by a high degree of complexity. Its main
features can be described generally as follows:
(a)
A special tax adjustment for the preservation of equity whereby certain
corporate assets are classified broadly into Fixed (inflation resistant) Assets
and Non-Fixed (soft) Assets. Where a companys equity, as defined in the
law, exceeds the depreciated cost of Fixed Assets, a deduction from taxable
income that takes into account the effect of the applicable annual rate of
inflation on the excess is allowed, up to a ceiling of 70% of taxable income in
any single tax year, with the unused portion permitted to be carried forward on
a linked basis. The unused portion that was carried forward may be deductible in
full in the following year. If the depreciated cost of Fixed Assets exceeds a
companys equity, then the excess multiplied by the applicable annual rate
of inflation is added to taxable income.
(b)
Subject to certain limitations, depreciation deductions on Fixed Assets and
losses carried forward are adjusted for inflation based on the increase in the
consumer price index.
(c)
Gains on the sale of certain traded securities are taxable in certain
circumstances, subject to detailed rules which were modified as of January 1,
1999. Today, all Israeli companies, except certain companies in certain cases,
are subject to reporting and taxation requirements under this law. From 2006
onwards, these gains will be taxable under the Israeli Income Tax Ordinance.
Israeli Tax Reforms
The
Israeli Income Tax Ordinance and regulations promulgated there under allow
Foreign-Invested Companies, to adjust their tax returns based on exchange rate
fluctuations of the shekel against the US Dollar rather than changes in the CPI, in lieu
of the principles set forth by the Inflationary Adjustments Law. For these purposes, a
Foreign-Invested Company is a company in which more than 25% of the share
capital in terms of rights to distributions, voting and appointment of directors, and of
the combined share capital, including shareholder loans and capital notes, is held by
persons who are not residents of Israel and are considered a Significant
Shareholder. A Significant Shareholder is a shareholder that holds
directly or indirectly, including along with others, at least 10% of any means of control
in the company.
Pursuant to such reform interest, dividends and capital gain,
including capital gain from the sale of securities listed on a stock exchange, will be
taxed at an equable tax rate of 20% for individuals or 25% if the dividends receiver is a
Significant Shareholder.
In
addition, the marginal tax rate on ordinary income of individuals shall be reduced
gradually during the following years from 47% to 44% in 2010. Non-Israeli residents will
be exempt from tax on capital gain derived from investment in Israeli companies,
commencing on July 1, 2005 through December 31, 2008, even if the capital gain was derived
after such period and without derogating from any other capital gain tax exemption
applying to non-Israeli resident under Israeli law or under any applicable tax treaty.
Taxation of our
Shareholders
Capital
Gains on Sales of Our Ordinary Shares.
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.
- 102 -
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.
For
residents of other countries, 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.
Under
legislation which became effective on January 1, 2003, the capital gain from the sale of
shares by non Israeli residents would be tax exempt in Israel as long as our shares are
listed on the NASDAQ Global Market or any other stock exchange recognized by the Israeli
Ministry of Finance, and provided certain other conditions are met, the most relevant of
which are: (A) the capital gain is not attributed to the foreign residents permanent
establishment in Israel, and (B) the shares were acquired by the foreign resident after
the companys shares had been listed for trading on the foreign Exchange. If the
shares were sold by Israeli residents, then (A) for the period ending December 31, 2004
their sale would be subject to 35% so long as the shares are listed on a stock exchange,
such as the NASDAQ Global Market, which is recognized by the Israeli Ministry of Finance,
and (B) for the period commencing January 1, 2005, the sale of the shares would be subject
to a 20% tax if the shares are listed on a stock exchange recognized by the Israeli
Ministry of Finance. If we are delisted, gains from the sale of our ordinary shares will
be subject to capital gains tax at a rate of 20% or 25% for a shareholder that is
considered a Significant Shareholder, unless an exemption or other tax rate applies in
accordance with a tax treaty between Israel and the shareholders 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,
|
- 103 -
|
|
certain
insurance companies,
|
|
|
real
estate investment companies or real estate investment trusts,
|
|
|
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 acquire their ordinary shares through the exercise or cancellation of employee stock
options or otherwise as compensation for services,
|
|
|
investors
that actually or constructively own 10% or more of our voting shares, and
|
|
|
investors
holding ordinary shares as part of a straddle or appreciated financial position or a
hedging, constructive sale 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 the partnership and 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.
|
|
For
purposes of this summary, a U.S. Holder is:
|
|
|
an
individual who is a citizen or, for U.S. federal income tax purposes, a resident of the
United States;
|
|
|
a
corporation 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
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
current and accumulated 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.
- 104 -
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 spot
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 such day 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 (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, in the
case of certain U.S. Holders, general category income for United States foreign tax credit
purposes. Further, there are special rules for computing the foreign tax credit limitation
of a taxpayer who receives dividends subject to a reduced rate of tax, see discussion
below. 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. 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 noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be subject to tax
at a reduced maximum tax rate of 15 percent. 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 Untied 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 to dividends received from passive foreign investment
companies, see discussion below, or in respect of certain hedged positions or in certain
other situations. U.S. Holders of ordinary shares should consult their own tax advisors
regarding the effect of these rules in their particular circumstances.
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 amount
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 will generally 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 be generally 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.
- 105 -
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, or the IRS. 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
For
U.S. federal income tax purposes, we will be considered a passive foreign investment
company, or a PFIC, in 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, 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. If we were determined to be a PFIC for U.S. federal income tax purposes,
highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you
are urged to consult your tax advisors regarding the application of such rules.
Based
on our current and projected income, assets and activities, we believe that we are not
currently a PFIC nor do we expect to become a PFIC in the foreseeable future. However,
because the determination of whether we are a PFIC is based upon the composition of our
income and assets from time to time, there can be no assurances that we will not become a
PFIC for any future taxable year.
If
we are treated as a PFIC for any taxable year, dividends could not qualify for the reduced
maximum tax rate, discussed above, and, unless you elect either to treat your investment
in ordinary shares as an investment in a qualified electing fund, or a QEF
election, or to mark-to-market your ordinary shares, as described below, the
following rules would apply:
|
|
you
would 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, 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
would be required to file an annual return on IRS Form 8621 regarding distributions
received with respect to ordinary shares and any gain realized on your ordinary shares.
|
If
you make either a timely QEF election or a timely mark-to-market election in respect of
your ordinary shares, you would not be subject to the rules described above. If you make a
timely QEF election, you would be required to include in your income for each taxable year
your pro rata share of our ordinary earnings as ordinary income and your pro rata share of
our net capital gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we comply with
certain applicable information reporting requirements.
Alternatively,
if the ordinary shares qualify as marketable stock and you elect to
mark-to-market your ordinary shares, you will generally include in income, in
each year in which we are considered a PFIC, 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 would generally 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 on the disposition of ordinary shares with respect to which the mark-to-market
election is made, is treated as ordinary income or loss (except that loss on a disposition
of ordinary shares is treated as capital loss to the extent the loss exceeds the net
mark-to-market gains, if any, that you included in income with respect to such ordinary
shares in prior years). 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.
- 106 -
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 fall 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.
F.
|
DIVIDENDS
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.igld.com
) 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 000-30198.
- 107 -
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 that are referred to in this annual report may also be
inspected at our offices located at 1 Alexander Yanai Street, Petach Tikva, Israel.
The
documents concerning our company which are referred to in this annual report may also be
inspected at our offices located at. We will provide a copy of this annual report
containing our financial statements upon shareholders request.
I.
|
SUBSIDIARY
INFORMATION
|
Not
applicable.
ITEM 11.
|
|
QUANTITATIVE AND QUALITATIVE DISCLOSURE 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.
Foreign Currency
Exchange Risk
Most
of our revenues are denominated in NIS. Our purchases of international bandwidth and other
international transactions are primarily in U.S. dollars, and most of our communications
and advertising costs are in U.S. dollars. We are required by law to state our prices in
NIS to our local small office and home office, or SoHo, customers. We also have U.S.
dollar denominated liabilities (such as rights of use-leasing obligations for our
international lines).
Since
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. As a result, fluctuations in rates of exchange between NIS and the U.S. dollar
may affect our operating results and financial condition.
To
manage this risk, from time to time, we have entered into forward exchange contracts to
hedge some of our foreign currency exposure. These derivative financial instruments are
carried at fair value.
A
hypothetical 10% depreciation in our major foreign currency rate (the U.S. dollar) against
the NIS, with all other variables held constant, would result in a decrease of NIS 37
million, (approximately $9.7 million) in our expected 2009 sales and an increase of NIS
24.7 million ($6.5 million) in our 2008 net loss.
Effects of Changes in
the Israeli Consumer Price Index
The
debentures that we issued in September 2007 and the convertible debentures that we issued
in April 2005 are linked (principal and interest) to the Israeli consumer price index. We
have also marketable securities which are linked to the Israeli consumer price index. A
hypothetical 1% (based on December 31, 2008 balance sheet) increase in the Israeli
consumer price index would result in an increase in our expected financing expenses of
approximately NIS 3.6 million ($946,000) and a hypothetical 1% decrease in the Israeli
consumer price index would result in financing income of approximately NIS 3.6 million
($946,000).
- 108 -
The
debentures of 012 Smile.Communications that were issued during the period of March 2007 to
May 2007 are linked (principal and interest) to the Israeli consumer price index. 012
Smile.Communications also has marketable securities which are linked to the Israeli
consumer price index. A hypothetical 1% (based on December 31, 2008 balance sheet)
increase in the Israeli consumer price index would result in an increase in its expected
financing expenses of approximately NIS 2.5 million ($657,000) and a hypothetical 1%
decrease in the Israeli consumer price index would result in financing income of
approximately NIS 2.5 million ($657,000 million).
Interest Rate Risk
We
pay interest on our short-term loan facility and credit line based on the Israeli Prime
rate. As a result, changes in the general level of interest rates directly affect the
amount of interest payable by us under these facilities.
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
|
Material Modifications
to the Rights of Security Holders
None.
Use of Proceeds
Not
applicable.
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.
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.
- 109 -
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.
The
effectiveness of our internal control over financial reporting as of December 31, 2008 has
been audited by Somekh Chaikin, a member of firm of KPMG International, an independent
registered public accounting firm, that audited and reported on our consolidated financial
statements for the year ended December 31, 2008. The attestation report of our independent
public accounting firm is set forth on page F-2 of our audited consolidated financial
statements set forth in Item 18 Financial Statements, and is incorporated
herein by reference.
Changes in Internal
Control over Financial Reporting
In
connection with our managements assessment of our internal control over financial
reporting in 2007, our management concluded that as of December 31, 2007, we, through 012
Smile.Communications subsidiary did not maintain effective internal control over certain
spreadsheets utilized in the period-end financial reporting process. We utilized these
spreadsheets in connection with the integration of 012 Golden Lines into 012
Smile.Communications. We completed the integration of the financial reporting process in
the fourth quarter of 2007 and no longer use these independent spreadsheets. Therefore,
the identified material weakness has been remediated.
There
was no other change in our internal control 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 control over financial reporting.
ITEM 16A.
|
|
AUDIT COMMITTEE FINANCIAL EXPERT
|
Our
board of directors has determined that Ms. Anat Winner, one of our independent directors,
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 for Executive and Financial Officers, which is a code of
ethics that applies to our chief executive officer, chief financial officer, corporate
controller and other finance organization employees, and a Code of Conduct, which applies
to all of our employees. The Code of Ethics for Executive and Financial Officers and the
Code of Conduct are publicly available on our website at
www.igld.com
. Written
copies are available upon request. If we make any substantive amendments to the Code of
Ethics for Executive and Financial Officers or grant any waivers, including any implicit
waiver, from a provision of these codes to our chief executive officer, chief financial
officer or corporate controller, we will disclose the nature of such amendment or waiver
on our website.
ITEM 16C.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
Fees Paid to Independent
Public Accountants
The
following table sets forth, for each of the years indicated, the aggregate fees billed to
us by our independent registered public accounting firm. All of such fees were
pre-approved by our Audit Committee.
- 110 -
|
|
Year Ended December 31,
|
|
Services Rendered
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit (1)
|
|
|
$
|
1,327,243
|
|
$
|
364,500
|
|
|
Audit-related
|
|
|
|
-
|
|
|
-
|
|
|
Tax (2)
|
|
|
$
|
35,816
|
|
|
-
|
|
|
Other
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,363,059
|
|
$
|
364,500
|
|
|
|
|
|
|
|
|
(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.
|
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 accounting firm, 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
registered public accountants to perform the prohibited non-audit functions defined in
Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and also requires the audit
committee to consider whether proposed services are compatible with the independence of
the registered public accountants.
ITEM 16D.
|
|
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|
Not
applicable.
ITEM 16E.
|
|
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|
Issuer Purchase of
Equity Securities
In
November 2007, our Board of Directors authorized the repurchase of up to NIS 70 million
(approximately $18.4 million) of our ordinary shares in the open market from time to time
at prevailing market prices. As of December 31, 2008, we had repurchased 1,978,476
ordinary shares under the program at a total purchase price of approximately NIS 68.0
million ($17.9 million), or an average price of NIS 34.3 ($9.00) per share, of which
144,189 ordinary shares were repurchased during 2007 at a total purchase price of
approximately NIS 6.4 million ($1.7 million), or an average price of NIS 44.5 ($11.70) per
share, and 1,834,287 ordinary shares were repurchased during 2008 at a total purchase
price of approximately NIS 61.5 million ($16.2 million), or an average price of NIS 33.6
($8.80) per share.
In
July 2008, our Board of Directors authorized a second repurchase program, for the
repurchase of up to an additional NIS 70 million (approximately $18.4 million) of our
ordinary shares in the open market from time to time at prevailing market prices. As of
December 31, 2008, we had repurchased 1,886,005 ordinary shares under the second program
at a total purchase price of approximately NIS 38.7 million ($10.2 million), or an average
price of NIS 20.5 ($5.40) per share. From January 1, 2009 and until June 22, 2009, we
repurchased an additional 1,481,087 ordinary shares under the second program at a total
purchase price of approximately NIS 26.2 million ($6.9 million). or an average price of
NIS 17.7 ($4.70) per share.
- 111 -
The
following table sets forth, for each of the months indicated, the total number of shares
purchased by us, the average price paid per share, the number of shares purchased as part
of our publicly announced repurchase programs and the maximum number of shares that may
yet be purchased under the programs.
Period in 2008
|
Total Number
of Shares
Purchased
|
Average Price
Paid per Share
NIS
|
Average
Price Paid
per Share $
($1=3.802)
|
Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
|
Approximate NIS
Value of Shares
that May Yet Be
Purchased Under
the Plans or
Programs
|
Approximate
$Value
($1=3.802) of
Shares that May
Yet Be Purchased
Under the Plans
or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
|
285,303
|
|
|
37.2
|
|
|
9.80
|
|
|
429,492
|
|
|
52,968,236
|
|
|
13,931,677
|
|
February
|
|
|
|
308,480
|
|
|
36.7
|
|
|
9.60
|
|
|
737,972
|
|
|
41,658,399
|
|
|
10,956,970
|
|
March
|
|
|
|
452,084
|
|
|
27.1
|
|
|
7.10
|
|
|
1,190,056
|
|
|
29,400,474
|
|
|
7,732,897
|
|
April
|
|
|
|
472,258
|
|
|
34.7
|
|
|
9.10
|
|
|
1,662,314
|
|
|
13,020,421
|
|
|
3,424,624
|
|
May
|
|
|
|
167,572
|
|
|
36.0
|
|
|
9.50
|
|
|
1,829,886
|
|
|
6,984,840
|
|
|
1,837,149
|
|
June
|
|
|
|
148,590
|
|
|
33.2
|
|
|
8.70
|
|
|
1,978,476
|
|
|
2,045,140
|
|
|
537,912
|
|
July
|
|
|
|
223,700
|
|
|
27.9
|
|
|
7.30
|
|
|
2,202,176
|
|
|
65,805,488
|
|
|
17,308,124
|
|
August
|
|
|
|
299,338
|
|
|
26.6
|
|
|
7.00
|
|
|
2,501,514
|
|
|
57,852,794
|
|
|
15,216,411
|
|
September
|
|
|
|
138,411
|
|
|
22.7
|
|
|
6.00
|
|
|
2,639,925
|
|
|
54,714,492
|
|
|
14,390,976
|
|
October
|
|
|
|
295,533
|
|
|
17.5
|
|
|
4.60
|
|
|
2,935,458
|
|
|
49,540,903
|
|
|
13,030,222
|
|
November
|
|
|
|
604,671
|
|
|
19.6
|
|
|
5.20
|
|
|
3,540,129
|
|
|
37,673,465
|
|
|
9,908,845
|
|
December
|
|
|
|
324,352
|
|
|
13.4
|
|
|
3.50
|
|
|
3,864,481
|
|
|
33,340,938
|
|
|
8,769,316
|
|
ITEM 16F.
|
|
CHANGES IN REGISTRANTS CERTIFYING ACCOUNTANT
|
Not
applicable.
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 Eurocom Communications 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.
|
- 112 -
|
|
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.
PART III
ITEM 17.
|
|
FINANCIAL STATEMENTS
|
We
have elected to furnish financial statements and related information specified in Item 18.
ITEM 18.
|
|
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
|
|
Consolidated Balance Sheets as of December 31, 2008 and 2007
|
F-4
|
|
|
|
Consolidated Statements of Operations for the Years ended
|
|
|
|
December 31, 2008, 2007 and 2006
|
F-6
|
|
|
|
Consolidated Statements of Changes in Shareholders' Equity for the Years ended
|
|
|
|
December 31, 2008, 2007 and 2006
|
F-7
|
|
|
|
Consolidated Statements of Cash Flows for the Years ended
|
|
December 31, 2008, 2007 and 2006
|
F-8
|
|
|
|
Notes to the Consolidated Financial Statements
|
F-10
|
- 113 -
Index
to Exhibits
1.1
|
|
Memorandum
of Association of the Registrant*
|
1.2
|
|
Articles
of Association of the Registrant*
|
2.1
|
|
Specimen
of Share Certificate*
|
2.2
|
|
Terms
of Convertible Debentures Traded on Tel Aviv Stock Exchange***
|
2.3
|
|
Terms
of Warrants Traded on Tel Aviv Stock Exchange***
|
2.4
|
|
Form
of Smile.Communications Series A Debenture Certificate for Notes issued in March
2007 and May 2007****
|
4.1
|
|
Registration
Rights Agreement, dated July 30, 1999, among the Registrant, Euronet
Communications Ltd., Shaul Elovitch and Eli Holtzman*
|
4.2
|
|
Hebrew
version and an English summary of Lease Agreement between Rivka and Avraham
Veron and the Registrant dated March 1999**
|
4.3
|
|
Agreement
among the Registrant, Fishman Family Properties Management (1988) Ltd,
Monitin Media Ltd and 012 Golden Lines Ltd. for the for the
acquisition of 012 Golden Lines Ltd. dated July 25, 2006****
|
4.4
|
|
Amendments
to the July 25, 2006 Agreement among the Registrant, Fishman Family
Properties Management (1988) Ltd, Monitin Media Ltd and 012 Golden
Lines Ltd. for the acquisition of 012 Golden Lines Ltd., dated
August 1, 2006 and December 20, 2006****
|
8
|
|
List
of Subsidiaries of the Registrant
|
12.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act, as amended.
|
12.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act, as amended.
|
13.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
13.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
15.1
|
|
Letter
of Consent of BDO Ziv Haft Consulting and Management Ltd.
|
*
|
Previously
filed as an exhibit to the Registrant's Registration Statement on Form F-1 (Registration
No. 333-10576), and incorporated herein by reference.
|
**
|
Previously
filed as an exhibit to the Registrants Annual Report on Form 20-F for the year
ended December 31, 2000, and incorporated herein by reference.
|
***
|
Previously
filed as exhibit to the Registrants Report on Form 6-K for the month of April 2005
submitted to Securities and Exchange Commission on April 11, 2005, and incorporated
herein by reference.
|
****
|
Previously
filed as exhibit to the Registrants Annual Report on Form 20-F for the year ended
December 31, 2006, and incorporated herein by reference.
|
- 114 -
|
Internet Gold - Golden Lines Ltd.
|
|
Consolidated Financial Statements
|
|
Contents
F - 1
Report of Independent
Registered Public Accounting Firm
The Board of Directors
and Shareholders of
Internet Gold
Golden Lines Ltd.:
We have audited the accompanying
consolidated balance sheets of Internet Gold Golden Lines Ltd. and
subsidiaries as of December 31, 2007 and 2008, and the related 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. We also have audited Internet Gold
Golden Lines Ltd.s internal control over financial reporting as of December 31,
2008, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Internet Gold Golden Lines Ltd.s management is responsible for these
consolidated financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Annual Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on
these consolidated financial statements and an opinion on the Companys internal
control over financial reporting based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our
audits of the consolidated financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A companys internal control
over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material
effect on the financial statements.
F - 2
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Internet Gold Golden Lines Ltd. and subsidiaries as of
December 31, 2007 and 2008, and the results of its operations and its 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. Also in our opinion, Internet Gold Golden
Lines Ltd maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria established in
Internal Control
Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
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
consolidated financial statements.
As discussed in Note 2 to the
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 (Israel)
Member Firm of KPMG
International
Tel Aviv, Israel
June 24, 2009
F - 3
|
Internet Gold - Golden Lines Ltd.
|
|
Consolidated Balance Sheets (in thousands)
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
December 31
|
December 31
|
|
2007
|
2008
|
2008
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
601,926
|
|
|
86,090
|
|
|
22,643
|
|
Marketable securities
|
|
|
|
161,353
|
|
|
214,895
|
|
|
56,694
|
|
Trade receivables, net of allowance for
|
|
|
doubtful accounts of NIS 14,239 and NIS 15,660
|
|
|
at December 31, 2007 and 2008
|
|
|
|
224,616
|
|
|
217,796
|
|
|
57,285
|
|
Related parties receivable
|
|
|
|
4,294
|
|
|
1,729
|
|
|
455
|
|
Prepaid expenses and other current assets
|
|
|
|
23,683
|
|
|
27,046
|
|
|
6,941
|
|
Deferred tax assets
|
|
|
|
9,707
|
|
|
26,116
|
|
|
6,869
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
1,025,579
|
|
|
573,672
|
|
|
150,887
|
|
|
|
|
|
|
|
|
|
|
|
Long-term trade receivables
|
|
|
|
3,460
|
|
|
6,350
|
|
|
1,670
|
|
Marketable securities
|
|
|
|
-
|
|
|
279,823
|
|
|
73,599
|
|
Assets held for employee severance benefits
|
|
|
|
20,639
|
|
|
17,786
|
|
|
4,678
|
|
Deferred tax assets
|
|
|
|
192
|
|
|
57
|
|
|
15
|
|
Property and equipment, net
|
|
|
|
163,949
|
|
|
171,104
|
|
|
45,003
|
|
Other assets, net
|
|
|
|
317,780
|
|
|
302,934
|
|
|
79,678
|
|
Other intangible assets, net
|
|
|
|
202,376
|
|
|
174,640
|
|
|
45,934
|
|
Goodwill
|
|
|
|
417,608
|
|
|
416,888
|
|
|
109,650
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
2,151,583
|
|
|
1,943,254
|
|
|
511,114
|
|
|
|
|
|
|
|
|
/s/ Eli Holtzman
Eli Holtzman
Chief Executive Officer and Director
|
|
/s/ Doron Turgeman
Doron Turgeman
Chief Financial Officer
|
Date of signature: June
24, 2009
The accompanying notes are an
integral part of the consolidated financial statements.
F - 4
|
Internet Gold - Golden Lines Ltd.
|
|
Consolidated Balance Sheets (in thousands except share data)
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
December 31
|
December 31
|
|
2007
|
2008
|
2008
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
Short-term bank credit
|
|
|
|
77,998
|
|
|
42,738
|
|
|
11,241
|
|
Current maturities of long-term obligations
|
|
|
|
10,734
|
|
|
11,238
|
|
|
2,956
|
|
Accounts payable
|
|
|
|
170,797
|
|
|
148,580
|
|
|
39,079
|
|
Current maturities of convertible debentures
|
|
|
|
19,039
|
|
|
17,516
|
|
|
4,607
|
|
Current maturities of debentures
|
|
|
|
5,330
|
|
|
100,142
|
|
|
26,339
|
|
Other payable and accrued expenses
|
|
|
|
120,734
|
|
|
125,388
|
|
|
32,980
|
|
Related parties payables
|
|
|
|
211
|
|
|
3,223
|
|
|
848
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
404,843
|
|
|
448,825
|
|
|
118,050
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities
|
|
|
|
|
|
Long-term obligations and other payables
|
|
|
|
32,265
|
|
|
760
|
|
|
200
|
|
Convertible debentures
|
|
|
|
104,640
|
|
|
84,857
|
|
|
22,319
|
|
Debentures
|
|
|
|
848,616
|
|
|
812,254
|
|
|
213,639
|
|
Deferred tax liabilities
|
|
|
|
59,104
|
|
|
46,856
|
|
|
12,324
|
|
Liability for employee severance benefits
|
|
|
|
35,918
|
|
|
34,626
|
|
|
9,107
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
|
1,080,543
|
|
|
979,353
|
|
|
257,589
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 20)
|
|
|
|
|
|
Minority interest
|
|
|
|
180,410
|
|
|
190,472
|
|
|
50,098
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
Ordinary shares, NIS 0.01 par value (501,000,000 shares
|
|
|
authorized; 23,372,953 and 19,653,925 shares issued and fully
|
|
|
paid as of December 31, 2007 and 2008, respectively)
|
|
|
|
248
|
|
|
211
|
|
|
55
|
|
Additional paid-in capital
|
|
|
|
436,131
|
|
|
436,182
|
|
|
114,724
|
|
Treasury shares at cost (144,189 and 3,864,481 Ordinary shares
|
|
|
as of December 31, 2007 and 2008, respectively)
|
|
|
|
(6,423
|
)
|
|
(106,513
|
)
|
|
(28,015
|
)
|
Accumulated other comprehensive loss
|
|
|
|
-
|
|
|
(36,812
|
)
|
|
(9,682
|
)
|
Retained earnings
|
|
|
|
55,831
|
|
|
31,536
|
|
|
8,295
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
485,787
|
|
|
324,604
|
|
|
85,377
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
|
|
2,151,583
|
|
|
1,943,254
|
|
|
511,114
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 5
|
Internet Gold - Golden Lines Ltd.
|
|
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
|
|
2006
|
2007
|
2008
|
2008
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
Revenue*
|
|
|
|
408,359
|
|
|
1,175,946
|
|
|
1,167,327
|
|
|
307,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and operating expenses:
|
|
|
Cost of revenue**
|
|
|
|
252,413
|
|
|
802,296
|
|
|
799,914
|
|
|
210,393
|
|
Selling and marketing
|
|
|
|
75,576
|
|
|
176,250
|
|
|
175,780
|
|
|
46,234
|
|
General and administrative
|
|
|
|
33,957
|
|
|
69,843
|
|
|
71,548
|
|
|
18,818
|
|
Impairment and other expenses (income), net
|
|
|
|
12,813
|
|
|
14,589
|
|
|
(5,581
|
)
|
|
(1,468
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
|
374,759
|
|
|
1,062,978
|
|
|
1,041,661
|
|
|
273,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
33,600
|
|
|
112,968
|
|
|
125,666
|
|
|
33,053
|
|
Financial income
|
|
|
|
19,549
|
|
|
25,919
|
|
|
36,177
|
|
|
9,515
|
|
Financial expenses
|
|
|
|
40,410
|
|
|
83,452
|
|
|
158,250
|
|
|
41,623
|
|
Gain from issuance of shares in a subsidiary
|
|
|
|
-
|
|
|
120,310
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
12,739
|
|
|
175,745
|
|
|
3,593
|
|
|
945
|
|
Income tax expense
|
|
|
|
1,286
|
|
|
50,460
|
|
|
14,550
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
Income (loss) after income tax expense
|
|
|
|
11,453
|
|
|
125,285
|
|
|
(10,957
|
)
|
|
(2,882
|
)
|
Minority share in income
|
|
|
|
(34
|
)
|
|
(1,267
|
)
|
|
(13,338
|
)
|
|
(3,508
|
)
|
Company's share in net loss of investees
|
|
|
|
(334
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
11,085
|
|
|
124,018
|
|
|
(24,295
|
)
|
|
(6,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
Basic earnings (loss) per share
|
|
|
|
0.60
|
|
|
5.74
|
|
|
(1.13
|
)
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of ordinary
|
|
|
shares used in calculation of basic
|
|
|
earnings per share
|
|
|
|
18,438
|
|
|
21,617
|
|
|
21,551
|
|
|
21,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
Diluted earnings (loss) per share
|
|
|
|
0.60
|
|
|
5.44
|
|
|
(1.13
|
)
|
|
(0.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
|
|
|
used in calculation of diluted earnings per
|
|
|
share
|
|
|
|
18,438
|
|
|
24,795
|
|
|
21,551
|
|
|
21,551
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes
revenues from related parties of NIS 1,270, NIS 3,139 and NIS 5,395 for the years ended
December 31, 2006, 2007 and 2008, respectively.
|
**
|
Includes
cost of revenue from related parties of NIS 181 NIS 1,444 and NIS 12,803 for the years
ended December 31, 2006, 2007 and 2008, respectively.
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 6
|
Internet Gold - Golden Lines Ltd.
|
|
Consolidated Statements of Changes in Shareholders' Equity (in thousands except share data)
|
|
|
Share capital
|
Additional
paid-in
capital
|
Treasury
shares at
cost
|
Accumulated
other
comprehensive
loss
|
Retained
earnings
(losses)
|
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
|
|
|
|
18,431,500
|
|
|
197
|
|
|
227,048
|
|
|
-
|
|
|
-
|
|
|
(79,272
|
)
|
|
|
|
|
147,973
|
|
|
|
|
|
|
|
Changes during 2006:
|
|
|
Conversion of convertible debentures
|
|
|
|
159,721
|
|
|
2
|
|
|
8,387
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
8,389
|
|
|
|
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
11,085
|
|
|
11,085
|
|
|
11,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,085
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
|
18,591,221
|
|
|
199
|
|
|
235,435
|
|
|
-
|
|
|
-
|
|
|
(68,187
|
)
|
|
|
|
|
167,447
|
|
|
|
|
|
|
|
Changes during 2007:
|
|
|
Exercise of warrants
|
|
|
|
2,494,659
|
|
|
25
|
|
|
103,967
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
103,992
|
|
|
|
|
Conversion of convertible debentures
|
|
|
|
2,431,262
|
|
|
24
|
|
|
96,729
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
96,753
|
|
|
|
|
Treasury shares at cost
|
|
|
|
(144,189
|
)
|
|
-
|
|
|
-
|
|
|
(6,423
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(6,423
|
)
|
|
|
|
Net income
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
124,018
|
|
|
124,018
|
|
|
124,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,018
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
|
23,372,953
|
|
|
248
|
|
|
436,131
|
|
|
(6,423
|
)
|
|
-
|
|
|
55,831
|
|
|
|
|
|
485,787
|
|
|
127,771
|
|
|
|
|
Changes during 2008:
|
|
|
Conversion of convertible debentures
|
|
|
|
1,264
|
|
|
* -
|
|
|
51
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
51
|
|
|
13
|
|
Treasury shares at cost
|
|
|
|
(3,720,292
|
)
|
|
(37
|
)
|
|
-
|
|
|
(100,090
|
)
|
|
-
|
|
|
-
|
|
|
|
|
|
(100,127
|
)
|
|
(26,335
|
)
|
Comprehensive loss, net of tax:
|
|
|
Unrealized losses on available-for-sale
|
|
|
marketable securities, net of deferred tax
|
|
|
benefit of NIS 12,271
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(36,812
|
)
|
|
-
|
|
|
(36,812
|
)
|
|
(36,812
|
)
|
|
(9,682
|
)
|
Net loss
|
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(24,295
|
)
|
|
(24,295
|
)
|
|
(24,295
|
)
|
|
(6,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,107
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
|
19,653,925
|
|
|
211
|
|
|
436,182
|
|
|
(106,513
|
)
|
|
(36,812
|
)
|
|
31,536
|
|
|
|
|
|
324,604
|
|
|
85,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Represent
an amount less than NIS 1.
|
The accompanying notes are an
integral part of the consolidated financial statements.
F - 7
|
Internet Gold - Golden Lines Ltd.
|
|
Consolidated Statements of Cash Flows (in thousands)
|
|
|
|
|
|
Convenience
translation
into US dollars
(Note 2)
|
|
Year ended December 31
|
Year ended
December 31
|
|
2006
|
2007
|
2008
|
2008
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
11,085
|
|
|
124,018
|
|
|
(24,295
|
)
|
|
(6,390
|
)
|
|
|
|
Adjustments to reconcile net income (loss) to
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
31,178
|
|
|
116,848
|
|
|
117,503
|
|
|
30,906
|
|
Deferred tax expense (benefit)
|
|
|
|
(227
|
)
|
|
244
|
|
|
(14,894
|
)
|
|
(3,917
|
)
|
Accrued interest on debentures and convertible
|
|
|
debentures
|
|
|
|
9,302
|
|
|
48,037
|
|
|
24,021
|
|
|
6,317
|
|
Increase in allowance for doubtful accounts, net
|
|
|
|
1,235
|
|
|
6,126
|
|
|
1,421
|
|
|
374
|
|
Increase in employee severance benefits, net
|
|
|
|
43
|
|
|
435
|
|
|
1,561
|
|
|
410
|
|
Impairment and other expenses (income)
|
|
|
|
9,471
|
|
|
-
|
|
|
(12,839
|
)
|
|
(3,377
|
)
|
Linkage and interest differences on long-term
|
|
|
obligations, exchange rate difference and other
|
|
|
|
3,416
|
|
|
7,555
|
|
|
65,155
|
|
|
17,137
|
|
Minority share in income
|
|
|
|
58
|
|
|
1,267
|
|
|
13,338
|
|
|
3,508
|
|
Stock-based compensation in a subsidiary
|
|
|
|
-
|
|
|
-
|
|
|
3,429
|
|
|
902
|
|
Company's share in net loss of investees
|
|
|
|
334
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Realized and unrealized (income) expenses on
|
|
|
marketable securities, net
|
|
|
|
(840
|
)
|
|
(2,181
|
)
|
|
39,967
|
|
|
10,512
|
|
Gain from issuance of shares in subsidiary
|
|
|
|
-
|
|
|
(120,310
|
)
|
|
-
|
|
|
-
|
|
Gain from redemption of debentures and
|
|
|
convertible debentures
|
|
|
|
-
|
|
|
-
|
|
|
(4,624
|
)
|
|
(1,216
|
)
|
Changes in assets and liabilities, net of
|
|
|
effects of acquired companies:
|
|
|
Trade receivables including non current portion
|
|
|
|
(16,121
|
)
|
|
(10,517
|
)
|
|
2,509
|
|
|
660
|
|
Prepaid expenses and other current assets
|
|
|
|
(914
|
)
|
|
(1,765
|
)
|
|
(4,969
|
)
|
|
(1,307
|
)
|
Other assets, net
|
|
|
|
1,234
|
|
|
(52
|
)
|
|
483
|
|
|
127
|
|
Accounts payable
|
|
|
|
(5,242
|
)
|
|
6,004
|
|
|
(34,503
|
)
|
|
(9,075
|
)
|
Other payables and accrued expenses
|
|
|
|
20,366
|
|
|
38,404
|
|
|
6,135
|
|
|
1,614
|
|
Related parties receivables (payables)
|
|
|
|
2,200
|
|
|
1,445
|
|
|
5,576
|
|
|
1,466
|
|
Other
|
|
|
|
3
|
|
|
-
|
|
|
13
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
|
66,581
|
|
|
215,558
|
|
|
184,987
|
|
|
48,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
Purchase of property and equipment and
|
|
|
other assets
|
|
|
|
(33,253
|
)
|
|
(61,737
|
)
|
|
(59,045
|
)
|
|
(15,530
|
)
|
Acquisition of Golden Lines
|
|
|
|
(5,118
|
)
|
|
(585,636
|
)
|
|
-
|
|
|
-
|
|
Consolidation of investee company
|
|
|
|
(1,515
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Investment in trading marketable securities
|
|
|
|
(568
|
)
|
|
(183,443
|
)
|
|
(368,324
|
)
|
|
(96,876
|
)
|
Investment in available-for-sale marketable securities
|
|
|
|
-
|
|
|
-
|
|
|
(325,824
|
)
|
|
(85,698
|
)
|
Proceeds from sale of trading marketable securities
|
|
|
|
-
|
|
|
25,154
|
|
|
266,418
|
|
|
70,073
|
|
Additional acquisition of 012 shares
|
|
|
|
-
|
|
|
-
|
|
|
(1,723
|
)
|
|
(453
|
)
|
Proceeds in respect of MSN transaction
|
|
|
|
-
|
|
|
-
|
|
|
22,000
|
|
|
5,786
|
|
Other
|
|
|
|
(355
|
)
|
|
-
|
|
|
392
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
(40,809
|
)
|
|
(805,662
|
)
|
|
(466,106
|
)
|
|
(122,595
|
)
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral
part of the consolidated financial statements.
F - 8
|
Internet Gold - Golden Lines Ltd.
|
|
Consolidated Statements of Cash Flows (in thousands) (cont'd)
|
|
|
|
|
|
Convenience
translation
into US Dollars
(Note 2)
|
|
Year ended December 31
|
Year ended
December 31
|
|
2006
|
2007
|
2008
|
2008
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in short-term bank credit, net
|
|
|
|
69,020
|
|
|
(286,864
|
)
|
|
(34,756
|
)
|
|
(9,142
|
)
|
Long-term finance arrangement
|
|
|
|
7,370
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Redemption of debentures and convertible
|
|
|
debentures
|
|
|
|
-
|
|
|
-
|
|
|
(31,385
|
)
|
|
(8,255
|
)
|
Repayment of convertible debentures
|
|
|
|
-
|
|
|
-
|
|
|
(15,406
|
)
|
|
(4,052
|
)
|
Payment in respect of long-term finance
|
|
|
arrangement
|
|
|
|
(36,474
|
)
|
|
(50,027
|
)
|
|
(25,835
|
)
|
|
(6,795
|
)
|
Issuance of debentures, net of issuance expense
|
|
|
|
-
|
|
|
827,026
|
|
|
-
|
|
|
-
|
|
Repayment of long-term loans from bank
|
|
|
|
(7,172
|
)
|
|
(7,177
|
)
|
|
(7,176
|
)
|
|
(1,887
|
)
|
Issuance of warrants, net of issuance expenses
|
|
|
|
2
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds from issuance of shares in a subsidiary, net
|
|
|
|
-
|
|
|
299,364
|
|
|
-
|
|
|
-
|
|
Exercise of warrants
|
|
|
|
-
|
|
|
103,992
|
|
|
-
|
|
|
-
|
|
Treasury shares acquired at cost
|
|
|
|
-
|
|
|
(6,423
|
)
|
|
(100,127
|
)
|
|
(26,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
|
|
|
activities
|
|
|
|
32,746
|
|
|
879,891
|
|
|
(214,685
|
)
|
|
(54,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in cash and cash equivalents
|
|
|
|
58,518
|
|
|
289,787
|
|
|
(495,804
|
)
|
|
(130,406
|
)
|
Effect of exchange rate changes
|
|
|
|
(3,527
|
)
|
|
(8,340
|
)
|
|
(20,032
|
)
|
|
(5,269
|
)
|
Cash and cash equivalents at
|
|
|
beginning of the year
|
|
|
|
265,488
|
|
|
320,479
|
|
|
601,926
|
|
|
158,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
|
|
320,479
|
|
|
601,926
|
|
|
86,090
|
|
|
22,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
Interest paid
|
|
|
|
9,667
|
|
|
21,566
|
|
|
7,416
|
|
|
1,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
|
|
-
|
|
|
8,250
|
|
|
26,164
|
|
|
6,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
|
|
|
investing activities:
|
|
|
|
|
|
Net change in unrealized losses on available-for-
|
|
|
sale marketable securities
|
|
|
|
-
|
|
|
-
|
|
|
(36,812
|
)
|
|
(9,682
|
)
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
|
and other assets on credit
|
|
|
|
7,545
|
|
|
13,063
|
|
|
12,286
|
|
|
3,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Lines acquisition
|
|
|
|
584,621
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debentures
|
|
|
|
8,389
|
|
|
96,753
|
|
|
51
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 1, on December
31, 2006, 012 completed the acquisition of Golden Lines 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 consolidated financial statements.
F - 9
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 1 General
|
Internet
Gold Golden Lines Ltd. (hereinafter the Company) is a publicly traded
corporation currently traded on the NASDAQ Global Market and on the Tel-Aviv Stock
Exchange (TASE). The Company provides through its subsidiaries two main services:
communication services in Israel and diversified Internet media services.
|
|
The
Company is a communication services provider in Israel, focused on offering broadband
data and traditional voice services to residential and business customers, as well as to
domestic and international communication services providers, or carriers. The Company
also provides diversified Internet media services in Israel, and generates revenues
through the sale of advertising on its websites (e-advertising), the sale of products and
services on the Internet and from the delivery of paid content to subscribers
(e-Commerce).
|
|
On
December 31, 2006, the Company signed an agreement for the transfer of the assets,
liabilities and operations related to the communication business of the Company (the
Communication Business) to 012 Smile.Communications Ltd. (hereinafter 012).
On December 31, 2006, the Company also signed an agreement with its wholly owned
subsidiary, Smile.Media Ltd. for the transfer of the assets, liabilities and operations
related to the media business of the Company (the Media Business) to
Smile.Media Ltd.
|
|
On
December 31, 2006, the Companys wholly-owned subsidiary, 012 acquired the entire
outstanding share capital of 012 Golden Lines Ltd. (hereinafter Golden Lines)
for a total consideration of approximately NIS 599.4 million. The consideration for the
acquisition was paid in two installments in January 2007 and March 2007. Upon completion
of a statutory merger, all of the assets and liabilities of Golden Lines were statutorily
merged into 012 and Golden Lines ceased to exist as a separate legal entity. The
statutory merger was approved by an Israeli court in February 2007.
|
|
On
October 31, 2007, 012 consummated an initial public offering (IPO) of its
ordinary shares on the NASDAQ Global Market for net proceeds of NIS 299 million. The
Company recorded a gain from issuance of shares in a subsidiary of NIS 120 million.
Following the IPO, 012 also listed its shares for trading on the TASE.
|
|
In
October 1999 and in 2000, the Company and Microsoft Corporation (Microsoft)
entered into agreements (the MSN Agreements) for the establishment of MSN
Israel Ltd. (MSN Israel), a consolidated variable interest subsidiary. The
Company and Microsoft held 50.1% and 49.9% of the shares of MSN Israel, respectively.
|
|
The
main asset of MSN Israel was the properties of the MSN Israel internet portal, MSN.co.il.
Under the terms of the MSN Agreements, Microsoft had the right to terminate the MSN
Agreements with or without cause upon 60 to 90 days written notice and the Company would
be required to remove the MSN Israel portal from the Internet and stop using the MSN
brand.
|
|
On
August 6, 2008 the Company and its subsidiary Smile.Media Ltd signed a Settlement and
Wind Down Agreement for the termination of the aforementioned agreements between the
Company and Microsoft Corporation for a total consideration of approximately NIS 22
million and recorded a NIS 12.8 million gain which was classified under the impairment
and other income (expense), net in the statement of operations.
|
F - 10
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies
|
The
consolidated financial statements are prepared in accordance with generally accepted
accounting principles in the United States of America (US GAAP).
|
|
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 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 U.S. 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 computation of deferred tax assets and liabilities, the valuation of
derivatives, 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 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
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Consolidated
financial statements
|
|
Principles
of consolidation
|
|
The
consolidated financial statements include those of the IGLD and its subsidiaries. All
intercompany transactions and balances were eliminated in consolidation.
|
|
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.
|
|
Investments
in marketable securities
|
|
Investment
securities at December 31, 2007 and 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. As of December 31, 2007, all securities were classified
as trading.
|
|
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 consolidated statements of operations. Dividend and interest income are
recognized when earned.
|
F - 12
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
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:
|
|
|
December 31
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
2006
|
2007
|
2008
|
Year ended
December 31
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts is
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprised as follows:
|
|
|
|
Balance at beginning of year
|
|
|
|
6,878
|
|
|
8,113
|
|
|
14,239
|
|
|
3,745
|
|
|
Provision
|
|
|
|
2,085
|
|
|
10,039
|
|
|
7,251
|
|
|
1,907
|
|
|
Write-offs
|
|
|
|
(850
|
)
|
|
(3,913
|
)
|
|
(5,830
|
)
|
|
(1,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
|
|
8,113
|
|
|
14,239
|
|
|
15,660
|
|
|
4,119
|
|
|
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 consolidated 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 capitalized software development cost for
internal use that was under development at that time in the amount of NIS 8.2 million was
impaired and wrote-off the amount.
|
F - 13
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the 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
|
6-15
|
|
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.
|
|
The
Company amortizes debenture issuance expenses over the term of the debentures, under the
effective interest method.
|
|
The
Company capitalizes website development costs in accordance with FASB Emerging Issues
Task Force Issue No. 00-02, Accounting for Web Site Development Costs (EITF
00-02). Capitalized website development costs are amortized on a straight line
basis over the estimated useful life of the website (eighteen months to three years) once
it is available for general release. Costs not eligible for capitalization are expensed
to cost of revenue as incurred. Costs incurred during the preliminary project stage, as
well as maintenance and training costs are expensed as incurred.
|
F - 14
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
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.
|
|
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. In 2008, following the Companys annual impairment test of
goodwill, a goodwill impairment charge of NIS 720 was recognized. In 2006 and 2007, the
company concluded that there was no impairment of goodwill.
|
|
Communication
Services Revenue
|
|
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.
|
F - 15
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Revenue
recognition (contd)
|
|
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, anti-spam and anti-virus.
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.
|
|
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).
|
|
The
Company generates revenues through the sale of advertising on its websites and the sale
of products on the Internet (e-Commerce).
|
|
The
Company recognizes revenue on arrangements in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104 Revenue Recognition, (SAB
104) and EITF No. 00-21. In all cases, revenue is recognized only 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. Where the Company enters into sales contracts for the sale of
multiple products or services, the Company evaluates whether it has objective fair value
evidence for each deliverable in the transaction. If the Company has objective fair value
evidence for each deliverable of the transaction, then it accounts for each deliverable
separately, based on the relevant revenue recognition accounting policies. However, if
the Company is unable to determine objective fair value for one or more undelivered
elements of the transaction or where revenue from a delivered unit is contingent upon the
delivery of additional items or meeting other specified performance conditions, revenue
recognition is determined for the combined deliverables as a single unit of accounting.
In accordance with EITF No. 01-9, Accounting for Consideration Given by a Vendor to
a Customer including a Reseller of the Vendors Products, the Company accounts
for cash consideration given to customers for which it does not receive a separately
identifiable benefit or cannot reasonably estimate fair value, as a reduction of revenue
rather than as an expense.
|
F - 16
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
The
Company evaluates the criteria outlined in EITF Issue No. 99-19, Reporting Revenue
Gross as a Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of product sales and related costs or the net
amount earned as commissions. Generally, when the Company is primarily obligated in a
transaction, is subject to inventory risk, has latitude in establishing prices and
selecting suppliers, or has several but not all of these indicators, revenue is recorded
gross. If the Company is not primarily obligated and amounts earned are determined using
a fixed percentage, a fixed-payment schedule, or a combination of the two, the Company
will generally record the net amounts as commissions earned.
|
|
Advertising
revenue is generated from several offerings including: the display of rich media
advertisements, the placement of text-based ads on the Companys web sites,
placement of ads on search result pages targeted to users search queries and
content-branded channels with third parties. The Company recognizes advertising revenue
related to the display of advertisements on its portals as impressions are
delivered. An impression is delivered when an advertisement appears in pages
viewed by users. In the majority of cases, the terms are for less than one month or may
be terminated at any time by the advertiser.
|
|
Advertising
agreements may involve multiple element arrangements (arrangements with more than one
deliverable). Lead generation revenue is generated from the collection of consumer
contact information through the Company web sites. Institutions list their services or
product offerings on Company websites and pay fees based on the number of consumer
contacts received via the listing. The Company recognizes lead generation revenue in the
month the leads are provided to the institutions.
|
|
Transaction
revenue generated from facilitating e-Commerce-based transactions through the Companys
portals is presented on a net basis when the Company is not subject to inventory risk and
is not the primarily obligor in the transactions. Such revenue is recognized when there
is evidence that qualifying transactions have occurred. When the Company is subject to
inventory risk and is the primary obligor in the transactions, the revenue is presented
on a gross basis and is recognized when the product is delivered. Products being
delivered as a subscription are recognized on a straight-line basis over the term of the
service contract with the subscriber.
|
|
Deferred
revenues are comprised of contractual billings in excess of recognized revenue and
payments received in advance of revenue recognition.
|
|
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 24.9 million, NIS 58.1 million and NIS 45 million for the years
ended December 31, 2006, 2007 and 2008, respectively.
|
F - 17
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
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 consolidated statement of
operations.
|
|
Treasury
shares are presented as a reduction of shareholders equity, at their cost to the
Company, under Treasury shares at cost.
|
|
Basic
earnings per share is computed by dividing net income by the weighted average number of
ordinary shares outstanding during the year, net of treasury shares.
|
|
In
computing diluted earnings per share, basic earnings per share is adjusted to take into
account the potential dilution that could occur upon: (i) the exercise of warrants
using the treasury stock method; and (ii) the conversion of convertible debentures
using the if-converted method, by adding to net income interest expense on
the convertible debentures and amortization of issuance costs, net of tax benefits, and
by adding the weighted average number of shares issuable upon assumed conversion of the
debentures. The total weighted average in number of ordinary shares related to the
outstanding warrants and convertible debentures excluded from the calculation of diluted
earnings per share in 2006, 2007 and 2008, since they would have had an anti-dilutive
effect is 5,340, 2,909 and 1,837 shares, respectively.
|
|
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 17). 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).
|
F - 18
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Fair
value measurements (contd)
|
|
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.
|
|
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. Regarding options on 012 shares that
have been granted to 012 employees, see Note 15C.
|
|
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.
|
F - 19
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
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 non-controlling interests, including any that arose
before the effective date, except for the following provisions, which are required to be
adopted retrospectively:
|
|
1)
|
Reclassify
non-controlling interests from the mezzanine to equity,
separate from the parents shareholders equity, in the
consolidated statement of financial position. The amount to be
classified to equity upon adoption of Statement 160 is NIS 190,472.
|
|
2)
|
Recast
consolidated net income to include net income attributable to both the
controlling and non-controlling interests.
|
|
The
adoption of Statement 141(R) will be applied prospectively to new acquisitions.
|
|
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.
|
F - 20
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 2 Reporting
Principles and Accounting Policies (contd)
|
Recently
Issued Accounting Standards (contd)
|
|
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 requires 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.
|
Note 3
Acquisitions
|
The
Golden Lines Acquisition
|
|
On
December 31, 2006, 012 acquired 100% of the outstanding shares of Golden Lines for 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
in two installments in January 2007 and March 2007, bearing interest at the rate of 6.5%
since the dates the agreements were signed.
|
|
On
July 25, 2006, 012 signed an agreement for the acquisition of 60% of the issued share
capital of Golden Lines, subject to among other things to 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 012 of an additional
37.72% of the issued share capital of Golden Lines. In addition, in December 2006, a
share purchase agreement was signed between 012 and a minority shareholder in Golden
Lines for the purchase of the remaining 2.28% of the issued share capital of Golden
Lines. The minority shareholder received additional consideration of NIS 1 million
following the completion of the 012 IPO.
|
|
The
acquisition date was determined to be December 31, 2006, when all required approvals for
the acquisition including from the Anti-Trust 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.
|
F - 21
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 3
Acquisitions (contd)
|
The
Golden Lines Acquisition
(contd)
|
|
The
assets and liabilities of Golden Lines 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 estimate replacement cost fair market value of 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 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
had 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 - 22
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 3
Acquisitions (contd)
|
The
Golden Lines Acquisition
(contd)
|
|
The
following table summarizes the estimated fair values of the Golden Lines 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
|
|
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 - 23
|
Internet Gold - Golden Lines Ltd.
|
|
Notes to the Consolidated Financial Statements
|
|
|
(All amounts are in thousands except where otherwise stated)
|
Note 3
Acquisitions (contd)
|
The
Golden Lines 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 Golden Lines was completed as of January 1, 2006:
|
|
|
Year ended
December 31
2006
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
1,103,723
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
|
(8,500
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
(3,718
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted in NIS
|
|
|
|
(0.20
|
)
|
|
|
|
|
|
The
unaudited pro forma information presents the consolidation operating results of the
Company and Golden Lines, 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 Golden Lines.
|
|
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 Golden Lines 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 Golden Lines acquisition, net of cash acquired
|
|
|
|
590,754
|
|
|
|
|
|
|
Nirshamim
Lalimudim Ltd. (Nirshamim)
|
|
In
May 2006, the Company acquired the remaining 50% of the shares of Nirshamim in exchange
for consideration of NIS 2,541. Of the purchase price, NIS 2,477 was allocated to
goodwill and NIS 64 was allocated to minority interest.
|
F - 24
Internet Gold - Golden Lines Ltd.
Notes
to the 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
|
|
|
|
290,868
|
|
|
-
|
|
|
(57,235
|
)
|
|
233,633
|
|
|
Equity securities
|
|
|
|
43,353
|
|
|
2,837
|
|
|
-
|
|
|
46,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334,221
|
|
|
2,837
|
|
|
(57,235
|
)
|
|
279,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
191,422
|
|
|
153,825
|
|
|
Due after five years through ten years
|
|
|
|
99,446
|
|
|
79,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
290,868
|
|
|
233,633
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company also maintains a portfolio of investment securities classified as trading of NIS
161,353 and NIS 214,895, as of December 31, 2007 and 2008, respectively. These investments
are subject to price volatility associated with any interest-bearing instrument. Net
realized gains on trading securities during the years ended December 31, 2007 and
2008 were NIS 582 and NIS 1,398, respectively; and are included in financial income. Net
unrealized gains (losses) on trading securities held at year end and included in financial
income or financial expenses for 2007 and 2008 were NIS 3,064 and NIS (41,843),
respectively.
|
|
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 2,526 on an investment in a
certain corporate debt security in 2008. The unrealized losses on this corporate debt
security were 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 - 25
Internet Gold - Golden Lines Ltd.
Notes
to the 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
|
|
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
|
|
57,235
|
|
|
233,633
|
|
|
-
|
|
|
-
|
|
|
57,235
|
|
|
233,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,235
|
|
|
233,633
|
|
|
-
|
|
|
-
|
|
|
57,235
|
|
|
233,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
rating of the Israeli corporation which issued the bonds have not decreased during the
period the bonds have been outstanding. Because the decline in fair value if 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 cost and
|
|
|
|
|
|
|
|
|
|
|
|
|
computers
|
|
|
|
251,654
|
|
|
301,524
|
|
|
79,306
|
|
|
Furniture and office equipment
|
|
|
|
33,554
|
|
|
34,393
|
|
|
9,046
|
|
|
Motor vehicles
|
|
|
|
848
|
|
|
848
|
|
|
223
|
|
|
Leasehold improvements
|
|
|
|
40,433
|
|
|
44,494
|
|
|
11,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326,489
|
|
|
381,259
|
|
|
100,278
|
|
|
Less - accumulated depreciation and amortization
|
|
|
|
162,540
|
|
|
210,155
|
|
|
55,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,949
|
|
|
171,104
|
|
|
45,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 26
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 5 Property
and Equipment, Net (contd)
|
For
the years ended December 31, 2006, 2007 and 2008, the Company recorded NIS 19,246,
NIS 55,045 and NIS 56,990 of depreciation and amortization expense on property and
equipment, respectively.
|
Note 6 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
|
|
|
|
339,684
|
|
|
362,245
|
|
|
95,278
|
|
|
Licenses for telecommunication services
|
|
|
|
4,031
|
|
|
4,031
|
|
|
1,060
|
|
|
Website development costs
|
|
|
|
17,211
|
|
|
5,351
|
|
|
1,407
|
|
|
Debenture issuance costs
|
|
|
|
11,898
|
|
|
9,891
|
|
|
2,602
|
|
|
Other
|
|
|
|
1,859
|
|
|
4,117
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,683
|
|
|
385,635
|
|
|
101,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less - accumulated amortization
|
|
|
|
(56,903
|
)
|
|
(82,701
|
)
|
|
(21,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317,780
|
|
|
302,934
|
|
|
79,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the years ended December 2006, 2007 and 2008, the Company recorded NIS 11,832, NIS 29,308
and NIS 32,057 of amortization expenses on other assets, respectively.
|
|
The
expected other assets amortization expense will be approximately NIS 30,000 for each of
the next five years.
|
F - 27
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 7 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 8 Goodwill
|
Changes
in goodwill for the years ended December 31, 2007 and 2008 is as follows:
|
|
|
|
|
Convenience
translation into
US dollars
(Note 2)
|
|
|
Year ended December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Goodwill, beginning of year
|
|
|
|
416,593
|
|
|
417,608
|
|
|
109,839
|
|
|
Acquisition of 012
|
|
|
|
* 1,015
|
|
|
-
|
|
|
-
|
|
|
Impairment
|
|
|
|
-
|
|
|
**(720
|
)
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, end of year
|
|
|
|
417,608
|
|
|
416,888
|
|
|
109,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Additional
payment to minority shareholder, see Note 3.
|
|
**
|
During
2008 certain reporting units under the Media segment experienced a decline in their
operating profits and cash flows. The fair value of these reporting units was estimated
using the expected present value of future cash flows.
|
F - 28
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 9 Short-Term
Bank Credit
|
The
Company and its subsidiaries have an authorized revolving line of credit of NIS 124
million and NIS 114.6 million that bears interest at a weighted average rate of 5.4% and
5% as of December 31, 2007 and 2008, respectively. As of December 31, 2008, the
Companys unutilized line of credit amounted to NIS 71.8 million (as of December 31,
2007, NIS 36.6 million of line of credit was available).
|
|
The
Company committed to the banks 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 Companys subsidiary 012 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%.
|
|
The
debentures have the following terms:
|
|
|
012
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.
|
|
|
012
is prohibited from creating any liens on its assets without the prior approval of the
general meeting of the debentures holders.
|
|
|
012
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.
|
|
|
012
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 012.
|
|
b.
|
Non-payment
by 012 of the amounts required according to the terms of the debentures.
|
|
c.
|
A
foreclosure is imposed on 012s principal assets.
|
|
d.
|
Breach
of a material provision of the debentures.
|
F - 29
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 10
Debentures (contd)
|
As
of the date of these financial statements 012 was in compliance with the financial
covenants of the debentures. The debentures were listed for trading on TASE on November
28, 2007
|
|
On
September 30, 2007, the Company issued a total of 423 million par value Series B
debentures at 97% of their par value. The debentures are repayable in six equal annual
installments on November 1
st
of each of the years 2010 to 2015 (inclusive). The
principal of the debentures and the interest accruing thereon is indexed to the Israeli
CPI.
|
|
The
outstanding balance of the debentures bears interest of 5% per year, payable once every 12
months. The interest will be paid once a year, on November 1
st
of each of the
years 2008 to 2015. The debentures were listed for trading on TASE on October 2007.
|
|
The
debentures have the following terms:
|
|
|
In
the event that TASE decides to delist the debentures (Series B) because the value of such
debentures falls below the threshold for delisting fixed in the regulations of the TASE,
the Company will announce a date for early redemption within 45 days of the resolution of
the TASE board to delist the Company as stated above, on which date the holders of the
debentures may redeem them. On the date of early redemption, the Company shall redeem the
debentures whose holders have asked that the Company redeem, at the balance of their par
value plus indexation and any interest accruing on the principal through the actual date
of redemption, in accordance with the terms of the debentures, and the debentures shall
be delisted from the TASE.
|
|
|
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.
|
|
As
of the date of these financial statements the Company was in compliance with the
financial covenants of the debentures
|
|
Aggregate
maturities are as follows:
|
|
|
As at
December 31
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
54,979
|
|
|
2010
|
|
|
|
127,667
|
|
|
2011
|
|
|
|
127,667
|
|
|
2012
|
|
|
|
127,667
|
|
|
2013 and thereafter
|
|
|
|
437,977
|
|
|
|
|
F - 30
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 10
Debentures (contd)
|
B.
|
Debentures
buyback program
|
|
In
November 2008, our Board of Directors authorized the repurchase of up to NIS 100 million
of the Series B debentures. According to this decision the purchases will be made from
time to time by us or one of our wholly-owned subsidiaries in the open market on the TASE.
The timing and amount of any purchases will be determined by the Companys management
based on its evaluation of market conditions and other factors. As of December 31, 2008,
the Company had repurchased Series B Debentures under the program at a total purchase
price of approximately NIS 4.4 million.
|
|
In
November 2008, 012s Board of Directors announced that it had authorized the
repurchase of up to NIS 100 million of its Series A debentures. As of December 31, 2008,
012 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.
|
Note 11 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 3,933, NIS 5,441 and
NIS 8,127, respectively.
|
Note 12
Convertible Debentures
|
In
2005, the Company issued 220,000 Debentures (Series A) together with 1,500 Stock Purchase
Warrants (Series 1) together with 2,500 Stock Purchase Warrants (Series 2) which were
offered to the public in 100,000 units by means of a tender. The interest rate set for the
Debentures was 4% (annual effective interest rate 4.75%).
|
|
The
securities offered under the Prospectus were as follows:
|
|
1.
|
NIS
220,000 Debentures (Series A) of NIS 1 par value, repayable (principal) in
eight equal annual installments on April 1 of each of the years 2008 to 2015
(inclusive), bearing interest of 4% per year and linked (principal and
interest) to the Israeli CPI published on March 15, 2005 for February 2005. The
interest will be paid every twelve months, on April 1 of each of the years 2006
to 2015 (inclusive). The Debentures are convertible into ordinary shares on
each trading day, until March 16, 2015.
|
F - 31
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 12
Convertible Debentures (contd)
|
The
conversion price was NIS 40 of Debentures per ordinary share until March 31, 2008 and was
adjusted to NIS 50 of Debentures per ordinary share from April 1, 2008 until March 31,
2015. Debentures (Series A) not converted into ordinary shares by March 16, 2015
(inclusive) will not be convertible.
|
|
During
the years 2006, 2007 and 2008, NIS 103,689 par value of the convertible debentures were
converted.
|
|
2.
|
1,500
of Stock Purchase Warrants (Series 1), registered in the name of their owners,
were exercisable into ordinary shares of NIS 0.01 par value each, from June 1,
2005 until August 15, 2005. The exercise price was NIS 32 per ordinary share.
The Series 1 warrants expired unexercised.
|
|
3.
|
2,500
of Stock Purchase Warrants (Series 2), registered in the name of their owners,
were exercisable into ordinary shares of NIS 0.01 par value each, from June 1,
2005 until October 15, 2007. The exercise price was NIS 40 per ordinary share,
linked to the Israeli CPI. During 2007, 2,495 of the Warrants were exercised
for net proceeds of NIS 104 million and 5 Warrants expired.
|
|
The
Company attributed the proceeds from the offering based on their fair value relative as
follows:
|
|
|
%
|
NIS thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures
|
|
|
|
96
|
|
|
211,156
|
|
|
|
|
|
|
Stock Purchase Warrants (Series 1)
|
|
|
|
1
|
|
|
1,898
|
|
|
|
|
|
|
Stock Purchase Warrants (Series 2)
|
|
|
|
3
|
|
|
6,946
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Price Per Unit
|
|
|
|
100
|
|
|
220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
In
January 2008, the Board of Directors of the Company authorized the repurchase of up to NIS
112 million of the Companys convertible debentures. The repurchases will be made
from time to time in the open market on the TASE. The timing and amount of any convertible
bond repurchased will be determined by the Companys management based on its
evaluation of market conditions and other factors. The repurchase program may be suspended
or discontinued at any time. As of December 31, 2008, the Company had repurchased
11,024,053 Series A Debentures, at a total purchase price of approximately NIS 11.6
million.
|
|
Aggregate
maturities are as follows:
|
|
|
As at
December 31
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
14,476
|
|
|
2010
|
|
|
|
14,476
|
|
|
2011
|
|
|
|
14,476
|
|
|
2012
|
|
|
|
14,476
|
|
|
2013 and thereafter
|
|
|
|
43,427
|
|
|
|
|
F - 32
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 13 Long-Term
Obligations and Other Payable
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
As at December 31
|
December 31
2008
|
|
|
2007
|
2008
|
|
|
|
|
US$
|
|
|
|
|
|
|
Long-term financial arrangement
|
|
|
|
|
|
|
|
|
|
|
|
|
(See Note 20B3)
|
|
|
|
(linked to US$ exchange rate)
|
|
|
|
6,394
|
|
|
2,940
|
|
|
773
|
|
|
Less: current maturities
|
|
|
|
(3,558
|
)
|
|
(2,797
|
)
|
|
(735
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,836
|
|
|
143
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term loans
|
|
|
|
16,147
|
|
|
9,058
|
|
|
2,382
|
|
|
Less: current maturities
|
|
|
|
(7,176
|
)
|
|
(8,441
|
)
|
|
(2,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,971
|
|
|
617
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Long-term accrued interest
|
|
|
|
20,458
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,265
|
|
|
760
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
maturities as of December 31, 2008 are as follows:
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
As at
December 31
2008
|
December 31
2008
|
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
11,238
|
|
|
2,956
|
|
|
2010
|
|
|
|
760
|
|
|
200
|
|
|
|
|
|
F - 33
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
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
|
|
|
|
46,700
|
|
|
53,361
|
|
|
14,035
|
|
|
Employee and payroll accruals
|
|
|
|
22,544
|
|
|
18,970
|
|
|
4,989
|
|
|
Government authorities
|
|
|
|
4,425
|
|
|
4,147
|
|
|
1,091
|
|
|
Income tax payable
|
|
|
|
43,814
|
|
|
47,094
|
|
|
12,387
|
|
|
Derivative financial instruments
|
|
|
|
828
|
|
|
1,055
|
|
|
278
|
|
|
Others
|
|
|
|
2,423
|
|
|
761
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,734
|
|
|
125,388
|
|
|
32,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 15 Share
Capital
|
In
2005, the Company established the 2005 Israeli Share Option Plan (the 2005
Plan), which complies with amended Section 102 of the Income Tax Ordinance, and
authorizes the grant of options to purchase up to 540,000 of the Companys ordinary
shares with an exercise price of $4.50 per ordinary share. Employees, officers, directors
and consultants of the Company and its subsidiaries are eligible to participate in the
2005 Plan. The 2005 plan has a term of seven years and will terminate in July 2012. The
implementation of the Plan is subject to final approval or change by the Board of
Directors.
|
|
As
of balance sheet date and as of the date of the approval of the financial statements, the
Board of Directors has not yet approved the final terms of the Plan and no grants were
awarded under the Plan.
|
|
In
November 2007, the Companys Board of Directors authorized the repurchase of up to
NIS 70 million of the Companys ordinary shares in the open market from time to time
at prevailing market prices. As of December 31, 2008, the Company had repurchased
1,978,476 ordinary shares under the program at a total purchase price of NIS 68 million.
In July 2008, the Board of Directors authorized a second repurchase program, for the
repurchase of up to an additional NIS 70 million of the Companys ordinary shares in
the open market from time to time at prevailing market prices. As of December 31, 2008,
the Company had repurchased 1,886,005 ordinary shares under the second program at a total
purchase price of NIS 39 million. From January 1, 2009 and until June 22, 2009, the
Company repurchased 1,481,087 ordinary shares under the second program at a total purchase
price of approximately NIS 26 million.
|
F - 34
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 15 Share
Capital (contd)
|
C.
|
012
2007 Equity Incentive Plan
|
|
In
February 2008, 012s Board of Directors approved a share based incentive plan for its
employees, directors and service providers. Under its equity incentive plan, 012 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 012 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 012 grants under the plan. At December 31,
2008, there were 1,150,000 012 ordinary shares available for future grants.
|
|
During
2008, 012 granted 1,100,000 options to certain of its employees. The fair value of each
option award was estimated on the date of grant using the Black-Scholes option-pricing
model that used the weighted average assumptions in the following table. Since 012s
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
|
%
|
|
|
|
|
The
weighted average grant date fair value of 012 options granted during 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 012 options are expected to vest.
|
|
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 012 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 012
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 - 35
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 16 Earnings
Per Share
|
The
net income (loss) and the weighted average number of shares used in the computation of
basic and diluted earnings per share are as follows:
|
|
|
Years ended December 31,
|
|
|
2006
|
2007
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
11,085
|
|
|
124,018
|
|
|
(24,295
|
)
|
|
|
|
|
|
Dilutive effect:
|
|
|
|
Interest expense on convertible debentures
|
|
|
|
and issuance costs
|
|
|
|
-
|
|
|
10,718
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) used for computation of diluted
|
|
|
|
earnings (loss) per share
|
|
|
|
11,085
|
|
|
134,736
|
|
|
(24,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number shares used in the
|
|
|
|
computation of basic earnings (loss) per share
|
|
|
|
(in thousands)
|
|
|
|
18,438
|
|
|
21,617
|
|
|
21,551
|
|
|
|
|
|
|
Add:
|
|
|
|
Additional shares from the assumed exercise
|
|
|
|
of warrants
|
|
|
|
-
|
|
|
268
|
|
|
-
|
|
|
Weighted average number of additional shares issued
|
|
|
|
upon assumed conversion of convertible debentures
|
|
|
|
-
|
|
|
2,910
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average Ordinary shares
|
|
|
|
outstanding (in thousands)
|
|
|
|
18,438
|
|
|
24,795
|
|
|
21,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per Ordinary share
|
|
|
|
0.60
|
|
|
5.74
|
|
|
(1.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per Ordinary share
|
|
|
|
0.60
|
|
|
5.44
|
|
|
(1.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 36
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 17 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, 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
and convertible debentures: The Companys debentures and convertible debentures are
listed for trade on the TASE. The fair value of the Companys debentures and
convertible debentures is measured using quoted market prices of the debentures and
convertible debentures.
|
|
The
estimated fair value of the debentures and convertible debentures with a carrying
materially different from their fair value, based on quoted market prices of the
Companys debentures and convertible debentures, and related carrying amounts are as
follows:
|
|
|
December 31, 2007
|
December 31, 2008
|
|
|
*Book value
|
Fair value
|
*Book value
|
Fair value
|
|
|
NIS
|
NIS
|
NIS
|
NIS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
|
|
|
865,223
|
|
|
881,081
|
|
|
904,489
|
|
|
766,098
|
|
|
Convertible debentures
|
|
|
|
120,847
|
|
|
133,233
|
|
|
100,391
|
|
|
85,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
986,070
|
|
|
1,014,314
|
|
|
1,004,880
|
|
|
851,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Includes
Debenture issuance costs.
|
F - 37
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 17 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
494,718 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.
|
Note 18 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.
|
F - 38
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 18 Income
Taxes (contd)
|
A.
|
Adjustments
for inflation (contd)
|
|
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 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 tax 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.
|
|
C.
|
The
income tax expense (benefit) presented in the consolidated 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
|
|
|
|
1,513
|
|
|
50,216
|
|
|
29,444
|
|
|
7,744
|
|
|
Deferred taxes
|
|
|
|
(227
|
)
|
|
244
|
|
|
(14,894
|
)
|
|
(3,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
1,286
|
|
|
50,460
|
|
|
14,550
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 39
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 18 Income
Taxes (contd)
|
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 consolidated
|
|
|
|
statements of operations
|
|
|
|
12,739
|
|
|
175,745
|
|
|
3,593
|
|
|
945
|
|
|
Statutory tax rate
|
|
|
|
31
|
%
|
|
29
|
%
|
|
27
|
%
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Theoretical income tax expense
|
|
|
|
3,949
|
|
|
50,966
|
|
|
970
|
|
|
255
|
|
|
|
|
|
|
Increase (decrease) in income tax
|
|
|
|
expense resulting from:
|
|
|
|
Permanent differences in respect of
|
|
|
|
losses on hedge transactions
|
|
|
|
4,831
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Non-deductible expenses
|
|
|
|
214
|
|
|
4,894
|
|
|
3,056
|
|
|
804
|
|
|
Effect of change in tax rate
|
|
|
|
-
|
|
|
(4,121
|
)
|
|
1,162
|
|
|
305
|
|
|
Change in valuation allowance
|
|
|
|
(7,988
|
)
|
|
(16,435
|
)
|
|
8,696
|
|
|
2,287
|
|
|
Inflationary adjustments and other
|
|
|
|
differences
|
|
|
|
280
|
|
|
2,398
|
|
|
(766
|
)
|
|
(201
|
)
|
|
Share-based compensation
|
|
|
|
-
|
|
|
-
|
|
|
926
|
|
|
244
|
|
|
Prior year income tax expenses
|
|
|
|
-
|
|
|
12,758
|
|
|
506
|
|
|
133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
|
1,286
|
|
|
50,460
|
|
|
14,550
|
|
|
3,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 40
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 18 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
|
|
|
|
6,174
|
|
|
5,997
|
|
|
1,577
|
|
|
Allowance for doubtful debts
|
|
|
|
5,533
|
|
|
5,837
|
|
|
1,535
|
|
|
Tax loss carryforwards
|
|
|
|
26,002
|
|
|
32,803
|
|
|
8,628
|
|
|
Property and equipment and other assets, net
|
|
|
|
4,245
|
|
|
3,389
|
|
|
891
|
|
|
Unrealized loss on marketable securities
|
|
|
|
-
|
|
|
24,063
|
|
|
6,329
|
|
|
Other
|
|
|
|
2,052
|
|
|
1,976
|
|
|
520
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
|
44,006
|
|
|
74,065
|
|
|
19,480
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
(11,749
|
)
|
|
(20,445
|
)
|
|
(5,377
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
|
32,257
|
|
|
53,620
|
|
|
14,103
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Intangible assets
|
|
|
|
(51,385
|
)
|
|
(44,226
|
)
|
|
(11,632
|
)
|
|
Issuance of shares in a subsidiary
|
|
|
|
(30,077
|
)
|
|
(30,077
|
)
|
|
(7,911
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
|
(81,462
|
)
|
|
(74,303
|
)
|
|
(19,543
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
|
|
(49,205
|
)
|
|
(20,683
|
)
|
|
(5,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
income before income taxes and related income tax expense are from Israeli sources.
|
|
The
Company and its subsidiaries (the Group) has NIS 130,141 of operating loss
carryforwards, which can be carried forward indefinitely.
|
|
The
Groups 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, amongst others, benefits
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 the Groups ability to generate the appropriate character of future
taxable income sufficient to utilize loss carryforwards.
|
|
In
assessing the need for a valuation allowance, the Group has evaluated all positive and
negative evidence, including the work plans of the Groups 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 all the deferred tax assets of certain
subsidiaries that incurred losses as of December 31, 2008 and 2007.
|
F - 41
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 18 Income
Taxes (contd)
|
F.
|
Accounting
for Uncertainty in Income Taxes
|
|
The
Group 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
|
|
|
|
-
|
|
|
19,562
|
|
|
5,145
|
|
|
Increase related to current year tax position
|
|
|
|
-
|
|
|
17,861
|
|
|
4,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31,
|
|
|
|
-
|
|
|
37,423
|
|
|
9,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
majority 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 subsidiaries file income tax returns only in Israel. The Israeli tax
returns of the Company and its subsidiaries are open to examination by the Israeli tax
authorities for the tax years beginning in 2004.
|
F - 42
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 19 Related
Parties
|
A.
|
Related
party balances arise from the ordinary course of business and are as follows:
|
|
Related
parties are comprised of principal shareholders (holders of 10% and above of the
Companys share capital) the Companys management, immediate family members of
the aforementioned and subsidiary and affiliated companies of the aforementioned.
|
|
Transactions
with related parties are arms-length transactions as detailed below:
|
|
(a)
|
Purchase
of office equipment for both self use and promotion and cellular mobile phones
from related parties.
|
|
(b)
|
Sale
of communication services to related parties.
|
|
(c)
|
Advertising
through related parties.
|
|
(d)
|
Fees
with respect of investment services.
|
|
Related
parties balances are presented as follows:
|
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
December 31
|
Year ended
December 31
2008
|
|
|
2007
|
2008
|
|
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
Debit balance - current assets
|
|
|
|
4,294
|
|
|
1,729
|
|
|
455
|
|
|
Credit balance - current liabilities
|
|
|
|
211
|
|
|
3,223
|
|
|
848
|
|
|
|
|
|
|
|
B.
|
Related party transactions were reflected in the consolidated statements of
operations as
follows:
|
|
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
December 31
|
Year ended
December 31
2008
|
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
1,270
|
|
|
3,139
|
|
|
5,395
|
|
|
1,419
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
181
|
|
|
1,444
|
|
|
12,803
|
|
|
3,367
|
|
|
|
|
|
|
|
F - 43
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 19 Related
Parties (contd)
|
B.
|
Related party transactions were reflected in the consolidated statements of
income as follows:
(contd)
|
|
|
|
|
|
Convenience
translation into
US Dollars
(Note 2)
|
|
|
December 31
|
Year ended
December 31
2008
|
|
|
2006
|
2007
|
2008
|
|
|
NIS
|
NIS
|
NIS
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing expenses
|
|
|
|
1,266
|
|
|
699
|
|
|
206
|
|
|
54
|
|
|
|
|
|
|
General and
|
|
|
|
administrative expenses
|
|
|
|
603
|
|
|
262
|
|
|
274
|
|
|
72
|
|
|
|
|
|
|
Financing expenses
|
|
|
|
-
|
|
|
45
|
|
|
768
|
|
|
202
|
|
|
|
|
|
|
|
Note 20
Commitments and Contingencies
|
A.
|
Contingent
liabilities
|
|
1.
|
On
September 2, 2007, a motion for a class action suit was filed with the Tel Aviv
District Court against the owners of several leading e-Commerce sites in
Israel, including the Company, which operated the website
www.P1000.co.il.
The
e-Commerce site and operations were transferred to Smile.Media Ltd., a
subsidiary of the Company, on December 31, 2006.
|
|
The
petitioners claim that these sites have deceived and defrauded participants in online
auctions by unrightfully preventing them from winning products that the sites determined
were underpriced. The petition also claims that this practice was carried out
through the use of fictitious bidders during the auction process. In addition to the
lawsuit, the petitioners are asking for a temporary injunction to prevent the websites
from amending, erasing, or disposing of any auction or sales data that is in their
possession, in order to enable the petitioners to discover the extent of the alleged
fraud and related damages.
|
|
On
October 15, 2007, the court granted the requested temporary injunction. On January 13,
2008, the Company filed its response to these petitions A preliminary hearing, regarding
the possible severance of the proceeding, is scheduled for September 2008. At this stage
it is impossible to estimate, if any, potential liability or costs that may have incurred
in connection with these petitions.
|
F - 44
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
A.
|
Contingent
liabilities (contd)
|
|
2.
|
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, against other telecommunication companies. 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 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 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 in
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, 012 and another defendant in the
2005 Claim, filed a motion to the Court requesting that it allow 012 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, 012 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.
|
F - 45
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
A.
|
Contingent
liabilities (contd)
|
|
3.
|
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. 012 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,
012 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 012 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 012 as to its position shortly.
|
|
Representatives
of the Ministry of Communications and 012 met during July 2008 in order to discuss this
dispute. Following this meeting the representatives of 012 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 012s 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.
|
|
4.
|
In
2003, Bezeq, The Israel Telecommunications Co. Ltd (Bezeq),
requested a collection commissions from 012 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 012. On January
4, 2006, the Minister of Communication determined that Bezeq is not entitled to
the collection commission and is required to return to 012 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.
|
F - 46
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
A.
|
Contingent
liabilities (contd)
|
|
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 012.
|
|
Following
the Supreme Court ruling, 012 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, in light of the fact that the settlement did not take place during
the year ended December 31, 2008, no gain was recognized.
|
|
5.
|
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. 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. 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 012. The action
alleges that 012 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
these petitions.
|
F - 47
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
A.
|
Contingent liabilities (contd)
|
|
6.
|
On
October 12, 2008, 14 former freelancers and a former employee filed a monetary
claim in Tel Aviv Employment Tribunal against Smile.Media, Mr. Eli Holtzman,
Microsoft Israel and Mr. Dani Yamin, in the amount of approximately NIS 1.1
million. The former freelancers seek to be acknowledged as employees of the
defendants, and receive the social rights derived from such relationship and
the termination of such relationship with the defendants. On January 6, 2009,
two additional former freelancers joined the claim, and the plaintiffs
requested to amend their claim so that among other things, that Microsoft
Corporation be substituted for Microsoft Israel Ltd. as a defendant. The amount
of the amended claim is approximately NIS 1 million. On February 19, 2009, the
Tribunal granted its consent to the requested amendments. In addition, on
February 5, 2009, an additional former freelancer filed a monetary claim
against all the defendants mentioned above in the amount of NIS 72,115, and
sought to join his claim with the other former freelancers. On May 4, 2009, the
Tribunal granted its consent to the requested motion. Simultaneously, two of
the plaintiffs (one former freelancer and one former employee) who were
pregnant, requested a temporary injunction for their reinstatment. A hearing
took place on October 17, 2008, and in light of the Tribunals
recommendation, the plaintiffs withdrew their claim, and the Tribunal rejected
the request for the temporary injunction. On November 11, 2008 those two
plaintiffs requested an extension to the time which they can file an appeal
with respect to the decision of the Commissioner for Employment of Women Law.
Both the Commissioner and the Company filed responses to the request. On
December 31, 2008, the Tribunal accepted the request to extend the period in
which to file an appeal. On April 4, 2009, at the plaintiffs initiative,
the appeal was dismissed. On April 21, 2009, Smile.Media and Mr. Eli Holtzman
moved to dismiss the action against them. No answer has been submitted by the
plaintiffs. The time to file a statement of defense has not passed. At this
preliminary stage it is impossible to estimate what potential liability or
costs, if any, may be incurred in connection with this matter.
|
|
7.
|
From
time to time, claims arising from the normal course of business are brought
against the Company and its subsidiaries. In the opinion of management, 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 - 48
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
012
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, 012 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 in voice over
broadband (VoB) technology.
|
|
According
to the license terms, 012 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.
|
|
012
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 012 fulfills all of its obligations under the licenses.
|
|
2.
|
Under
the terms of the licenses 012 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 agreement
|
|
a.
|
012
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. 012 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, 012 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 - 49
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
3.
|
Rights
of Use (ROU) and lease agreement (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, 012 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 and its subsidiaries have entered into various noncancellable
operating lease agreements for premises and motor vehicles. The Company
and its subsidiaries deposited NIS 94 pursuant to the terms of the
operating lease agreements and 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
|
|
|
|
17,437
|
|
|
4,586
|
|
|
2010
|
|
|
|
16,096
|
|
|
4,234
|
|
|
2011
|
|
|
|
13,098
|
|
|
3,445
|
|
|
2012
|
|
|
|
6,321
|
|
|
1,663
|
|
|
2013 and thereafter
|
|
|
|
12,183
|
|
|
3,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,134
|
|
|
17,132
|
|
|
|
|
|
|
|
|
|
|
|
F - 50
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 20
Commitments and Contingencies (contd)
|
4.
|
Effect
of new legislation and standards
|
|
Bezeq
pays 012 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 to 012 because 012 uses its infrastructure. Although the Ministry of
Communications has determined that Bezeq should continue to pay interconnect fees to 012
for calls originated from Bezeq fixed-lines to 012s lines at the same tariff that
012 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 012 interconnect fees at the then 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,
none of the cellular or landline operators implemented number portability by that date.
|
|
On
May 24, 2007, 012 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 012 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. 012 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, 012 provided bank guarantees to other parties in the aggregate amount of
NIS 1,159 as of December 31, 2008.
|
F - 51
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 21 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 industries Communications Services and Media. The
Communications Services business includes two segments, broadband services 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.
|
|
Media
includes website content provision, operating portals, search engines, lead-generation,
e-Commerce and paid content.
|
|
The
majority of the Companys property and equipment is utilized by all 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.
|
F - 52
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 21 Segment
Reporting (contd)
|
|
Year ended December 31, 2008
|
|
|
Broadband
|
Traditional
Voice
|
Media
|
Adjustments
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenues for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the segment
|
|
|
|
546,986
|
|
|
557,224
|
|
|
63,117
|
|
|
-
|
|
|
1,167,327
|
|
|
Internal revenues
|
|
|
|
for the segment
|
|
|
|
1,993
|
|
|
-
|
|
|
-
|
|
|
(1,993
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
for the segment
|
|
|
|
548,979
|
|
|
557,224
|
|
|
63,117
|
|
|
(1,993
|
)
|
|
1,167,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
240,355
|
|
|
112,432
|
|
|
15,427
|
|
|
(801
|
)
|
|
367,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,780
|
|
|
General and
|
|
|
|
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,548
|
|
|
Impairment and other
|
|
|
|
expenses (income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,581
|
)
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,666
|
|
|
|
|
|
|
Financial income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,177
|
|
|
Financial expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,250
|
|
|
|
|
|
|
|
|
|
|
Income before income
|
|
|
|
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,593
|
|
|
Goodwill attributed
|
|
|
|
to the segment
|
|
|
|
297,040
|
|
|
114,131
|
|
|
5,717
|
|
|
-
|
|
|
416,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
amortization
|
|
|
|
73,482
|
|
|
38,241
|
|
|
5,780
|
|
|
-
|
|
|
117,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 53
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 21 Segment Reporting
(contd)
|
|
Year ended December 31, 2007
|
|
|
Broadband
|
Traditional
Voice
|
Media
|
Adjustments
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the segment
|
|
|
|
478,972
|
|
|
624,185
|
|
|
72,789
|
|
|
-
|
|
|
1,175,946
|
|
|
Internal revenues
|
|
|
|
for the segment
|
|
|
|
1,717
|
|
|
-
|
|
|
896
|
|
|
(2,613
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
for the segment
|
|
|
|
480,689
|
|
|
624,185
|
|
|
73,685
|
|
|
(2,613
|
)
|
|
1,175,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
215,175
|
|
|
128,299
|
|
|
31,694
|
|
|
(1,518
|
)
|
|
373,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,246
|
|
|
General and
|
|
|
|
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,843
|
|
|
Impairment and other
|
|
|
|
expenses (income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,589
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112,972
|
|
|
|
|
|
|
Financial income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,919
|
|
|
Financial expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,456
|
|
|
Gain from issuance of
|
|
|
|
shares in a subsidiary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,310
|
|
|
|
|
|
|
|
|
|
|
Income before income
|
|
|
|
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,745
|
|
|
Goodwill attributed
|
|
|
|
to the segment
|
|
|
|
297,040
|
|
|
114,131
|
|
|
6,437
|
|
|
-
|
|
|
417,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
amortization
|
|
|
|
77,266
|
|
|
33,715
|
|
|
5,867
|
|
|
-
|
|
|
116,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 54
Internet Gold - Golden Lines Ltd.
Notes
to the Consolidated Financial Statements
|
(All amounts are in
thousands except where otherwise stated)
Note 21 Segment
Reporting (contd)
|
|
Year ended December 31, 2006
|
|
|
Broadband
|
Traditional
Voice
|
Media
|
Adjustments
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for the segment
|
|
|
|
182,516
|
|
|
159,990
|
|
|
65,853
|
|
|
-
|
|
|
408,359
|
|
|
Internal revenues
|
|
|
|
for the segment
|
|
|
|
-
|
|
|
-
|
|
|
2,871
|
|
|
(2,871
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
|
for the segment
|
|
|
|
182,516
|
|
|
159,990
|
|
|
68,724
|
|
|
(2,871
|
)
|
|
408,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
92,195
|
|
|
27,944
|
|
|
35,971
|
|
|
(164
|
)
|
|
155,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,576
|
|
|
General and
|
|
|
|
administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,957
|
|
|
Impairment and other
|
|
|
|
expenses (income), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,813
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,600
|
|
|
Financial income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,549
|
|
|
Financial expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,410
|
|
|
|
|
|
|
|
|
|
|
Income before income
|
|
|
|
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,739
|
|
|
Goodwill attributed
|
|
|
|
to the segment
|
|
|
|
296,307
|
|
|
113,849
|
|
|
5,746
|
|
|
-
|
|
|
415,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
|
|
|
|
amortization
|
|
|
|
17,894
|
|
|
3,539
|
|
|
9,745
|
|
|
-
|
|
|
31,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F - 55
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.
|
|
INTERNET GOLD - GOLDEN LINES LTD.
By: /s/ Eli Holtzman
Eli Holtzman
Chief Executive Officer
|
|
|
By: /s/ Doron Turgeman
Doron Turgeman
Deputy Chief Executive Officer and
Chief Financial Officer
|
Dated: June 24, 2009
- 115 -
Internet Gold Golden Lines (CE) (USOTC:IGLDF)
Historical Stock Chart
From Jun 2024 to Jul 2024
Internet Gold Golden Lines (CE) (USOTC:IGLDF)
Historical Stock Chart
From Jul 2023 to Jul 2024